With the current economic environment, vendor due diligence requirements and evolving member needs, credit unions are faced with challenges today that were not in play just a few years ago. Current legislation has a significant potential negative impact on the non-interest income revenue stream of credit unions. Legislative requirements add complex operational challenges to their IT and operational staffs. Now more than ever it is imperative for credit unions to understand their EFT portfolio, income and expense, and maximize processor and network partners.
With interchange income being about 18 to 19 percent of a credit union’s non-interest income, understanding the most suitable network partnerships for a credit union’s portfolio is imperative. In the past, many credit unions had to belong to multiple networks to ensure cardholders had full accessibility to their funds. In today’s EFT landscape, consolidation of EFT networks has provided credit unions the opportunity to “downsize” their number of partnerships and retain the needed access. In the evolution of the EFT environment, many once-regional networks have become national in scope. Understanding which networks can deliver the geographic reach and value-added services your members need is one of the key components to capturing financial efficiencies. Every credit union has a unique architecture. Membership demographics, geographical reach and platform configurations differ from one institution to another. It would be foolish to assume one business model would fit all credit unions needs. Each credit union should evaluate their structure. Understand what networks you participate in today, analyze your member demographics, service and product requirements as well as platform and processing configurations. Once you have gathered the data, you can then embark on a business plan to streamline your partnerships and maximize your income while controlling expense. You’ll want to choose those networks that charge you the least amount per transaction while yielding the best interchange rates.
As a general rule, I propose most institutions can succeed by choosing one PIN point-of-sale (POS) network, a signature POS network, a national/regional network, an international network and a value-added network offering surcharge free and deposit sharing access, such as CO-OP Network. Some networks play multiple roles, which is why this evaluation is so important.
It is important to choose a PIN POS network partner that maximizes your net interchange revenue – “net” meaning interchange minus switch fees. A key consideration in the PIN POS arena is that the merchant, as the acquirer of the transaction, will choose to priority-route a transaction to the network that will yield them the lowest interchange expense. As I mentioned earlier, my recommendation for issuers is to participate with one POS network partner. If you currently utilize two or more POS networks for your card program, more often than not you allow the merchant to choose the routing path between those networks. The fact remains that the more networks you have on your card, the greater the opportunity for the merchant to dictate the network route of the transaction, which will have a negative impact on the amount of interchange your credit union could earn on that transaction. Because the merchant will route the transaction through the least expensive network, your credit union will earn less than it might have otherwise.
While interchange and switch fees are important components for evaluation, they are not the only areas that credit unions should be analyzing for efficiencies. If you have an internal fee structure, ensure that these fees do not penalize your members for the institution’s cheapest transaction route. For example, if you charge an internal fee through your data processing system to your members for using a foreign ATM, consider not charging a fee for CO-OP Network transactions. Next to your “on us” activity – your members at your own credit union’s ATM – the CO-OP Network access may be the least expensive transaction to your institution. Promote cash back at the PIN POS, and also consider not charging an internal fee for these transactions. Your institution earns interchange on the purchase amount as well as the cash back amount, which is certainly more profitable than paying the interchange and switch fees for a standard ATM withdrawal. When promoting cash back at the PIN POS, ensure the message is targeted and concise so you are influencing the desired behavior change. The intent is to change ATM withdrawal activity to PIN POS behavior as opposed to pulling traffic from the signature POS route. By using CO-OP Revelation, credit unions can identify members that are making withdrawals at bank locations and have a targeted message to these members to promote the cash back at PIN POS.
Next, evaluate your ATM channel. You may have high volume deposit ATMs that would be much more efficient and cost effective as a check image ATM as opposed to an envelope depositor. Deposits are most often the most expensive transactions because they must be retrieved from the ATM, often times processed by hand and sent out for collection. Check imaging technology can significantly reduce these operating costs. Evaluate your ATM fleet to determine your net financial impact. Take into account net interchange by device, facilities costs, operational costs and transaction volume to determine the most effective and financially efficient deployment strategies. Ensure that your terminals are set up correctly to earn the correct interchange. For example, many networks have “on-premise” versus “off-premise” categories. Off-premise devices earn a heightened interchange rate as costs to maintain an off-premise device are typically higher. An off-premise ATM is a device that is placed more than 500 feet away from a branch.
Finally, manage vendor contracts. Understand contract terms, and clauses. Understand your vendor invoices and audit those invoices on a monthly basis. Analyze processing fees and review configurations to validate that your current structure brings the most value and processing efficiencies to your current configuration.
And, of course, call me or any of our National Relationship Managers at CO-OP, your strategic partners in helping you maximize your financial efficiencies.