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January 15, 2010 by Michael Croal Michael Croal

Time to Optimize POS Earnings


011510-1There is one word that describes the most pressing threats and opportunities during 2010 and that word is……


OMG! If you are not the CFO or head of payments at your financial institution, hit the Outlook forward button and send this alert to them right now. Then continue reading.

We at Gonzo understand that non-interest income is a sky high priority right now, and recent Fed rules and Congressional threats regarding OD privilege have banks everywhere ratcheting down revenue estimates for the second half of this year and beyond.

But, here’s a way banks should be thinking about offsetting the OD issue: optimizing the value they drive through their current point of sale (POS) debit networks.

You see, GonzoBankers, this is not only earnings season, but it is also the time of year when the electronic funds transfer networks release their changes to interchange and fee schedules. The past year hasn’t presented the opportunity to report much good news, but this past week a major banking service provider announced a change to pricing that on the surface could be a huge win to your top line.

011510-2In fact, this is such a game changer for the EFT vendor that I have to look at it through my jaundiced eye with a bit of skepticism. This move by one network will create a cascade of even more interesting moves by competitors. Regular Gonzo groupies know that we tell it like it is, and right now we are telling you to jump up from your desk and analyze how well your bank is situated to maximize POS revenue.

For those non-payment gurus reading this mission-critical column, let me provide a quick level set.

When debit card holders at the store use their cards for POS transactions, they have two options:

1. enter a Personal Identification Number, or
2. sign their name.

When the cardholder signs for it, the transaction is treated like a credit transaction (known as “sig debit”), and it goes through the card association branded on the card (Visa or MasterCard). When a PIN is entered, the transaction takes a different route to complete the EFT, and it goes through one of any number of POS network switches, such as STAR, PULSE or NYCE.

And here, fine Gonzo readers, is where all the competitive juices and all the revenue optimization get flowing – it’s the ROUTING of these transactions through these various networks that makes all the difference.

The cardholder may not care a hill of beans which way it goes, but there are four stakeholders that live and breathe by the route the transaction takes.

  • The merchants want the transactions to go the route that results in the least expense to them (lowest interchange rate)
  • The card associations (Visa and MasterCard) want to see signature transactions so they can charge fees
  • The POS networks want to see PIN transactions so they can charge fees
  • The card issuers (YOU – the bank or credit union) want the transactions to go the route that results in the greatest income (highest interchange rate)

So here’s how this competitive game plays out:

Decision Point #1: Transaction Initiation

011510-3At the point of sale, most cardholders do whatever pops up first on the merchant’s terminal so they can complete the transaction fast and get back to Fido, who’s either panting through the crack in the car window or snapping at passers-by from the back of the pickup, depending on which state you live in.

Merchants (the acquirers) and banks (the issuers) are fighting like John Cena and Randy Orton trying to influence how the cardholders behave. Although there are a lot of parameters required to compute interchange for each transaction, clearly PIN transactions cost the merchant less and “Sig” transactions earn the bank more. Accordingly, merchants immediately prompt for a PIN when the card is swiped while banks pelt their customers with double-loyalty-point offers to make it a signature transaction.

Decision Point #2: POS Network

If the merchant is unsuccessful in getting the lower cost PIN transaction, then the card issuer’s brand relationship (Visa or MasterCard) will determine where the transaction goes. But if the merchant is successful in getting a PIN transaction, its processor (called the merchant acquirer) can look at the POS networks on the card, compute the lowest interchange rate, and send the transaction to that POS network.


Banks have historically left money on the table by letting the merchant acquirer choose the lesser of two or more networks. In the old days when POS networks were regional, banks belonged to multiple POS networks to provide coverage and convenience for their customers (unless you wanted an irate customer vacationing in Orlando calling their branch in Seattle complaining they couldn’t use their card to get junior some mouse ears). But times have changed – banks can now take the decision out of the merchant acquirer’s hands and increase interchange income.

The way to drive this income is to avoid being misled or overly influenced by the multitude of POS networks courting your bank with detailed price sheets and confusing (often misleading) models. In this market, each POS network has different interchange rates and switch fees, and sorting through them takes effort.

Banks can only optimize their POS revenue if they apply more sophisticated analytics to the comparison between network providers.

011510-4At Cornerstone, we use our own proprietary model we call the POSSE (Point Of Sale bullShtick Exposure). This database model helps expose flaws in vendor pricing models where they make some VERY broad assumptions about your income potential based only on the total number of monthly POS transactions. The proposing vendor’s model arrives at a “blended rate.” BS ALERT. When you hear “blended rate,” think “transparent core conversion” or “shareholder friendly TARP repayment” or “seamless integration.”

The competitive moves by EFT networks can have great impact on the model and the optimization of your bank’s revenue. For instance, in our breaking news about a major interchange vendor’s new pricing, changes have been made to the structure that add more revenue to the card issuer (banks) and provide special, higher rates for institutions that drive all of their POS transactions through their network. The change for this particular vendor is so dramatic that the skeptic in me immediately asks, “What’s the catch? Are there higher fees somewhere else?” More than likely, I suspect they have cut deals with large merchants that fall outside of their published interchange schedule. This type of constant changes in the EFT competitive landscape illustrates the importance of continuous modeling and adjustments by banks to manage EFT revenue.

So, esteemed GonzoBankers, the priority is earnings and the watchword is payments. Don’t sign any POS network renewals until you’ve done the type of analysis that ensures revenue optimization. While competitive incentives and price sheets from EFT vendors can be good news, in the words of Ronald Regan, “Trust but verify.” Expect a heated and volatile competitive landscape in payments with future regulation also impacting this revenue stream, and in the meantime, make sure your CFO knows that there’s money to be made now.
-Croal Dude

Don’t bet on your Excel worksheet when you could have the Cornerstone POSSE on your side

The Cornerstone POSSE can outline an opportunity for your institution to offset the loss of OD fees by reducing expenses and increasing income. Contact us today to put the Cornerstone POSSE to work.


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2 Responses to “Time to Optimize POS Earnings”

  1. How about the bank or credit union charge the customer or member a buck if they use a PIN on a POS transaction? The first few can be refunded with the understanding that they will not be refunded in the future.
    With credit unions the case can be made to the member that members using the signature rather than the PIN benefits the the entire cooperative membership by reducing costs to the credit union. Members learn quickly.

  2. Suzanne Kirk says:

    Great article regarding increasing POS earnings, Michael! Thanks for the insight.

    Suzanne Kirk
    VP, Operations
    Space Coast Credit Union

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