WASHINGTON-The predicted "race to the bottom" in PIN network debit interchange rates may have begun, according to one new analysis of debit cards.
Cards 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 (Credit Union Journal, Aug. 8, 2011). Now, according to a CUNA interchange survey of 155 CUs, that predictions may be coming true. During the third quarter last year-two quarters after the PIN network provisions took effect-PIN revenue among the study's CUs fell 8%, or more than 30% annualized, from the previous quarter, according to CUNA's data.
What experts feared is that once FIs chose two qualified, unaffiliated PIN 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 I don't know is if this is a one-time downward shift in in PIN-based revenue, and if this is the last time it will happen. Or, if this is the first quarter of a step down in debit revenue per transaction," said CUNA Chief Economist Bill Hampel.
Jeff Russell, senior advisor at The Members Group, told Credit Union Journal that the CUNA data indicates the race to the bottom for PIN networks has started.
"There is now a more competitive marketplace and the merchants have control," said Russell. "We are in this race to the bottom and I am not sure of the time frame in which this will level out. But I don't think the next time we get data that we will see this same type of cliff that PIN fell off last year."
The CUNA data also shows that in the third quarter of 2012, PIN interchange income per dollar of transaction fell sharply (3.25%) from the previous three quarters.
Volume Offsets Losses
Previous studies and discussions with CUs indicate, too, that credit unions have been effective at boosting member debit transactions to counter any interchange-per-swipe falloff, and also shifting PIN transactions to the more-profitable signature payment. The CUNA study shows the number of debit transactions reached a high point (249 million) for the survey group in Q3 2012. The moves, apparently, have helped to offset overall debit per-swipe fees falling anywhere from 4% to 10% last year, according to several reports.
Russell concurred that a number of forces, not just falling PIN network swipe fees, are leading to the drop-off in PIN revenue, including Visa's pricing that caters to merchants who are now aggressively routing to the cheapest PIN network on each debit card. "As I have said before, it's time credit unions partner with merchants to help increase their sales and, ultimately, the use of the CU debit card," Russell said. "They need to also look at other revenue sources."
CUNA's study, conducted in November 2012, polled 238 credit unions and ended up with 155 in the study's final data. The CUs used in the study represent 13% of all CU debit volume, which Hampel said makes him confident the data is representative of the industry. The study also shows that signature debit revenue continued to rise in the second and third quarters of 2012, but at a slow rate. That growth, and the growth of overall CU debit transactions, have helped to buoy credit union debit interchange levels among this group, according to the study.
Overall debit interchange income among the study CUs has held steady, showing slight growth last year. Hampel said the Durbin protection for FIs below the $10-billion threshold appears to holding for now, noting it is "unsettling" what has occurred with PIN.
Hampel said CUNA will conduct the survey again in another six months.
