May 18, 2008

Are some banks already preparing for lower interchange fees?

To get ready for a potentially far less profitable card issuing business, some banks could be preparing to focus more heavily on a business that they have traditionally neglected: acquiring. This is what I have heard recently from several consultants and analysts in Europe, and my upcoming conference presentations will focus on this angle.

With credit margins already under pressure due to fewer revolving customers, and with the threat of reduced interchange becoming more real, issuing profitability might be on the way down. Acquiring has been neglected, even abandoned by many banks, so there might be an opportunity for new strategies. Some banks could offset decreasing profitability and revenues on the issuing side by developing new revenue streams on the acquiring side.

This strategy is especially relevant if interchange gets cut. Merchants will be paying less, so there is an opportunity for the merchant’s acquirer to offer new value added services that are paid with a portion of the money freed up by lower merchant discount fees.

What other ways can a bank deal with interchange risks? An individual bank doesn’t have much of a role to play in protecting interchange, that’s the role of the payment schemes. But a bank can choose Visa, MasterCard and American Express products which have a decent and plausible interchange story attached to them, and stay away from card products which generate higher interchange fees but which don’t offer additional benefits to merchants. It’s those benefits to merchants that make the product valuable to banks.

I am working on a more detailed “how-to” list of things banks can do today to prepare for the risk of lower interchange tomorrow.

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