Recoup Lost Interchange Income: Nine Steps
Don’t wait for the Fed to issue final debit interchange fee rules to determine how to recoup lost income, advises Bill Lehman, vice president of portfolio consulting for CSCU.
He says credit unions should take these steps now:
1. Segment members into relationship pools. Develop rate and fee structures based on members’ account value. “As their value diminishes—say a member has only a checking or saving account—consider ways to charge them for inactivity, or develop less-expensive products for them,” Lehman explains. “Understand who’s profitable.”
2. Encourage use of cost-effective delivery channels. Offer members incentives to use debit cards, for example, and charge for more expensive channels, such as checks. Move members away from the teller line and toward online banking.
3. Consider adding fees to generate revenue: annual fees for cards, card replacement, account inactivity, and surcharges for foreign ATMs. Let members avoid fees, and charge less than other providers—such as $10 or $15 for a late-payment fee, not $39, which is the industry average, Lehman advises.
• CSCU, Clearwater, Fla.
“Credit unions invest a lot of money in a surcharge-free network to make sure we have a significant footprint of ATMs,” Lehman says. “Why do members use Bank of America terminals instead of walking a block to use a free terminal? This is an opportunity to create the activity we want: using a credit union ATM.”
4. Leverage your card processor. Consider consolidating debit and credit card processing with one provider and outsourcing collections or other functions. “Investigate your options and make an educated decision,” Lehman says.
5. Increase debit and credit card penetration, activation, and use. Growing your plastic programs will help compensate for lost revenue.
6. Re-evaluate your rewards programs. Don’t eliminate rewards; make them more affordable through merchant-funded and relationship-based rewards.
“Provide more opportunities for rewards by basing them on activity across the credit union,” Lehman advises. “This lets you spread the expense across more business lines.”
Also, consider adjusting rewards downward—banks already are. “Do this in a way that’s not extremely visible and that doesn’t affect members too negatively,” he says.
7. Tackle fraud. Examine processes and procedures to find areas to reduce fraud and its related costs.
8. Consider a general-purpose reloadable card, which is exempt from interchange regulations. Target certain markets, especially students, travelers, and the under-banked.
9. Attack expenses. “Review invoices regularly to make sure you’re being billed for what you should be,” Lehman advises. “Do this for all vendors—make sure you pay for what you get.
“Regardless of the outcome of the interchange issue, we need to rethink our business model and how we grow revenue,” Lehman says. “We don’t know what the next attack will be. But it’s important to be ahead of the curve.”