Debit cards used to be viewed as
loss-leader accompaniments to current accounts, with little clarity
on how transaction costs contributed to overall current account
profit and loss ratios, and issuers had limited incentive to
actively promote their usage.

However, with the growing worldwide
consumer shift to debit over credit, which is boosting the volume
of funds in consumer current account deposits, and the economic
turbulence of the last two years incentivising consumers to gain
more control over their everyday spending, issuers are increasingly
positioning the current account debit card as a crucial customer
acquisition, retention and cross-selling tool.

And, in light of banks’ credit card
profits taking a hammering due to rising credit losses and
provisions, some issuers are also using this opportunity to hike up
fees on debit card-related services in a bid to recoup lost


Refocusing on

As debit cards are not a stand-alone proposition but one
component of the current account, banks have chosen to overhaul the
wider fee structure covering those accounts.

The most common direct revenue
sources associated with debit cards are interchange, ATM fees,
annual fees, issuance and card replacement fees and fees for
specific transactions. But overdraft fees have become a crucial
source of income for bank issuers – even more so in the recent
financial climate.

Up until the turn of the decade,
banks would usually decline to authorise debit purchases if the
cardholder did not have enough money in their account, but these
days a growing proportion of banks will approve transactions but
then charge over-limit or overdraft fees if cardholders exceed
their available funds.

Another big change is that
previously, those cardholders would not be charged overdraft fees
for two to three days after the transaction, the time it takes for
debit transactions to clear, giving them an opportunity to deposit
funds into their accounts. But now, a growing number of banks are
levying fees as soon as the transaction is conducted.

A 2009 study of US current account
fees by market research firm Bankrate found that one of biggest
trends in fee increases is ATM surcharges, which rose 12.6% from
2008 to an average of $2.22. Bankrate found that banks increasing
the fee outnumbered those reducing the fee by more than a seven to
one ratio. ATM surcharges have increased at an annual rate of 7%
over the past decade.

Monthly service fees this year hit
a new high at an average of $12.55, up nearly 5% from 2008. Another
growing source of fee income is tiered structure fees for
overdrafts, with 26% of US banks surveyed by Bankrate now charging
higher fees after the second overdraft during a rolling 12-month
period, with higher fees again for each subsequent overdraft.

On the consumer side, a study from
the US Center for Responsible Lending (CRL) found that over the
past 12 months, a quarter of US consumers with bank accounts had
paid overdraft charges, with financial institutions reaping almost
$27bn in such fees in 2008, a 35% increase from 2006.

Overall, over 50m US consumers
overdrew their checking account at least once in 2008, with 27m
accountholders incurring fees for doing so five times or more. The
irony is that as consumers have reined in their credit card
spending, they have become more reliant on debit cards for everyday
spending and an increasing number of low-value transactions are
being made, which puts consumers at greater risk of going


This article is an edited passage from the VRL report
Debit Cards as Profit Drivers. For more information on this or
other VRL reports, contact Jeannie Lam: Telephone +44 (0)20 7563