The time has come for some truth on the world of payment card flips.
Effective July 1,Reg II(Durbin 2.0) disrupted banks’ income on debit cards. While banks won’t immediately feel the effects that Durbin 1.0 had in 2011, they’re likely to see an 18% to 25% volume shift from signature to PIN card transactions by the end of 2025. And the threat of disruption on credit cards looms large.
Traditionally, bank and credit union card issuers have benefitted financially from the fierce competition between the Visa and Mastercard brands. Yet is now really the time to contemplate an unnecessary brand flip to chase an incentive dollar that may not even exist in 24 months? I know asking this question makes me wildly unpopular with Mastercard and Visa, and I’m OK with that. I don’t work for Mastercard or Visa. I work on behalf of every financial institution in the United States that is seeking a path forward in their card programs and striving to stay relevant in the payments arena.
Several recent events have pushed me past the point of being quiet on this. In no particular order:
A specific non-traditional signature network that used to just be back of the card POS/ATM has now turned-on dual message for card present transactions. A cardholder transaction made in person at a merchant can now be routed on PIN-less POS, POS with PIN, and dual message PIN rails – all before it routes to MC/Visa. Financial institutions make a lot less on these transactions than they did previously with an MC/Visa transaction. And they don’t get incentives from brand deals when transactions route via dual message PIN.
Network X is pitching an incentive-rich deal to leave Network Y. What interchange differential? Information published annually by theFederal Reserve(currently up to date through 2021) states that there isn’t much of an interchange difference between brands. Let me summarize a decade’s worth of deep interchange data for you: some of the differences presented by the brands in terms of better rates for issuers are purely optics and a financial institution may draw premature and incomplete conclusions about switching card brands with high-level proposals and pricing.
So much has changed in just the last three years (thanks, COVID). The average ticket has increased while the volume of transactions has dipped or held steady. We’ve seen a boom of cards, not present volume. New transaction routing options introduced over the last 10 years by the PIN networks have impacted interchange.
Banks should not make brand decisions, sig or PIN, based solely on this data. Fee differences exist between brands, and the geography and spending habits of a card base can impact earnings per issuer. There is so much more that goes into this decision for issuers, but banks that are looking at the potential improvement to NII with the deal should make sure they are looking at the whole picture and not just the good news.
A specific PIN network that used to just be the back of the card POS/ATM is hinting at significant price increases for its services in January 2024. Why? Because it can, and because it is now getting loads of volume it didn’t have to do anything for. It is also charging low interchange rates to acquirers, which means this network pays issuers a lot less than it did even two years ago.
Banks that have negotiated deals with their PIN networks in the last 24 months should be monitoring their volume – transaction, and spending – to ensure they are receiving all the promised benefits. TIP: A three-year PIN deal enables a bank to monitor and pivot if needed.
A brand change can have a significant impact on a bank. The merchant breaches in 2013/2014 due to reissues and fraud plagued Target, Home Depot, fill-in-the-blank merchants, and crushed financial institutions. A year later, the reissue for EMV made for a terrible cardholder experience. A brand flip today will be much worse due to digital wallets and tokenization.
A bank should not even be considering a brand flip unless it has a proven strategy in place for the digital issuance of cards with automatic tokenization into the wallet. FIsfoughtto get to 20% Apple Pay utilization for years – you know, the other product they had to have and then no one used it until, well, COVID? Why start that all over again? A brand change means asking cardholders that have been seamlessly using their digital wallets to use a new card they didn’t ask for and update iteverywhere.
Sometimes change is warranted due to situations – a name change, rebranding, M&A, etc. Some institutions are just wowed by the razzle-dazzle of a flip. Either way, financial institutions should answer the following questions before pulling the trigger.
Do you have only one unaffiliated back-of-card network today (STAR, Accel, Pulse, NYCE, etc.)?
Do you know your split between sig and PIN and how it breaks down between card present and card not present? (Bonus points if you can track this back to 2019 so that you can see the movement of volume since COVID.)
Do you know what the interchange differential is between the card present and the card not present on your sig volume today? How about your PIN volume?
Do you know your average ticket on sig and PIN?
Do you know your interchange rate, expressed as a percentage of the average ticket by the network?
Do you know who are the top 15% of users in your portfolio?
What percentage of your card base is active with Apple Pay, Samsung Pay, etc.? How has this changed in the last three years?
How many tokenized transactions do you have monthly?
What are the top merchants in your portfolio categorized by number of transactions and spend? Can you get to this data on PIN?
What is your reissue strategy and how will it be effectively managed in your organization?
What amount of attrition can your portfolio withstand before the economics of the deal are neutralized?
There are many more questions to ask but this is a starting point for all the things to consider besides interchange. Change can be good and can often be needed, but unnecessary change in an environment of debit card performance uncertainty is not fiscally wise. I suggest bankers stick a pin in this decision for 18 months and watch their volumes before pulling this trigger. In the meantime, focusing on delivering all the other card experiences like digital issuance, alerts, controls, mobile disputes, and self-service card management can deepen customer loyalty and help cut down some of the noise.