The debit card is a powerful link between your credit union and your members. Members carry the card your credit union issued with them everywhere they go to make purchases on everyday items.
These purchases generate interchange income for card-issuing credit unions. But that’s not the whole story. Interchange income and expenses vary depending upon the card networks and payment processors. As debit card usage continues to grow, any improvements in net interchange rates or reductions in processing expenses can result in a better performing, and more profitable, debit card program.
What is interchange?
Interchange is the small percentage of each debit card purchase amount paid to financial institutions by merchants to compensate card-issuing financial institutions for the costs of facilitating transactions.
Interchange rates may be a fixed-rate, variable-rate or a combination of the two. In some instances, it also includes a cap-rate. These rates are based upon a variety of factors such as: the purchase category, the type of transaction authorized, the type of card presented, or if the purchase was made online, known as card-not-present.
The Durbin Amendment specifies debit card issuers must enable at least two unaffiliated payment networks for processing electronic debit transactions. This means anytime one of your members uses their debit card to buy something, the merchant (and its acquirer processor) chooses which network the transaction travels over, typically based on lowest merchant cost. This choice has consequences for credit unions as the gross and net interchange rates earned can vary between networks.
Maximizing net interchange income
All networks couple differently due to acquirer/merchant routing choice favoritism or their desire to help earn top rates for the financial institution. In this example, a cardholder makes a $50 purchase. The fixed fee is $0.15 for both networks and the variable rate is 1.05% for network 1 and 1.00% for network 2. This results in network 1 having a gross interchange $0.025 higher than network 2.
The next piece of the story is what network fees you’ll be charged. Once we know this, we can figure out your net interchange. Network 1 has an issuer fee of $0.06, while network 2 has an issuer fee of $0.015. Once these fees are taken into consideration, as a financial institution, you would want the transaction to route on network 2, as that network provides you with greater net interchange.
Minimizing processing costs and fraud losses
Lowering operational costs and reducing fraud losses provides a boost to your debit card program’s bottom line. EFT providers who process your debit card transactions can help lower your operational costs by reducing your issuer switch fees. Some processors who also own their network will also waive the processing fee when a single-message transaction is routed through their network.
Another cost is fraud. On average, financial institutions lose a little over $100 per fraud claim with 80% of those losses being related to card-not-present transactions. Investing in fraud tools reduces this expense while increasing customer loyalty as they have more confidence in using their debit cards.
Picking a debit card partner
The payments industry is constantly changing. Which means partnering with a debit network and processor that has your best interest in mind is as important as ever. At SHAZAM, we lead the payments industry in providing secure, efficient debit processing with a focus on providing high touch customer service. Our rates are designed to help your credit union earn the highest possible net interchange revenue in the industry.
Let us show you how with a competitive analysis of your debit card program to ensure your credit union is making the most net interchange from each cardholder transaction.
For more information, contact:
Matt Morrow
mmorrow@Shazam.net
Regional Director of Sales
SHAZAM
