It just seems like nobody will leave banks’ poor checking accounts alone.
Over the last five years or so, we witnessed the splitting of liquidity management and checking. Courtesy of online transfers to internal money market accounts and the intrusion of what I now think of as the “Ingsters”, i.e. national players that have attacked the bank money market base, the management of liquid assets is entirely separate from the management of checking and payments.
Now comes a new threat to bank checking account revenue in the form of two announcements that came through the wires (or maybe the wireless) in just the last two weeks. First, Capital One announced it will start marketing a debit card product that is not linked to its checking account. This is already being referred to as a “decoupled” debit card in the industry. Here’s the deal: it is MasterCard logo’d, and when a transaction is performed it is routed to Capital One, which takes the fee (thank you very much), converts it to an ACH transaction, and forwards that on to you for payment (rip off your fee very much). Other than that, it’s a debit card just like yours – usable anywhere and free.
Now, I’m not sure exactly how fraudulent and disputed transactions will be handled, but Capital One assumes the risk in this area and I imagine it did just a teensy bit of analysis before deciding the risk was worth the investment.
Second, HSBC and CVS/pharmacy have jointly announced they will issue a CVS-branded debit card processed through Tempo’s payment network that essentially links the customer’s checking account to their CVC ExtraCare account. Same proposition, basically, although Tempo also has roughly 200,000 additional retailer locations where the card can also be used. There is a summer pilot planned for this card in Indianapolis.
It’s pretty clear what the intention is here. Both Capital One and HSBC want to take a 10-foot crowbar and separate debit transactions from a customer’s checking account. And they have a pretty good proposition – consumers that use the Capital One debit card will get credits in the very same loyalty program as they get with their credit cards. You want airline miles? Got ’em. Hotel points? Si. CVS loyalty points via HSBC? Done. Not a bad opening argument – but more on that later.
Looking at debit revenue growth banks have enjoyed in the last few years, there’s a lot at stake here. Based on recent Cornerstone numbers, the average checking account is producing $40-$50 in debit income per year, and based on usage trends, that can be expected to grow as much as 50%-100% in the next three to five years. In fact, debit income (along with overdraft fees) was one of the key components of almost every free checking account initiative in recent memory. This is too big a topic, and threat, to be ignored.
Will these products work with your customers? Let’s look at the early arguments they could and the reasons they might not.
Argument A: This is a real threat that will significantly reduce bank debit income over the long term. Our “A” theory and argument:
Since I know I’ve gotten you into a good mood already, Capital One’s loyalty programs return somewhere in the neighborhood of 46 cents per $100 spent, vs. 10-20 cents for the typical debit rewards program.
Argument B: This whole initiative will get little or no traction. Our argument for this position:
Which argument will prevail? Too early to tell, my Gonzo Wonks, but there are two points I want to make. One, you had better be looking at this, monitoring it, and thinking about your response should argument “A” prevail. This could be serious.
Two. Of all the arguments that this will fail, only the last – you pre-empting this with better loyalty programs of your own – is one that is in your control right now and that you can address pro-actively. It’s time to take a serious look at how competitive your debit rewards program is and be ready to move to improve it fast if need be.
Because, one way or the other, I don’t think it will be enough to tell people to leave our damn checking account alone.
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