Issuer Perspectives on Debit Processing Relationships

Navigator Edition: April 2014
By: Casey Merolla and Ginna Rodriguez

In a study conducted by First Annapolis at the end of 2013, twenty-two U.S. financial institutions from the Top 150 debit issuers were surveyed on their debit processing and ATM driving provider relationships. The results suggest or reaffirm a number of key themes; this article focuses on the trend toward consolidation of processing relationships, dissatisfaction with basic reporting and analytics tools, and increasing sensitivity to service costs.

In our conversations with issuers regarding vendor processes, consolidation was a frequently recurring theme. In particular, debit issuers consistently conveyed that when evaluating prospective processing providers for debit and ATM services, they favor current partners, including those that provide other processing services to the issuer (e.g., core account platform, credit card processing, etc.). In fact, 100% of surveyed debit issuers indicated that in their most recent contract evaluation, they either renewed with their incumbent or expanded previously established partnerships. Interestingly, incumbency was described by many issuers as a double-edged sword: although frustration with a current partner’s flaws and shortcomings may factor into issuers’ decisions to solicit bids from other providers, organizational and operational inertia tend to outweigh any arguments for migration. The data appear to support this narrative; while 55% of the survey participants held a formal RFP process during their most recent contract evaluation, 80% of all participants renewed with their incumbent provider. Even if an RFP process does not result in a change in processor, our experience shows that issuers that conduct a formal process save on average two times as much as those that go through a non-competitive process.

The study also examined issuer satisfaction with the various aspects of processor relationships, including services such as transaction processing, fraud tools, data analytics/reporting, and back office support. On the whole, issuers expressed satisfaction with their providers’ services; however, analytics/reporting tools repeatedly received lower-than-average satisfaction scores. Many issuers expressed dissatisfaction with the standard reports they receive from their processors, finding them lacking in clarity, utility, or both. Issuers also conveyed a desire for more manageable, user-friendly tools for developing custom reports. Some issuers acknowledged that their processors offered more robust, higher-quality premium tools beyond the standard packages, but that the issuers were not willing to incur the additional costs associated with those tools.

Issuers have frequently cited regulatory pressure on debit revenues – in particular, interchange limits – as a source of increasing cost sensitivity. Yet it is interesting to note that pricing, although listed as an important factor, was not always the strongest driver of vendor selection among our participants. However, as debit economics deteriorate, it seems safe to predict that issuers will place a growing emphasis on cost savings with regards to their debit vendor relationships, while seeking to maintain base functionality and reliability.

For more information, please contact Casey Merolla, Senior Manager, or Ginna Rodriguez, Consultant, They are members of our Deposit Access Practice, specializing in Debit and Prepaid.

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