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April 30, 2012 by Ryan Rackley Ryan Rackley

Who Moved My Interchange!?

“Imagining myself enjoying new cheese even before I find it, leads me to it.” –Spencer Johnson

120430-aThings are certainly changing fast in our industry these days, and bankers may not fully recognize a certain unseen hand at their Cheese Station. While most bankers are well-versed in the impact of the Durbin amendment on large banks, there are market forces at play right now that will dramatically affect the unregulated issuers as well. Unless bankers take action now, it won’t be long before they are all saying, “Who Moved My Interchange!?”

Through our mother ship Cornerstone Advisors, I work within the depths of the debit card industry on a daily basis. April 1 has come and gone and the deadline of the Durbin Network Exclusivity rule has gone into effect. If you’re not completely familiar with the Network Exclusivity rule, let’s do a quick exercise to see if your debit card is compliant. It’s all about the brand (logo on the front) and bugs (“Service Mark” logos on the back). Go ahead, grab it out of your wallet and take a look. If:

  • You have a VISA logo on the front and ONLY an Interlink bug – you are not compliant. You can have Interlink plus others, or a single bug so long as it’s not Interlink.
  • You have a MasterCard logo on the front and ONLY a Maestro bug – you are not compliant. You can have Maestro plus others, or a single bug so long as it’s not Maestro.

120430-bThat’s the bottom line in Durbin’s market competition experiment, and, as one might imagine, the last couple of months have been very exciting in the card world. The intent of this Durbin rule is idealistic indeed in trying to break up the duopoly that exists in the United States today. However, unintentional consequences of government intervention are striking yet again. I have seen more activity in the last three months with interchange schedules than in the history of plastic cards. Of course, these schedules can slip right by trusting bankers if they are not careful. Visa and MasterCard are not taking this lying down. Big surprise right? If bankers take a step back and think about the market forces at play behind the scenes it is a bit scary. The end game result is that unregulated interchange is about to bottom out. Here’s a summary of the key players in the game that explains why:

  • Visa and MasterCard – These guys are all about merchant fees and transaction volume. Both of these vendors are coming out with new merchant fees to replace some of their lost revenues. Visa has a trio of fees that went into effect on April 1, 2012: the Transaction Integrity Fee, a revision of the Network Acquirer Processing Fee, and the Fixed Acquirer Network Fee. MasterCard will be coming out with a new Annual License and Registration Fee, and look for those to take effect in July 2012. A topic of special interest is that Visa has found a loophole to protect its PIN transaction volume and is coming out with a new PIN Authenticated Debit (PAVD) interchange schedule. PAVD has been around for quite a while but has typically not been a conversation piece due to low usage and high decline rates. Word on the street is that the new PAVD interchange is lower than current PIN POS interchange rates, enough that PAVD will take significant volume away from the PIN POS networks and thus have a major negative impact on our interchange revenue. Yikes!
  • 120430-cPIN POS Networks – This group (NYCE, PULSE, ACCEL, STAR, Shazam, Jeanie, etc.) are wise to the big boy games. They have been very busy keeping their finger on the pulse of the market releasing unscheduled updates to their interchange schedules at an atypically fast pace. This group’s primary motivator depends on maintaining their transaction volumes. Right now they are launching counteroffensive strikes through interchange updates and are doing their best to keep both merchants and issuers happy. These networks are reducing their interchange in order to compete against and protect their revenue streams from PAVD. One might say that they are trying to soften the blow of the upcoming battle with Visa by ramping up their efforts over several months. They now support four interchange schedules that are unregulated, regulated, exclusive and non-exclusive. None of them will call their schedules exclusive for fear of the Durbinator. The most significant changes are occurring on the unregulated exclusive and non-exclusive schedules.
  • Merchants – The happiest group of all in the interchange ecosystem. This group has been lobbying for years to get this outcome and they are clearly going to see more cheese flow back into their stations. I am a pretty positive person, but have serious doubts my groceries will get cheaper soon. The merchants are doing as they have done over the last 20-some years. When offered a choice of networks, they are going to send a transaction on the network with the smallest interchange rates, thus minimizing their cost of doing business. Obviously not happy about the new fees the brands are introducing, very few merchants can stop accepting Visa or MasterCard in fear of customer retaliation. Some of the largest merchants are even negotiating unpublished special interchange rates.
  • Issuers – It’s fair to say bank and credit union issuers have remained ticked since Durbin moved their cheese. Banks have been scrambling to work on compliance, and now the unregulated schedules are going to get beat up. It is up to each of us to be as diligent as Sniff and Scurry and to not repeat the mistakes of Hem and Haw.


So with Visa making changes to take volume from the PIN networks and the PIN networks reducing interchange to compete with the big boys, we are going to see an Interchange race to the bottom. It’s impossible to grasp where the bottom is at this point. To put it into perspective, though, let us say that we do 250,000 PIN transactions per month and our average gross interchange reduces by 4 cents across 50% of our transactions. That’s $5,000 a month in revenue that just evaporated. The one thing I can be sure of is that there will continue to be a lot of moves in the near future and these moves are out of our control. It’s an exciting time indeed to be in the cards sector. We as issuers simply have no power over these guys to stop it. However, in the nature of Sniff and Scurry there are things we should all be doing now to protect our interests in this race:

  • Establish a Payments P&L – simply keeping a close eye on your interchange and arming yourself with information will tell you when to zig or zag. Formulating and having a strategy in place for this event will be precious. As my good mentor GI Joe always tells me, “Knowing is half the battle.”
  • Analyze and Optimize your Interchange – interchange today represents a large portion of our business. If you haven’t taken a hard look at what your interchange is today versus what it could be, now is the time.
  • Put the Brakes on Your Race to the Bottom – banks and credit unions can lock in things such as network membership, switch fees and processing costs through the negotiation process with vendors. While we cannot gain complete control over all of the levers at play here, there are some that we can exert influence over that will make a difference to the bottom line.

It’s hardly exaggeration to say your bank’s payment revenue is under attack and being rattled by a bizarre molting period right now. Banks can’t be caught flat footed with all these variables in play. Taking the time and effort to position yourself today could very well put you in an advantageous position tomorrow. So go – “Smell the cheese often so you know when it is getting old.” (Spencer Johnson)


Do You Have a Post-Durbin Plan?

Cornerstone Advisors’ Point of Sale Strategic Execution (POSSE) service can help banks optimize their strategies for card payments in a Post-Durbin world.

Our proprietary analytic tools match opportunity in the cardholder base with pricing in the network world. Being armed with this information is a first step toward maximizing future payments revenue.

Contact us today to learn more about the Cornerstone POSSE.


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2 Responses to “Who Moved My Interchange!?”

  1. Marvin Umholtz says:

    Mr. Rackley writes about a fascinating topic that should be very high on every credit union’s and community bank’s list of business model tipping points. Thanks for the lesson and reality check.

  2. Randy Aronis says:

    Ryan you are right. My grocery bill is not going either. Overall, the current administration imposed an epidemic of 75 new major regulations, with annual costs to the consumer of $38 billion. That’s you and me! The crush of red tape will undoubtedly persist, as hundreds of new regulations including the Dodd–Frank financial regulation law,further weakens an anemic economy and job creation. Action by Congress as well as the President to stem this regulatory surge is essential…but unlikley.

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