The release of the Federal Reserve’s new debit interchange rules is merely the latest in a series of unprecedented legal, economic and technological events that have buffeted the financial-services industry over the last three years. In many financial experts’ minds, the new rules have raised as many questions as they have settled.
So, what are financial institutions to make of it all?
The Fed’s ruling directly influences bank interchange and network affiliations. Interchange is getting most of the attention, and the good news is that the rule, which takes effect Oct.1, applies to financial institutions with more than $10 billion in assets, a threshold that exempts many community banks.
Therefore, interchange–a valuable source of noninterest income–should remain stable for most community banks at a time when large competitors are faced with a double-digit decrease in interchange revenue.
Less noted, but affecting all banks regardless of asset size, are the rules prohibiting network exclusivity.
Upon initial reading, this rule may be viewed negatively from a community bank point of view. The Fed is requiring affiliation with two unaffiliated networks to fulfill the minimum compliance requirement. In practical terms, this means your institution can take advantage of increased interchange rates while managing costs by electing to participate in either Visa’s or MasterCard’s signature-debit and one unaffiliated PIN-based point-of-sale debit brand.
To best manage operations and associated costs, community banks should align themselves with networks that provide the best overall expense and revenue structure.
It is time for community banks to seize this golden opportunity by expanding their payments business and growing market share. They can begin by implementing payment strategies focused on revenue optimization, expense reduction and efficiency maximization while enabling a superior user experience for members.
They can start by taking stock of their operations and understanding their internal and external demographics. They should provide the payment tools–debit, credit, prepaid, bill payment, electronic commerce and mobile commerce–customers want and have come to expect.
Community banks also should evaluate their payment-network affiliations and understand the total costs and benefits of participation, and they should rethink rewards, as blended and merchant-funded programs will help grow an issuer’s debit portfolio. It is wise to think beyond just debit transactions and consider rewarding customers on the entire relationship they have with the institution
Institutions also should review their demand deposit account structures and pricing. If they decide to re-price, they should make it simple, easy to understand and transparent.
Today’s consumers demand the flexibility and real-time payment capability their debit cards provide. They also appreciate the safety and convenience of a payment vehicle that reduces their need to carry cash or a checkbook.
In this changing environment, a well-utilized debit card program will continue to provide community banks with a recurring source of fee income, while enhancing customer loyalty and offering greater potential for relationship growth.
The community banks that will thrive going forward will be those that are best able to address and serve their customers’ needs within an evolving funds access and payments landscape.
David Keenan
General Manager
Accel/Exchange
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