Between the Durbin Amendment and retailers’ antitrust lawsuits against the card networks, it seems debit and credit card interchange battles have been raging forever.
While these certainly are important issues, their impact is largely confined to the rate that card issuers receive on a given transaction. At least as important a bottom-line factor to credit unions is the number of card payments the issuer generates.
On this battlefront the news is both rosier and—for smaller institutions—perhaps even scarier.
Federal Reserve data shows that card transactions continue to grow at a healthy clip. Debit card volumes have increased at roughly 10% annually over the past decade, and after consumers took a breather during the de-leveraging that followed 2008’s financial crisis, credit card growth has returned to past levels and even slightly outpaced debit in recent years.
This is welcome news for financial institutions that have seen multiple sources of fee income dry up since the crisis, at the same time that net interest margins faced historic pressures.
Interchange fees became a reliable and increasingly important component of the revenue picture. With card use continuing its upward trend, it’s tempting to assume that a rising tide will lift all boats.
Not so fast. Just as assets have been consolidating at the biggest financial institutions and income inequality has widened among consumers, it’s easy to envision a path where the largest issuers gobble up a greater share of the payments pie.
“Top of wallet” has long been the rallying cry for a successful card program. Issuers strive to make their card the one reflexively pulled out of one’s wallet at the time of purchase.
For debit, the path is straightforward: Consumers “follow the money.” In other words, they’ll almost always use the debit card linked to the account where their paychecks are deposited.
Credit cards offer a more wide-open playing field, allowing for greater marketing savvy. There are virtually no barriers to consumers selecting any credit card in their wallet for a given purchase. This is why we see so much invested in reward programs, TV advertising, etc.
Frankly, credit unions’ success in claiming a fair share of credit card volume has always lagged behind the market—a fact that can’t be pinned entirely on advertising budgets.
Further, the dividing line between debit and credit can be a tenuous one, with many consumers treating the two interchangeably (pun intended).
But worrying about the wallet may be akin to fighting last year’s battle. Bear in mind that the physical credit/debit card is going the way of the audio CD—an extraneous slice of plastic that’s merely a conduit for the digital credentials we really care about.
As digital wallets gain traction, the notion of which plastic card gets pulled from the wallet becomes quaint and obsolete.
The new Holy Grail is “top of app,” and it’s an area where the giant issuers have staked an early lead.
Think about it: With mobile commerce on a seemingly endless upward trend, earning default status for your credit union’s payment credentials at merchant sites (Amazon, Netflix) or in digital wallets will pay increasing dividends.
The big boys were quick to this game—witness the credits Citi offered to customers who entered their card credentials at the iTunes store, which were then conveniently ported into Apple Pay.
And there’s hardly any mystery surrounding which card will receive favorable treatment in the Chase Pay app.
The key for credit unions is not to fall further behind in the race. Here’s how:
• Train front-line staff on the leading wallet apps so they can assist members with setup, including entry of credit union-issued cards.
• Offer attention-getting, one-time incentives encouraging use of credit union cards for online purchases and recurring biller relationships.
• Consider updating reward programs to favor these activities as well.
• Promote financial responsibility by educating members on the benefits of choosing debit over credit for certain transactions.
And don’t rest on your laurels once credit union credentials are entered. It takes ongoing diligence to deal with reissued card numbers, address changes, etc.
Consumers aren’t going to move from plastic cards to digital wallets overnight. But the migration from brick-and-mortar stores to online shopping is well underway, and credit unions can’t afford to look up in a couple of years to find themselves caught similarly flat-footed by an altered landscape.
Adopt “top of app” as a new mantra to preserve existing revenue streams and position your credit union for ongoing growth.
Fights over the size of the interchange pie are bound to play out at a macro level for years to come. Actions to capture your credit union’s share of that pie are more directly under your control.