Prediction #1: Card Rewards To Grow
ST. PETERSBURG, Fla.-If interchange income from debit cards is reduced, Tom Gandre foresees credit cards-and credit card rewards programs-taking on increasing importance.
The credit side is "going to grow," said Gandre, EVP for PSCU Financial Services.
"The interchange on credit cards has not yet been changed, meaning credit cards suddenly become very profitable to financial institutions when consumers use them to purchase goods and services. How attractive can they price credit cards as a leading instrument? People are putting purchases on credit cards because they enjoy the rewards. Financial institutions might look at moving people over to credit cards from debit cards, if credit cards continue to be a more profitable payment instrument."
Such a migration is already being seen in the marketplace today, but Gandre said the further the spread becomes between debit and credit, the more attractive credit becomes to the financial institution.
In a share draft relationship the debit card is an extension of the checking account, he noted. Surcharge-free networks are a cost, and any difference in interchange will cause pricing changes, so CUs are examining how they price checking accounts.
"And debit rewards are a part of that. What can a credit union do to incent or move members over to a higher performing payment instrument? Rewards is one of many levers, both from an acquisition perspective to driving increased usage--as long as the legislature does not limit credit card interchange fees."
A Roadblock to Credit?
Because credit cards extend credit, there is significantly more risk around those unsecured funds. As such, Gandre believes any movement on the credit card side to reduce interchange would make it more difficult for consumers to access credit.
A big unknown is how FIs will move to alter pricing relationships with merchants. Gandre said the strategy on rewards programs will need to migrate to a model that rewards members for loyalty, and participation in products. For example: a greater number of points to promote loans. Another possibility is combining debit and credit points.
"Credit unions will look to reprice share drafts," he predicted. "It is difficult to say exactly what will happen, but interchange will affect share draft profitability, which will make credit unions examine the entire relationship."
The Federal Reserve is due to announce the final rule regarding debit interchange on April 21. Until then, Gandre cautioned, it is difficult to say how much interchange will be affected-especially for those institutions with more than $10 billion in assets.
There will be a growing movement toward merchant funded reward programs for credit and/or debit cards, Gandre said, adding that movement was in the process of occurring anyway because rewards programs are an avenue for merchants to promote their services through home banking websites.
"Merchants will be offering discounts to credit union members, which is a lower-cost alternative for the credit unions to deploy that fits very well with an electronic strategy," he said. "The more interesting things that are on the credit union website, the more members will use the website, which means the credit union can make other offers to those members, such as auto loans. The more people use the credit union, the better for retention."
Contrary to some, Gandre said he does not believe rewards will dissipate entirely, especially on the credit side. While he expects there will be changes on the debit side depending on a possible loss of interchange income, debit rewards probably will be combined with member loyalty programs.
"Many institutions will not get rid of debit rewards because they are an effective acquisition tool. Other institutions will want to reduce costs and will make changes. We are all guessing until we see what the final number is. We need to see what the Fed says, and then what Star, PULSE, Visa, MasterCard and other networks come back with."