Debit Cards: The Future of Non-Interest Income Growth?

As cash and checks lose market share to debit cards, credit unions are presented with a significant opportunity to grow their non-interest income.


Credit unions have grown their fee income substantially in recent years to compensate for the shrinking net interest margin. Much of the fee income discourse lately has surrounded courtesy pay, which many organizations have added to their service offerings to support the bottom line. However, according to a recent Callahan & Associates survey, credit unions derive their largest amount of fee income from debit card interchange fees.

The number and dollar volume of debit card transactions have increased as debit cards have become the card of choice for many Americans, especially when purchasing smaller ticket items. According to Visa, the company’s check card volume grew 19.7 percent in 2004 to $346 billion.

As members become more educated about debit cards and more accustomed to using them, debit cards will continue to gain market share as a substitute for cash and checks. According to CardWeb and a study conducted by the American Bankers Association and Dove Consulting, one-third of in-store purchases are made with debit cards, up from 21 percent six years ago.

In addition, a recent MasterCard study shows that more than two-thirds of U.S. households now pay recurring bills automatically, with three in ten households charging them to a debit card. Credit unions will continue to benefit from these trends, especially since share draft penetration is on the rise (see below graph).

With increased share draft penetration, and proactive promotion of debit card use, credit unions can experience strong interchange income growth. ABNB Federal Credit Union ($324 million in assets in Chesapeake, VA) experienced 33 percent annualized growth through June 2005 compared to full-year 2004 results after management made an internal policy decision to ''put debit cards in members hands in lieu of ATM cards,'' according to Mike Doland, Executive Vice President. Increased transaction volume has helped to offset the lower per-transaction fees earned in the wake of the Visa and MasterCard settlements in 2003.

As credit unions look for areas of fee income growth in the coming years, debit cards should remain at the top of the list. The potential for growth through debit cards is significant, and the related fees do not impact members financially.