In the ever-changing world of payments, the gritty details in vendor PIN network contracts matter – a lot. And ignoring these details or getting agreements wrong can cost financial institutions as much as six or even seven figures over the life of a contract.
In just the last year:
The net result? Collectively, these three changes are significantly altering the mix between signature and PIN-based transactions. The mix was 80/20 only three years ago. Now, many card issuers are seeing 50% PIN, 50% sig. Assuming an institution’s sig interchange income is roughly double that of its PIN interchange income, this results in a revenue reduction of 10% annually.
Why? Here are the three mistakes financial institutions make with their PIN networks that can lead to that 10% reduction.
Mistake #1 – Making card processor and PIN network decisions together with one vendor
This is the number one mistake made by FIs, and we see it happen over and over. The processors make it sound so simple and attractive – one contract, one provider. But bankers, PIN network and card processor contract negotiations should never be coupled. Sure, it is very easy to combine them; it’s one less decision to make. But in the perpetual race to the bottom on transaction pricing and interchange, the goal must be to get the best combination of processing and interchange costs, and coupling these decisions often works against that goal.
A practical example:
To further illustrate, a Federal Reserve study published in June 2018 compares rates from 2014 to 2017. More than 75% of PIN networks have seen reductions or fluctuations to their average interchange rate since 2014. However, there is still a $0.10 differential between the highest and lowest, or a $.16 differential between Interlink & STAR – a difference that is worth more than any reduction to transaction processing costs.
Card processor and PIN network contracts must be negotiated as two different contracts. Banks and credit unions looking for the best possible deal should:
Mistake #2 – Picking a network based solely on published interchange rates
If this were just an interchange discussion, then the Fed’s chart would provide a quick answer as to the right partner. But, the rates in the chart are an average. No two financial institutions are alike, and a bank or credit union’s ability to earn the average published rate (or greater) is dependent on its cardholder mix, where it uses their cards, and where the institution is geographically located.
Networks are not known for guaranteeing the interchange rate in the Fed’s data, and financial institutions should not make decisions based only on this data.
Before a financial institution chooses a PIN network provider, it should perform a complete evaluation that includes analyzing cardholder spend and then negotiate appropriate fees and incentives with the selected provider.
Mistake #3 – Not finding a compatible partner
Is the institution’s “back of the card” compatible with its “front of the card?” At the end of the day, any network will work with any processor and with any front of the card brand. However, a bank or credit union needs to understand the best possible combinations for the institution and its revenue.
What I am specifically referencing is this:
All of these factors are critical, especially when selecting a secondary PIN network. Financial institutions want to earn the average rate of interchange (or higher) published in the Fed data.
Networks are aggressively trying to steal market share, much more so than even two years ago. And this activity is not going to stop, because their movement of transactions to PIN is working. Networks have managed to shift at least 10% volume from signature to PIN for many financial institutions, which is good for the networks but very bad for banks and credit unions. All PIN networks used to be equal, but with the introduction of new transaction types in the last year, this is no longer true. Financial institutions need to ensure they are properly rewarded and protected in their decisions. Banks and credit unions armed with this knowledge can avoid these three mistakes and maximize their debit income.