Financial institutions that issue debit cards are constantly managing the risk associated with debit cards. The greatest risk is that the debit cards issued will be used without the authorization of the customer resulting in the bank having to reimburse the customer for the unauthorized transaction(s). Though it appears that debit card losses have decreased since the changes from a magnetic stripe card to the EMV chip card, losses still exist and need to be managed.
Compliance and risk management professionals need to understand that there is a positive and negative side to issuing debit cards. In Part 1 of this blog post, we will discuss the positive side to issuing debit cards. In Part 2, we will discuss the various options to manage debit card fraud losses.
When a customer uses their bank-issued debit card for the purchase of goods or services, the bank earns interchange income. Depending on the number of debit cards issued and the number and amount of debit card transactions, interchange income can be a significant line item on the bank’s income statement as non-interest income. According to a report issued by the Board of Governors of the Federal Reserve System, the average interchange fee per covered transaction in 2017 was, on average, without consideration of the network is $0.23 per transaction.
Additionally, according to the Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices, for consumer non-prepaid debit cards, the average number of payments per active card in 2015 was 22.8.
If you bank has 1,000 consumer debits cards issued to customers and they all conduct the average number of transactions, your bank’s interchange income for the month would be approximately $5,290 (1000 debit cards multiplied by 23 transaction multiplied by $0.23). If you multiple the monthly income estimate by 12 months, you have $63,480 ($5.29 per debit card per month, or $63.50 per debit card per year). This is just an example based on averages as the actual amounts may be different depending on the size of your bank (I.e., Durbin Amendment), number of debit cards issued, and the number of debit card transactions conducted by your customers.
As long as your bank’s debit card income is greater than the expenses associated with issuing the debit cards and the fraud losses reimbursed to customers under both the Electronic Funds Transfer Act and its implementing Regulation E, as well as the rules of the processor (Visa, MasterCard, Discover, etc.), then your bank has a sufficient debit card management program.
More to come on the various options to manage debit card fraud losses in Part 2: Managing Non-Interest Expense of Debit Card Fraud.