When Australian banks got hit with mandated interchange fee cuts, virtually all of them reacted the same way. They devalued their rewards currencies and increased the annual fees charged to cardholders. Some began issuing American Express cards in addition to Visa and MasterCard, for higher rewards rates.
Whether or not interchange gets regulated in the US or Europe remains to be seen. But there are things that banks can do today that can help adjust to the current pressure on interchange and prepare for potential risks.
“Just because there might be a tornado doesn’t mean we should live in the basement, and just because there is a risk that interchange fees will go away doesn’t mean that we should act like they are already gone,” says David Evans over on the Catalyst Code blog. “What we can say, however, is that there is a significant risk that interchange fees will fall and banks need to be prepared for that scenario.”
If you are a banker hearing increasingly loud calls for interchange regulation, how do you prepare? Here are a few things that can help improve your profitability today, and will help you adjust better than your competitors if interchange gets cut tomorrow.
1 – Cut the cost of rewards by getting merchants to pay for bonus points that they provide to your cardholders. Merchants can agree to co-finance your rewards program in exchange for the free advertising and marketing that they get when you promote the relationships to your cardholders (more here). Merchants also value the ability to include targeted marketing messages in the statements you provide, or on the bottom of card receipts (more here).
2 – Cut the cost of running your rewards program by simplifying the rewards redemption and fulfillment process. Give customers the ability to redeem points directly at certain merchant locations, whenever they want. This helps to cut costs related to sourcing of rewards, inventory management, delivery of rewards to customers, etc. Merchants like it because your cardholders will use their rewards to buy things that they might not have bought otherwise.
3 – Switch rewards hungry premium card customers to American Express for higher interchange revenue that might not be impacted by the same regulations as Visa and MasterCard premium products. This happened in Australia. However, the tactic might not work as well anymore, as merchants now appear to be focusing on surcharges and other steering mechanisms that could apply to any card product.
4 - Choose Visa, MasterCard and American Express premium products that have a decent and plausible interchange story attached to them. Stay away from premium card products which generate higher interchange fees but which don’t offer real, tangible benefits to merchants above and beyond those offered by standard credit cards or even debit cards. It’s those additional benefits to merchants that make a scheme product valuable to you, since merchants will have less of an incentive to attack interchange fees on those cards, or steer customers away from using them.
5 – Add new merchant acquiring fees (if you are also an acquirer) to charge for items which you may have been giving away free. Even better, develop new revenue streams on the acquiring side. If interchange gets cut, there is an opportunity for acquirers to offer new value added services that are paid with a portion of the money freed up by the lower interchange fees. See more posts on acquiring here.