Overdraft Fees Are Out, Interchange Fees Are In

Some of the biggest players in financial services are eliminating overdraft fees. Bank of America and Wells Fargo are just a few of the big names either reducing or eliminating overdraft fees, and many credit unions are also scrapping these fees.

While overdraft fees have been a nuisance to consumers, they are not the only ones pushing for this change. Regulators are becoming increasingly suspicious of overdraft fees, too. With this kind of pressure building, more and more financial institutions are likely to follow suit and say goodbye to overdraft fees.

Without this revenue source, where does this leave financial institutions? A study from the Center for Responsible Lending found that, for institutions with assets of $1 billion or more, overdraft or insufficient funds fees are about 5% of their non-interest income. When overdraft fees disappear, how can a credit union replace that revenue? For many credit unions, the answer lies in their card programs.

The Current State of Cards

Credit and debit cards are another source of non-interest income for credit unions because of the interchange fees they bring in. Most institutions get their interchange check every month and take it for granted. It’s easy money. If it’s not broken, why fix it?

The fact of the matter is credit unions have a huge opportunity to grow their interchange revenue by making some adjustments to their card programs and this growth can help soften the blow of losing out on overdraft fees. Regardless of their overdraft fee strategy, however, this is an important opportunity for credit unions to become more successful and help their bottom line, while also meeting the needs of members.

Virtual Cards

One answer to growing interchange revenue lies in virtual cards. Virtual cards can help boost interchange revenues and therefore boost non-interest income in many ways, the first of which being the method by which they are issued. Virtual cards are issued instantly and often automatically activated, so cardholders can begin spending right away. Members don’t have to wait for a card to come in the mail, then call a number to activate it.

Activation issues are a major vulnerability with physical cards today. If the card doesn’t get activated – and up to a third don’t – it doesn’t get used. An inactive card sitting in a drawer somewhere is not earning interchange for the credit union.

Virtual cards also come with enhanced security that can help cardholders feel confident using their cards more often. Features like single-use card numbers promote safer online shopping. The ability for a member to create a unique virtual card – with a unique card number – for each recurring online payment or card on file purchase they make can also limit exposure if one card is compromised. Other card features, such as the ability to turn cards off on demand, gives cardholders peace of mind that they can easily protect their cards from fraudulent activity. With that peace of mind, cardholders are empowered to use their cards more often and in more places.

Virtual cards also bring the added benefit of more opportunities for marketing. Credit unions can add loyalty programs to their virtual cards to help boost engagement. And since any virtual card will need a platform in which to manage it, there are additional opportunities to share marketing messages with cardholders directly through the platform.

Member Benefits

Virtual cards are not all about the credit union, though. Members also stand to benefit from a more modern card program. The convenience and security that virtual cards offer is critical for creating a better experience for members and demonstrating the value your credit union can provide.

All the advantages of virtual cards work together to boost card usage and consequently boost interchange revenues for the credit union that offers them. Virtual cards also have the added benefit of bringing a more modern and convenient experience for cardholders. Whether your credit union is looking to replace overdraft fees, or just looking for a new way to grow interchange, virtual cards are a great place to start.

Kelly Payne is Chief Marketing Officer for MOCA, a digital payment platform provider based in Austin, Texas.