Oh, Mama, I Got Them Cosmic Checking Account and Debit Blues Again

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:

1. Consumers that are very motivated by credit card loyalty programs will take to combined credit/debit like ducks to a pond. Consider this: according to a report by the Aite Group, 84% of credit-card purchases completed in 2007 will be on credit cards with a rewards program. By 2010, that will increase to almost 95%. In other words, virtually every credit card purchase will produce a reward. That is mind-boggling.And debit cards? The same report concluded that only 20% of debit transactions produce a like reward. Given that there will be in the neighborhood of 20 billion debit transactions this year, this means there may be as many as 15 billion of them that could be susceptible to a rewards come-hither offer from somebody other than your bank.

   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.

2. Capital One and HSBC (and CVS, for that matter) have access to millions of existing credit card customers via direct marketing campaigns. Capital One has a phenomenal customer database you’d kill for and, last I checked, is no slouch at marketing.
3. It’s not hard on the consumer to get one of these cards. No changes need to be made to their checking account, and they are being solicited by a company that is familiar to them.
4. Customers don’t have a problem with another card. Heck, don’t we all have 10-15 cards already? What’s one more?
5. Customers don’t care who processes their transactions.
6. Merchants that can get a spif from Tempo, Capital One or anybody else will get on the bandwagon fast. One interesting spin is that merchants will pay no interchange on on-us transactions (purchases at their store using their issued debit card), which gives them the option to make the rewards program that much richer.

Argument B: This whole initiative will get little or no traction. Our argument for this position:

1. Customers just won’t get the whole proposition – they associate debit with their checking account and the whole proposition will be too confusing. Or they will not be able to quantify the value in the change. Or they see somebody like Capital One as a credit card company only and won’t buy that they “do” debit. And, for one or more of these reasons, they will shrug off the whole idea.
2. Customers will experience too many real or perceived service issues and will come back to, or never leave, their banks. For example, they would have to call Capital One, not their bank, when a problem occurs. They’re already tired of dealing with too many people, so they’ll stay with their bank, which is already giving them pretty good service.
3. The combined issuer/merchant marketing will be mediocre and will just fail (uh huh – this one actually sounds pretty good until the hallucinogens wear off).
4. Capital One and the other issuers have underestimated the risk or servicing costs, will find the cards to be far less profitable than they estimated, and will drop or de-emphasize the program.
5. Banks will pre-empt the whole thing by coming up with better rewards programs of their own.

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.
–tr

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