Coping With Interchange Reduction: A Global Topic

Coping With Interchange Reduction: A Global Topic

Coping With Interchange Reduction: A Global Topic

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Matt Simester

Matt Simester is Piran Consulting's Director of Cards & Payments. Prior to this, he was a Managing Director within a leading payments consulting practice.

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It's no shock that payments regulators talk to each other on a regular basis. And what happens in one market will certainly be looked at in other markets. This means that despite individual countries' initiatives, interchange regulation and reduction is a global topic.

In Europe, interchange is, in simple terms, being regulated down to 30 basis points for credit and 20 for debit. Canada has capped credit interchange at 1.5 percent. Australia reduced interchange by almost 50 percent in 2003 and is currently reviewing further reductions.

And let's not forget the Durbin amendment in the U.S., which dropped debit interchange from 44 cents down to five basis points plus 21 cents. While credit in the U.S. remains untouched, retailers continue to challenge the cost of card acceptance through the legal system.

So what are the best practices in managing profitability and product strategy in these types of environments?

Get smart about other markets

Interchange reductions are happening globally, and interchange income is likely to be under pressure for a number of years. Higher interchange environments need to look at lower ones and learn from mitigation strategies using real case studies.

Accept that income will be less

There is a significant lowering of income in the move to a lower interchange environment. Firstly, accept that you will likely not replace all the income, however effective you are. After all, if the income replacement was easy, you would have done it by now – right? Without this acceptance, issuers and banks may look for income that is not there, damage customer relationships, or potentially incur the wrath of the regulator with value-management strategies that are too aggressive.

Introduce appropriate fees

It's been proven in Australia and in other studies that consumers will pay a fee for rewards, and in particular, enhanced earn-rates. Given the argument that interchange funds many rewards programs, the introduction of a fee is a valid mitigation strategy. In the UK, the Santander 123 account has been a cash-back product hit by interchange. The introduction of a fee to maintain a reasonable level of earnings was met with some negative PR sentiment, but attrition rates have been minimal.

Launch merchant-funded programs

Retailers should become the banks' best friends (well, in terms of potential rewards at least). If the banks can't fund rewards, then a relationship either through a co-brand card or the ability to earn and burn rewards at retailers is a valid strategy. The challenge is that there are only a certain number of retailers that will enhance true value to merchant-funded rewards programs, so there is likely to be a foot-race to secure deals.

Have another look at service

If rewards programs become expensive and beholden to retailers, how do banks differentiate? There is an opportunity to tier customer servicing (which can also be aligned with your fee strategy) to make products more attractive overall.

For example the Co-operative Bank in the UK has launched a credit card balance transfer offer where even if you are late or are over-limit on payments, the terms and conditions are protected. In other markets, fee waivers for late payments are becoming the norm. While not direct income replacement, customer-centric strategies can increase lifetime value and lower acquisition costs. However, it takes a long-term view to build the business case.

Use technology to look at the margins of profitable products

Near-prime, homemakers, low-income households, thin credit file segments and others all become more interesting when growth is slowed elsewhere or if slightly higher-risk products might be needed to replace portfolio income. Social media scoring, guarantor products and the use of big data all improve these processes. Those that work better at the margins of existing products will be able to replace some or all of the income lost to interchange reductions.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Matt Simester

Matt Simester is Piran Consulting's Director of Cards & Payments. Prior to this, he was a Managing Director within a leading payments consulting practice. His expertise covers payments strategy, partnership development, mobilisation, product development, retail payments and benchmarking.

In addition to working as a consultant, Matt is also an industry practitioner, having previously been Head of Value Added Services at Barclaycard Business, Managing Director of retail card issuing business and a founding executive of Barclaycard Partnerships.

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