When credit card issuers find their portfolios aren't living up to expectation or within the strategy they set for them, they often put them up for sale. Could debit card issuers do the same?
The issue came up when the results of a recent study suggested that many large issuers now are
Smaller issuers exempt from the cap, however, saw their interchange income fall only slightly.
So, using the credit card market as an example, might larger issuers dump their business card portfolios, perhaps to smaller issuers? One possible hurdle is the increased complexity a checking relationship has over a credit card one.
"It's a reasonable hypothesis, but it's really not possible to sell a debit card portfolio," Tim Kolk, owner of a Peterborough, N.H.-based TRK Advisors, said in an interview, noting most debit programs are tied to checking accounts. "You can't sell a checking account without getting rid of the relationship."
Indeed, today many issuers view business debit card programs as loss-leaders in that they need the relationships to help cross-sell other products.
"Those are relationships which most debit owners would want to protect, I think, and would therefore be less likely to sell," says Robert K. Hammer, CEO of RK Hammer Associates of Thousand Oaks, Calif. "Could this change? Of course, as we live in a world of change; but I am uncertain this will be the next step in the development of payments."
Perhaps more likely the larger issuers will respond to Durbin with new plans for fees or raising fees where permissible, Hammer says. "That's seems to me to be the more likely scenario," he says.
But once those changes are in place, smaller issuers exempt from Durbin's debit cap could "poach" business customers away from larger institutions, Kolk notes.
Discover Financial Services' Pulse electronic funds transfer network found in its annual debit survey that most larger issuers are turning their attention toward consumer PIN-debit, which carries less fraud risk in what is now a tighter-margin debit market.
Exempt issuers are those with assets of less than $10 billion. Companies above that size saw their interchange revenue from the average business debit card transaction plummet to 26 cents from $2.10 after the Fed's rate cap took effect, Pulse found.
Smaller issuers, which today earn $1.80 for the average business debit transaction, down relatively slightly from $1.93 previously, are eyeing the chance to take over those relationships. Fourteen percent of exempt issuers said business debit is one of their most significant opportunities for growth this year, while only 8% of nonexempt issuers said so, Steve Sievert, Pulse's executive vice president, said in an interview.
But smaller issuers should be careful about their growth plans, Kolk says. If they exceed the $10 billion threshold, it could set them back on interchange for every transaction, he says.
Smaller issuers may earn relatively more income from business debit transactions, thus enabling them to afford rewards and other perks for card spending, but they may not want to grow to the point that they lose their exempt status, Kolk says.
"They have to watch out for it, and they just have to adjust for it," he says. "And you'll see stories where issuers got to $9.8 billion in assets and did strange things to stop the progress from coming."
