We have all been asking questions about EFT within the community bank market since October 1, 2011, when the final rule implementing Section 1075 of Dodd-Frank (the “Durbin Amendment”) took effect.  On May 1, 2012, the Federal Reserve released  perhaps the first glimpse into the answer with a report (the “Report”) comparing average debit card interchange fees (i.e., the fees that each payment card network charges acquirers or merchants, and provides to debit card issuers) in the pre-Durbin and post-Durbin landscape.

The Report examines interchange fees during the period between January 1, 2011, to September 30, 2011 (i.e., pre-Durbin Amendment), and during the period between October 1, 2011, and December 31, 2011 (i.e., post-Durbin Amendment), with respect to both exempt issuers (i.e., banks with less than $10 billion in assets) and non-exempt issuers (i.e., banks with $10 billion or more in assets).  According to the Report, prior to the Durbin Amendment going into effect, the average interchange fee for PIN debit and signature debit transactions across both exempt and non-exempt issuers was 43 cents.    After the Durbin Amendment took effect, the average interchange fee received per transaction by non-exempt issuers declined substantially to 24 cents, down 45 percent from the average of 43 cents in 2009, while the average interchange fee received by exempt issuers continued to be at pre-Durbin levels.

The Report also revealed that the disparity between the average interchange fees received for signature debit transactions and PIN debit transactions narrowed for both exempt and non-exempt issuers after the Durbin Amendment went into effect.   Signature debit transactions historically generated much higher interchange fees than PIN debit transactions in the pre-Durbin era.

According to the Board’s Report, in the fourth quarter of 2011, the difference between the average signature debit and average PIN debit interchange fees received by non-exempt issuers had largely disappeared: the average interchange fee per signature debit transaction was only 2 percent higher than that for PIN debit.  The Report stated “the difference between signature debit and PIN debit interchange fees was larger for exempt issuers but still much smaller than in 2009”.

For exempt issuers, the average interchange fee paid for signature debits was 114% higher than the average paid to non-exempt issuers.  For PIN debit transactions, the average interchange fee paid to exempt issuers was 32% higher than that paid to non-exempt issuers.

If your Institution is spending marketing dollars and providing rewards to your card base for generating PIN signature as opposed to PIN POS debit transactions it would be smart to reexamine the cost versus the additional interchange revenue generated since the gap between signature debit and PIN debit has declined and by most EFT experts may continue to decline.

In light of the latest results summarized above, your Institution should review your PIN pos Network partner and insure you are receiving the highest interchange income possible from the EFT network you have designed and operate with today.



What is to come?

What is ahead for exempt issuers?  New changes continue to occur.  Visa and MasterCard continue to introduce changes that may have a big impact on the long-term effect of the Durbin Amendment, for both non-exempt issuers and possibly for exempt issuers, as well as for acquirers.

There could be big changes in the routing of PIN-authenticated debit transactions with the creation of Visa Pin, a new network created by Visa in 2012 (VPIN).  If Visa is successful in moving traffic over to VPIN by sharing some interchange revenue with merchants, who are ultimately in charge of routing, then your institution may receive less interchange income.

With all of these changes on the horizon, exempt issuers should consider whether it has selected the most profitable arrangement and the best network partner for its organization.

What should you be doing as an exempt issuer?

You should be examining your network setup today, your contractual obligations to networks and processors, and investigating what changes you can make to possibly increase interchange income and also establish yourself for the new environment to come with increased traffic on the EFT network from mobile wallet and P2P personal payments.

Even though your current contract may not be up for renewal within one or two years, or more, the vendor may be willing to renegotiate with you.  There also may be other opportunities for you to restructure your position for EFT.  Who your bank aligns with will impact your interchange income in the near future and for the long term.

If you have not taken the opportunity to examine these questions for your bank, then you may be missing an opportunity to improve your position in the market place.

We have the experience and knowledge to help you develop a strategy for EFT that will take you through the turbulent times ahead and possibly deliver more interchange income to you today.  We would be glad to discuss how you might do that and help you determine what your best options are.