“I ain’t saying that the customer service in my bank is bad, but when I went in the other day and asked the teller to check my balance, she leaned over and pushed me.” –Rodney Dangerfield
With the unquestioned maturing of the debit card market and significantly increased transaction counts, debit card income is being treated a bit by banks like the trust fund that one of my luckier friends got left by Aunt Irma – there is a nice annuity coming in every month, but there isn’t a lot of thought or much worry about the source of the revenue.
Well, Gonzo denizens, it’s time to take a look at some market and consumer forces that may have a negative effect in debit card income and plot out some strategies that can deal with them.
First, a level set. What are banks making from debit and how do they make it? And, for those of you not intimately familiar with debit transaction processing (and I can’t imagine why everybody wouldn’t be fascinated by this), here’s an admittedly over-simplified summary. PIN-based transactions, where you give a merchant your PIN, are processed as ATM transactions. The merchant pays less for this transaction, and banks make less. Signature-based transactions, where you sign for the debit purchase, are processed as credit card transactions. The merchant pays more for this type of debit transaction, the bank makes more.
Now, back to what this means to banks and revenue. No one formula holds true for every bank, due to the number of switches, providers, fee structures and contracts in the industry. However, using information from several different sources, here is how much, on average, banks are making:
Put this all together, and we have 120 annual debit transactions making $.33, which translates to annual debit revenue of $39.60 per checking account. Not bad money, bubba.
However, there are two trends that are putting at least some of this current revenue stream at risk. The first is fee compression. There has been a fairly steady reduction of fees, particularly signature-based, due to Wal-Mart legal efforts, good old competition and market forces. If the trend of recent years were to continue, it wouldn’t be any surprise to see a 5% reduction in fees within the next three years.
The second trend is merchant preference for PIN-based transactions, which is explained by simple math – do they want to pay a lower fee for instant authorization of a transaction or pay twice as much to get it processed like a credit card transaction? Hmmmm. Pretty easy. Merchants are very motivated to increase PIN debit usage, and they will. In fact, there are already efforts underway to provide systems that allow merchants to take debit cards from customers but actually process the transactions via the ACH network for less than $.10 a transaction and pretty much cutting the bank out completely. Boy, there’s no fighting human behavior.
Now let’s look forward three years. It is certainly possible fees will have not reduced, and the mix of transactions is still 60% signature, 40% PIN. That would certainly be nice, but nobody who is familiar with the business seriously expects no change.
Let’s consider another possibility – fees reduce 5% and the mix of transactions flips to 60% PIN, 40% signature. If that were to occur, those same 120 transactions that now make $39.60 in income would make the bank only $33.30, a loss of $6.30 per account per year (for argument’s sake, we’ll keep the average transaction at $40).
Put another way, if this were to happen, it would take 142 future transactions to produce the same income that 120 transactions produce today. That’s the first 18% of future growth just to stay even.
So, let’s hope for the best and plan for the worst. What can banks do to keep and grow the debit revenue stream? Looking at the various things that can affect debit income:
How can banks increase debit transaction volumes? Here are two thoughts banks might want to consider:
1. If you get customers started on debit, they’ll never stop.
Banks need to look at their inactive cards and those that have minimal usage and focus on marketing and education initiatives that get those customers to start using the cards. While there are no specific statistics that back this idea up, many of our clients have seen that if you can get customers to use a card 3-5 times a month, the next 5-10 monthly transactions will take care of themselves as customers experience the convenience.
2. It may be time to get serious about debit loyalty programs.
While these programs are still immature, there is already evidence that loyalty programs, when marketed well, do in fact translate to more transactions.
The ones that have gained the most traction are those that are de facto rebate programs. The most discussed is the Bank of America Keep the Change program, where the daily total of debit transactions is rounded up to the next whole dollar and the amount needed for that is transferred to a savings account. B of A matches the amount transferred in the first 90 days and 5% of the amount thereafter, with an annual maximum of $250. The bank gets a lot of additional debit transactions at the $.33 transaction fee at a cost of less than $.05 for the match, and they get a savings account on which they pay .5%. Pretty smart.
Other loyalty programs tend to follow the same rewards as credit cards, with points earned that translate to airline miles/travel, car rentals, hotel stays and other payoffs that are near and dear to credit card customers. Credit card customers are maniacs about their rewards. They can charge something and calculate what they earned in rewards fast enough to put a Cray supercomputer to shame. The key to success with these types of programs in debit usage will probably be their ability to add to the rewards already being earned by the customer on credit cards, e.g., if I get America West airline miles on my credit card, I get the same on debit purchases. One nice customer package might be a checking account, debit card, credit card and single loyalty program accrual for both.
However they mature, debit loyalty programs are worth a look in 2006/2007. There are many vendors that can be used to set these up, and they have pretty good ROI data that can justify the initiative.
Banks that haven’t thought about debit trends and proactive efforts to increase usage should put it on the management agenda. Anything that increases customer satisfaction because of its convenience and creates revenue for the bank makes for one of the few “win win” opportunities out there. Milk it.