Few Options for Small Banks Seeking Lower Debit Costs

There is little that smaller banks can do to reduce their exorbitant debit processing costs.

The discrepancy between debit processing costs for large institutions versus small institutions is vast. According to a First Data study, it costs small institutions about 78% more to process such transactions than larger institutions – a big gap.

The issue is volume. The mere fact that large financial institutions (those that have issued more than 500,000 debit cards) process so many transactions means that they enjoy lower processing costs.

Debit processing costs are important because usage of debit cards is continuing to increase in the United States.

Within the United States, MasterCard’s gross dollar volume on credit and charge cards inched up 0.7 percent during the second quarter — slower than in previous quarters — but gross dollar volume on debit cards soared 15.8 percent, the Associated Press reported. Visa also has announced that its debit card processing activity continues to accelerate.

Bert Ely, of Ely and Co. Inc., a financial consulting firm, says 78% higher processing costs for smaller institutions (institutions that have issued fewer than 100,000 debit cards) might shock, but when discrepancy is looked at in context, the real costs are similar.

Far from being at a disadvantage, Ely said smaller financial companies can be “more nimble,” meaning that they have a greater ability “to buy off-the-shelf products and use more cutting-edge technology.” He said this generally allows such companies to effectively compete against large, slower-moving institutions. It remains to be seen whether this advantage will eventually translate into reduced processing costs.

Bruce Kundiff, director of payments research at Javelin Strategies, said he has not seen any solution for smaller institutions. However, Kundiff said smaller payment processing companies for merchants have in the past banded together to extract more pricing power and lower their expenses. Kundiff said smaller financial institutions could pursue a similar strategy.

“There is potential,” he said.

Higher expenses or not, most smaller financial institutions are still offering the same level of debit card service as larger firms. Don Rhodes, director of risk management policy for the American Bankers Association, credited those smaller banks’ technology prowess.

“Small banks are able to offer the same technology and services, such as debit cards and online banking,” Rhodes said. “Knowing customers on a first-name basis creates a strong lender-borrower relationship, which is always an advantage.”