Concerns over fading debit interchange fee income have some credit unions re-examining—and possibly curtailing—their debit rewards programs to lower expenses.
But this isn’t the right approach, says Joe Gillen, CEO of Pinnacle Financial Strategies. Instead, he believes debit rewards programs can differentiate credit unions from other institutions and boost members’ use of their products and services.
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 cut debit interchange fees roughly in half. Although financial institutions with less than $10 billion in assets—all but three credit unions as of year-end 2011—are exempt from the Durbin Amendment, there’s no mechanism for enforcement or oversight.
That means smaller institutions may lose out over time as market pressures force the interchange fees smaller institutions receive toward the lower rate.
Gillen tells Credit Union Magazine how debit rewards programs can help credit unions maintain healthy interchange income.
CU Mag: How have CUs’ debit rewards programs changed due to the Durbin Amendment?
Gillen: Some credit unions have cut back for the wrong reason. They believe that the impact of Durbin on the big institutions will eventually affect them. So they’re hedging their bets by changing some of their rewards programs.
But there’s also a new recognition that there’s an advantage to offering a rewards-type program, and a lot of credit unions are looking at which program is best for them. Most credit unions are under the Durbin Amendment’s $10 billion asset threshold so there’s an opportunity to build market share or retain members.
Last year’s Bank Transfer Day produced some dramatic membership growth, but I’m not so sure those were all great gains.
What typically happens when you have those spikes is that these people are part-time members, not full-time. And you may or may not get the benefits you hoped for. For many consumers it was an emotional move, not necessarily a permanent move.
Even the big banks, although they do have fees now on certain accounts, allow consumers to have a free account if they do certain things. And many bank customers are already doing those things so their accounts remained free.
I’m not sure the impact of Bank Transfer Day was as great as credit unions had hoped because people are risk-averse and they hate change.
CU Mag: How can CUs take advantage of consumers’ goodwill and market their debit rewards programs?
Gillen: Research in the marketplace concludes that the best rewards programs are cash-based. Everyone has experience with points-based programs.
Over time, the points you need to acquire [a reward] increases: What you’d get for 10,000 points at the start of the program—when you can’t reach 10,000 points—changes in years two, three, four, or five, when the value of the points drops.
Points- and miles-based programs aren’t effective in acquiring or retaining members because it often takes a long time to earn and redeem the rewards.
Immediate gratification works well with all walks of life: Members did what you wanted them to do and they’re compensated for it. It’s action and reaction, which is an age-old marketing, value-add concept that always seems to work.
As the movie said, “Show me the money.”
CU Mag: What are the potential revenue opportunities for CUs?
Gillen: The revenue opportunities come from a multitude of areas. First, if you build the rewards program properly you’ll encourage members to use your debit card more frequently, thus driving up interchange income.
At least today, the typical interchange fee is 52 cents, so every time your member uses your debit card, you generate 52 cents in revenue. You have costs that come out of that.
But if you have a well-run program and have managed your contracts properly, you’re paying around 13 to 14 cents per transaction. So the net effect is 37 cents per transaction.
When you share a dime of this amount as part of your rewards program, you still net 27 cents per transaction.
There are different opportunities within the existing membership base. At a typical credit union, about 40% of members are active debit card users. These members typically use the credit union as a primary financial institution. They’re more likely to be permanent members, not part-time members.
That opens the door to lending opportunities, from auto loans to second mortgages, to mortgages, to lines of credit—and that’s the objective. You expand the members’ footprint within the credit union and they become more valuable to the credit union.
CU Mag: How can CUs get members to use their debit cards more often?
Gillen: Make it easy for members to remember their personal identification number (PIN). That only happens if they get to choose their own PIN.
Many credit unions mail the PIN and the member has to memorize it. When you do that, your active card use stays low.
Also, offer instant-issue. That’s when the credit union branch can produce a card when the account is opened. The quicker you get the card into members’ hands, the more likely they are to use it.
Finally, give everyone a debit card. Eliminate the basic ATM card—they’re just expense cards. They don’t create any interchange income, they only create expense.
Even if the member doesn’t want to use a debit card, it’s there for emergencies if they need it. And they can use it at ATMs.
Not issuing a basic ATM card is a significant cost-savings.