The world of network interchange has changed dramatically over the past decade with the onset of debit cards, the rise of PIN and signature-based transactions, and the proliferation of mergers and acquisitions among debit networks and processors.
But while the EFT interchange scene has significantly evolved, the EFT interchange strategies of many credit unions have remained stagnant. As a result, many of today's credit unions are spending too much on their debit network membership costs and missing out on opportunities to maximize the profitability of their EFT programs.
In the early 1980s, the notion of withdrawing cash from a machine with a simple plastic card found widespread acceptance among consumers. To keep pace with rising demand, new ATM networks began popping up in every geographic market imaginable. In those days, progressive institutions-including many credit unions that were early adopters of the popular ATM service-wanted to give their members anytime, anywhere access to their funds and therefore found value in investing membership dollars in multiple regional networks with all-but-forgotten brand names like MPACT, BankMate, Avail, and Instant Teller. Most regional networks have since been consolidated as a result of mergers and acquisitions from major networks like Star and Pulse.
By the early 1990s, most networks had expanded their transaction processing capabilities to include PIN-based point of sale (POS), surcharge, surcharge-free and deposit sharing ATM transaction processing services-all for additional fees to the financial institutions who chose to use them. At the same time, both VISA and MasterCard's signature-based check cards were starting to emerge as a new marketplace standard. By the end of 1999, more than 116.5-million debit check cards had been issued in the United States. Once again, credit unions invested the dollars necessary to expand their debit network membership affiliations in order to meet the changing transaction needs of their members.
As debit cards have emerged as popular convenience for consumers, merchants have discovered the value in driving those consumers to perform low-cost PIN-based POS transactions-a trend that has left card issuers with fewer opportunities to earn income from higher revenue generating signature-based transactions. With so many cost-driven factors influencing the EFT market, today's credit unions are left holding a heavy bag fraught with decreasing interchange income, numerous network membership fees, and a growing need to examine the income and expense balance of their EFT program.
Making Profitable Changes
Given the new face of the EFT industry, it's a wise choice for credit union leaders to take a hard look at their own situation and consider ways to improve the profitability of their EFT programs. How can you maximize the profitability of your EFT program? By performing a thorough, honest and ongoing review of your debit network memberships, interchange fee schedules and EFT processing expenses. To get started, follow this five-step process. You may also want to request assistance from your EFT provider to help you maximize your bottom line.
Step One: Establish A Baseline
To begin your evaluation, start by developing a comprehensive understanding of all of the expenses associated with your EFT interchange program. Begin by building a detailed spreadsheet that outlines every source of income and expense for the program. Include information about related staff and operating expenses, as well as one-time and ongoing membership expenses and transaction processing fees.
Use the following checklist of EFT financial components to help you establish a baseline understanding of your EFT financial picture.
Network Interchange Fees: PIN-based ATM/POS fees paid by card issuers to ATM owners and merchant acquirers to card issuers.
Network Switch Fees: PIN-based ATM/POS network switch fees paid by card issuers and merchant acquirers to the debit networks.
Network Gateway Fees: PIN-based ATM/POS "gateway" fee paid by card issuer to a network for routing a transaction onward to another network.
Network Membership Fees: Fees paid by card issuers and merchants to networks for the privilege of participation in the applicable network.
Processing Switch Fees: Fees paid by card issuers and merchant acquirers to their card/merchant processor organizations.
Signature-Based Debit Interchange Income: Merchant fees paid to card issuers based on a percentage of the sale price
EFT Program Administration Expense: Costs associated with FTE and part-time staff, operations overhead.
Step Two: Gather Historical Data
Once you have identified the financial components of your EFT program, the next step of the process is to populate your spreadsheet with the data that will help you understand how you're really using the services in your EFT program. You'll need to collect historical data for several months that includes a breakdown of transactions and costs by debit network, transaction type, card issuer, ATM acquirer and signature-based debit transaction volumes. By collecting this detailed information, you will arm yourself with the knowledge necessary to perform a realistic evaluation of your EFT interchange program and monitor trend lines.
Step Three: Summarize Regular Expenses
With your data in hand, you are now prepared to review the information and create a summary of reoccurring income and expenses on a monthly and annual basis for the following categories: interchange fee income and expense; network membership expense (and income if applicable), and staffing and operations expense.
As you examine this newly structured information, you may be able to identify areas that require immediate, obvious changes.
Consider this example: A credit union that owns 25 ATMs installed at locations other than their branches had accidentally and inaccurately defined these locations as "on-premise" to the various debit networks in which they participate. As a result of this simple terminal definition error, the institution was losing an average of $0.10 in "off-premise" monetary ATM transaction fee income for every transaction made. This kind of overlooked error can be fixed with a simple database change resulting in the immediate improvement of the CU's EFT program profitability.
Step Four: Perform a Detailed Analysis
The next step in the process is critical-possessing the most potential for generating a positive impact to the bottom line. Using all of the data and summary information you have gathered, perform a detailed analysis of the information, including "what-if" scenarios, such as:
* Map network membership expenses to member benefit. Do your members truly benefit from your credit union's participation in a specific network? If the answer is no, it may be time to withdraw your membership.
* Are your network memberships redundant? Do they overlap in geographic location, membership field or other category? In today's consolidated EFT market, less is usually more.
* Consider your network routing priorities. Are your networks prioritized to minimize fee expense and maximize fee income? Rethinking these priorities can have a significant impact on your institution's bottom line.
You may be surprised to discover what some transactions are costing your credit union. The credit union in this example certainly was: The CU had invested $20,000 for a one-time network membership fee. After reviewing their transaction history, the credit union discovered that in the 18 months since initiating their network membership they had averaged just 250 cardholder transactions per month. The network membership expense alone had cost the credit union an average of $4.44 per transaction for that time period. The institution decided to discontinue its membership in this network. As a result, card-holder transactions are now routed through an existing network membership at no incremental cost to the CU and with no inconvenience to members.
Step Five: Define a Profitability Action Plan
Finally, define a profitability action plan using the knowledge created during this evaluation process. There are increased revenues and reduced expenses to be found under the cushion of your EFT program-if you just know where to look. Perform this process on an annual basis to ensure your credit union is maximizing your interchange fee income potential, minimizing interchange fee expenses, and leveraging your debit network memberships to best meet the needs of your members.
Whether you decide to consolidate or eliminate network memberships, reassign network priorities to minimize expenses and maximize fee income, or make other adjustments large or small, your credit union will be ahead of the game by actively addressing the market changes and evaluating how your institution can strategically operate in today's EFT environment.
Kendall Workman is EFT Services Alliance manager for Integrasys. He can be reached at 888-287-3371 or kendall.workman
