Debit card interchange revenue is one of the highest non-interest-oriented revenue streams for financial institutions. However, many institutions still don’t get the most out of their card programs. Insufficient benchmarking, sub-optimal interchange rates or too few transactions mean missed opportunities.

Maximizing interchange revenue can make a significant impact on your institution’s bottom line. The following steps will point you in the right direction. They will incentivize customer behavior, build customer relationships and increase revenue.

What is Interchange Revenue?

Before we dive into strategies to maximize your revenue, let’s define our key term. Interchange revenue is a form of income generated by fees associated with banks’ processing of debit or credit card transactions. When a bank customer uses their card for a purchase, the merchant pays a fee to the issuing bank. This interchange fee compensates the bank for handling the transaction and assuming certain risks, such as fraud.

Since banks earn interchange revenue each time a cardholder makes a transaction, it is often a significant source of non-interest income for many institutions—especially considering the average cardholder performed 34.6 transactions per month in 2023.

How Much is an Interchange Fee?

Interchange fees are typically a percentage of the transaction amount plus a fixed fee. These fees are set by the payment networks and cover the costs of processing the payment and maintaining the cardholder services.

Measure What Matters to Maximize Interchange Revenue

Clear measurements of customer behavior are needed to improve your institution’s interchange income performance. Effective benchmarking and the tracking of key performance indicators inform you of gaps to fill. A careful recording of penetration, active rate and usage can guide you to maximize interchange revenue.

Penetration refers to the number of accounts eligible for cards compared to the number that have them. If there is a disparity between these two numbers, you should promote card use to a wider range of customers. Incentive programs like discounts or cashback can help motivate customers to take advantage of card offers. Further, consider having a simple application and onboarding process to reduce friction when opening a new card.

As a measure of the number of cards used in a given period, active rate is another good indicator of performance. If customers do not use active cards, consider why. These trends can help you understand customer needs, use cases and outreach opportunities. Using data analytics, you can segment customers based on spending to target them with communications promoting specific card benefits that are most attractive to their lifestyle.

Usage represents the number of income-generating transactions on a given account. When examining usage figures, consider growth opportunities. Perhaps cardholders need more reason to use them or you have customers inclined to purchase other products. Using usage-based promotions either year-round or for a limited time can help drive transactions as customers seek the benefit.

Implementing a mix of the strategies discussed above can help your institution boost card penetration, active rates and usage, leading to increased revenue opportunities. The key to higher interchange earnings is expansion of your customer base and giving those customers opportunities to transact.

Make the Most Out of Your Networks

While you may be increasing debit card usage, you may not be receiving the highest dividends from said use. To do so, you must situate your institution in the best possible ecosystem. Choosing the wrong network partners might not show up on a bill, but it’s a cost represented in missed profits. Here are a couple of pointers:

• Satisfy requirements without exceeding them. The Durbin Amendment to the Dodd Frank Act requires issuers to provide a choice of interchange networks for routing debit card transactions (at least two unaffiliated networks). It also enables merchants to choose how to route them. However, many institutions support more networks than they are regulatorily required to. As merchants can determine the route of the transaction, this mistake gives them the option to pay less for interchange.

• Choose issuer-centric networks. Not all payments networks are created equal. The Federal Reserve Interchange study reveals the disparity of interchange fee profits for issuers. Although some of the data has changed, it illustrates that networks matter. If you are exempt under the Durbin Amendment (below $10 billion in assets), you must make sure the payments networks you use are the best for the bank. The differences per transaction might seem minimal at first glance, but when they’re multiplied by tens of thousands or even hundreds of thousands of transactions, a few cents has exponential consequences to your bottom line.

A consultative analysis can further guide you with a comparison of not only costs, but income. It is also worth remembering that mergers and consolidation in the market have led to virtually identical rates across some networks, even if they haven’t completely merged into one.

Provide the Right Products to Strengthen Interchange Fee Revenue

You can also strengthen interchange fee revenue by distributing products that drive up usage and have a higher rate of return. Whether physically or through digital issuance, delivering credentials to your customers incentivizes higher use. Some institutions still cling to ATM proprietary cards for the sake of security. However, with the wealth of data to support the safety of EMV and tokenization, it’s time to adjust.

Remember that when considering implementation of new products, the profits made will render upfront costs relatively low. Consider providing the following:

• Instant issue debit cards – For those who still visit branches, immediate access to debit cards means the immediate ability to transact.

• Business debit cards – These cards benefit businesses through their ability to make payments within a budget and without interest. They also pay higher rates to the institution and can apply to non-consumer accounts of all sizes.

• Digital issuance – Broadening the ability to transact also applies to digital users. Through digital issuance, customers who open accounts online can receive their credentials without needing a physical card. With their card credentials in mobile or online banking, they can make card not present transactions, set up recurring payments and pay bills. According to Pulse’s 2024 Debit Issuer Study, CNP transactions represented 36% of all debit transactions and 45% of debit spend in 2023.

• Adding credentials to digital wallets – Empowering customers to transfer credentials into digital wallets can also increase interchange revenue. With push provisioning enabled, the ability for a customer to instantly provision their card into a wallet from their mobile banking application – the likelihood of immediate transactions – goes up.

Improving What You Can Control

The payments landscape is complex and constantly evolving. Many of the factors that determine payments trends are outside of your institution’s control. With interchange profits, the goal is ultimately to aim each element of your debit card program in the most favorable direction.

Get a glimpse into the future of payments by checking out our Digital Payment Trends in Banking white paper.

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