Debit card interchange rates may not change dramatically from year to year, but even small shifts can have a significant financial impact when multiplied across millions of transactions. Recent Federal Reserve data shows how modest changes in interchange rates are affecting financial institutions differently depending on transaction type, while highlighting the growing influence of merchant routing strategies.
Understanding these trends is essential for banks and credit unions looking to optimize debit portfolios, evaluate network relationships, and protect interchange revenue as the payments landscape continues to evolve.
The Federal Reserve, as required by Regulation ii periodically publishes average debit card interchange data by debit card network. An analysis in The Payments Review of this data really puts the impact of a basis point change here and there into perspective:
The Fed released its latest update on debit card interchange, and it showed very subtle but very telling trends for financial institutions with less than $10 billion in assets – a category called “exempt”, which includes all the credit unions in the U.S. except the top 7. While the lines of the graph (found here) look relatively horizontal, two takeaways are worth noting.
On one side of the coin, the average interchange for debit signature transactions (referred to by the Fed as a dual message) is increasing, from 50 cents in 2015 to 52 cents in 2018. While this sounds insignificant, a credit union that sees 100,000 signature transactions a month, is getting close to $24,000 more annually in interchange revenue for these transactions.
On the other side of the coin is debit PIN transactions (referred to by the Fed as a single message). The average interchange for these transactions is declining, from 30 cents in 2013 down to 25 cents in 2018, a full nickel. One of the drivers of this trend is the increasing sophistication of merchant processors to steer PIN transactions to the network that costs them the least.
With more and more merchants becoming adept at least-cost routing, there are limited options available to issuers, but this article has a suggestion for credit unions that also applies to other financial institutions as well:
The longer-term solution for declining average debit interchange, and a key action for credit unions to take, is to reassess the PIN networks supported by their debit portfolio. Average interchange for PIN transactions range from 35 cents per transaction down to 19 cents, varying by network. If your credit union supports both the highest and lowest charging network, the merchant will always choose the lowest. Credit unions need to evaluate their debit network contracts and optimize to just one unaffiliated network. Luckily, the Fed made the evaluation a little easier by providing a comprehensive comparison in the same updated report.
As merchants become more sophisticated in managing transaction routing, financial institutions must take a proactive approach to their debit network strategies. Reviewing network contracts and understanding how interchange rates vary across PIN and signature transactions can help issuers maximize long-term revenue opportunities.
Even small adjustments in interchange rates can translate into meaningful gains or losses over time, making ongoing portfolio optimization an important part of any debit card strategy.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
