LAS VEGAS-WestStar CU has slammed the brakes-at least for this credit union-on the so-called "race to the bottom" in PIN network debit interchange, and in the process expects to actually boost its debit interchange revenue.
The $140-million CU projects it may see greater debit revenue than before the Durbin rules kicked in by switching to MasterCard from Visa. WestStar believes many other CUs will be doing the same thing.
Cards and payments analysts have been concerned for more than a year that PIN transaction revenue could fall significantly after the routing and network exclusivity provisions of the Durbin Amendment kicked in April 1, 2012. CUNA data recently supported that concern (Credit Union Journal, March 11).
What experts have feared is that once FIs chose two qualified, unaffiliated networks for their debit cards (per Durbin rules) and the April 1 deadline passed, the PIN networks would begin dropping their swipe fees to cater to merchants, who are seeking the least-costly route for transactions. Prior to the Durbin rules the financial institution chose the routing option; now, the merchant does.
What WestStar CEO Rick Schmidt noticed is not the regional networks dropping price, but a shift in PIN transaction volume from regional Star network to Visa's Interlink network.
"We had started closely watching our interchange as soon as the Durbin Amendment rules took effect," said Schmidt, adding that he is aware of eight to 10 credit unions-ranging from small asset sizes to multi-billion-that have made, or are considering making, the same move as WestStar. "We saw a drop-off in PIN revenue each month, and a corresponding increase in Interlink transactions and drop-off in in Star PIN transactions. We concluded our current network alignment was not advantageous for us, and knew we had to eventually do something about it, because revenue would only continue to fall."
'Reversing the Trend'
Interlink was one of two PIN networks WestStar had on its debit card. "Before Durbin we used to see about 90% of our PIN transactions route through the Star network. Merchants began reversing that trend."
Making a change, in the fall of 2012 WestStar dropped Interlink from its debit card, expecting that would leave merchants only able to route WestStar PIN transactions through the Star network. Durbin rules require that card issuers have two unaffiliated networks on their debit cards. By having Visa's Plus signature network on its card, WestStar complied with the new rules.
But WestStar did not expect merchants would then route the CU's PIN transactions over Visa's signature rail, which can be done through Visa's PIN Authenticated Visa Debit (PAVD) program. Schmidt explained that while signature transactions return more interchange than PIN, PAVD was a more costly route in the long run.
"Literally, the day after we officially dropped Interlink, almost every single one of our Interlink debit transactions moved to PAVD," said Schmidt. "So all the transactions that we hoped to now go to Star were going to PAVD. We had not improved things, in fact, we made matters worse."
At that point Schmidt said he knew WestStar had to make another move. "I have done business with Visa for more than 20 years in my credit union career. They are a great brand and provide great service. But we had to make the change to MasterCard and we did that last month. This is not personal, it's business. The credit union has to make the best decisions for its members. For us, this is it. MasterCard will be our signature (Cirrus) network, and we will have MasterCard (Maestro) and Star as our PIN networks."
Schmidt said it is difficult to estimate exactly how much was being lost post-Durbin, citing the numerous factors that go into determining processing costs and interchange, such as where the transaction is conducted. "But with MasterCard we are estimating we will see an increase of anywhere between $50,000 to $150,000 a year in interchange revenue than had we remained with Visa, which we project will put us ahead of where we were before Durbin."
'Can't Stick With What You Have'
Schmidt is optimistic that the move will be beneficial for the credit union for the long haul, acknowledging that debit interchange, due to merchant pressures, will steadily decline over the years. "I think MasterCard has a very different business model than Visa in terms of how they are going about things in the post-Durbin world."
One cards analyst, asking for anonymity, is aware of credit unions heading from Visa to MasterCard. "Credit unions are doing the math and seeing a positive difference in the 10% to 25% range. Visa has made a lot of people mad, and MasterCard is out there making things easy so we are seeing a lot of conversions. I believe MasterCard is clearly more community financial institution friendly than Visa."
Schmidt believes it's time for more credit unions to get educated on "the debit interchange world" and determine what is the best path for them now and in the future. "You can't just stick with what you have. You have to study, learn and figure out the most financially lucrative path for the credit union and its members."
Numbers shared with CU Journal by CO-OP Financial Services, Rancho Cucamonga, Calif., too, indicate it may be time for CUs to look hard at debit transactions. "We cannot say why it is happening, but we have seen a 9% to 11% shift in transaction numbers from the regional PIN networks to Visa," said Caroline Willard, SVP-business development.
Mansel Guerry, president and CEO of Credit Union 24, Tallahassee, Fla., shared a sobering view of the future of debit interchange. "Over a period of time the $10-billion threshold will be like disappearing ink on paper-it will fade away and we will see uniform debit interchange pricing across all financial institutions."
Visa and MasterCard did not return calls from Credit Union Journal.
