A new report from VRL KnowledgeBank* examines best
practice in debit cards from around the world and looks, in
particular, at the ways banks can maximise profits from their debit
card customers. Loyalty and reward schemes can play a big part, as
will the development of mass payment technologies such as
contactless.


The debit card occupies a unique position in retail banking, in
mature and emerging economies. Debit card transactions grew three
times faster than credit card transactions in the US between 2005
and 2007, for instance, and US debit volume has continued to grow
even as consumer deposits in their current accounts hit record
lows.

This increasing shift towards debit card payments is also
evidenced by the US Federal Reserve, which in its March 2008
Electronic Payments Survey stated that debit payments are
the fastest growing payment method in the US.

China – number of debit cards in issuanceBut the challenge for
retail finance providers is to fully leverage the debit card as a
tool for customer acquisition and management. Despite the
proliferation of debit cards, they represent a challenge for
issuing institutions. Although they form part of the larger current
account proposition, banks have struggled to position debit cards
as revenue drivers in their own right.

In terms of the fees that are attached to payment cards, such as
interchange, debit card profit margins in many markets are smaller
than those of credit cards for a variety of reasons, and bank card
issuers are constantly having to grapple with the question of how
to maximise their revenue potential at a time when consumer payment
preferences are constantly changing.

As volumes increase, and as transaction values expand, is there
any way that issuers can use debit cards to drive profit or are
they destined to be viewed as loss leaders? Technology is likely to
influence consumer behaviour further, and the debit card market can
grow outside of its traditional status as a retail banking product
by expanding its functionality and scope.

An example of technological development is the addition of
contactless functions to a debit card, to enable it to be used in
quick-service locations such as transit stations, fast food
restaurants and other locations consisting of high volumes and low
transactions.

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This type of programme has already been rolled out in the US and
in the Asia-Pacific region in conjunction with low-value retail
environments such as fast food restaurants like McDonald’s and
retail chains, and are now making their way to Europe.

Used on a regular basis

Debit cards can be an effective tool for customer acquisition
when part of a current account proposition, although issuers need a
strategy to ensure the card is activated and used on a regular
basis – otherwise, it will inhabit the dreaded ‘loss leader’ niche
that issuers strenuously avoid.

UK – card usage split (£bn)The issuer should aim to get as many debit cards into the
hands of their current account customers as possible. Typically,
banks in the US establish a goal of 80 percent penetration,
although the top quartile of issuers reports an average of 89
percent.

A PULSE Network US debit card issuer study, published in April
2008, revealed an average debit card penetration rate of 73 percent
for issuer respondents in early 2008, compared to 72 percent in
2006, when a previous study was conducted.

Penetration is typically defined as the portion of demand
deposit accounts (DDA) having a debit card associated with the
account.

Penetration rates will very much depend on: the size of the
issuer, the business objectives it is pursuing, and the market in
which it is operating.

For instance, China’s bank card market consists of 1.08 billion
debit cards in a country of over 1.3 billion people – but analysts
estimate that only a fifth of Chinese bank cards are used on a
regular basis. Although an issuer may boast an impressive
penetration rate, it is activation and subsequent usage of the card
that is the critical success factor.

High inactivity rates and the related costs of having a mass of
unused cards in circulation will reduce the issuer’s return.
Industry statistics suggest that financial institutions work to
attain an activation goal of 65 percent.

Over 90 percent of US households have a debit card linked to
their current account, and issuers have made strenuous efforts to
boost activation rates, although low activation remains a problem.
The April 2008 PULSE study found that respondents’ card activation
(defined as the card being used for one signature debit transaction
within the last 30 days) averaged 59 percent in early 2008 versus
56 percent in 2006.

And according to TowerGroup, currently only about half of US
debit cards (55 percent) generate consistent use, meaning that
debit card issuers are missing out on significant debit interchange
revenue and fee income. However, debit cards have a much lower
attrition rate than credit cards, given the customer’s link to the
current account and by extension the issuer itself. Debit card
attrition is typically in the single-digit range, whereas credit
card attrition typically operates with a 15-20 percent rate.

A savings incentive?

Rewards programmes are a major incentive for consumers to switch
debit cards. In a 2006 survey of 1,000 US adults, Synergistic
Research found that 45 percent were aware of debit reward savings
programmes, although less than 3 percent of debit card users
participated in such a programme.

Europe – number of transactions per inhabitantMore than 60 percent told
researchers that they would be likely to use their debit card more
often if they had a savings incentive – much like Bank of America’s
successful ‘Keep The Change’ programme which, launched with a
flurry of publicity in October 2005, has now resulted in eight
million of the bank’s consumers saving more than $1 billion in
customer round-ups and bank-matching funds (see RBI 592).

A 2006 Consumer Credit Card Program Study by TNS Financial
Services concluded that 57 percent of US households are likely to
use a debit card which offers rewards rather than a credit card
with rewards, even though the levels of rewards on debit card
programmes pale in comparison with those linked to credit
cards.

It also found that relatively few US customers currently enjoy a
debit rewards scheme through their issuing bank, as fewer than one
in ten debit card users are using cards connected to a rewards
programme due to low availability.

Despite the relative rarity of debit rewards programmes, the TNS
study found that more than one-third of debit card users (38
percent) consider a rewards debit card to be an important part of
their banking relationship, indicating that banks can establish or
deepen relationships with consumers by offering debit cards with
reward programmes.

Loyalty programmes serve a number of purposes for issuers – they
can guide customer behaviour, deepen loyalty among customers and
increase customer loyalty to affiliated merchants, and also be used
as a tool for cross-selling.

As rewards offerings continue to evolve, issuers are also
expected to make greater use of the “householding of points”, in
which customers earn rewards points at various levels for every
financial relationship they have with an institution – Citi’s
‘Thank You’ rewards programme pioneered this concept.

Wachovia’s Possibilities Rewards (http://www.wachoviapossibilities.com/)
shows that banks are also looking to evolve and adapt their loyalty
tools to maximise usage. Wachovia allows its Possibilities Rewards
cardholders to combine their credit and debit spending to earn
points, and offers a wide range of rewards, including travel
rewards, cashback rebates and a catalogue gift programme. The card
has no annual fee and relatively low interest rates on the credit
side.

Debit rewards boost card spend

Australia – numbers of cards in circulationAccording to figures from
US consultant First Annapolis, although the debit rewards value
proposition to consumers is significantly less than that of credit
rewards (25-40 basis points for debit vs 100-125 basis points for
credit), issuers have found that debit rewards generally boosts
total card spend. Activation rates are far higher on rewards cards
than on a non-rewards offering with a higher average spend per
card.

The growing popularity of rewards schemes attached to debit
cards is evidenced by the US, where 14 of Visa’s top 15 issuers
have some form of rewards attached to debit card use. According to
Visa, it is giving issuers a 30 percent lift overall, increasing
not only volume of transactions but cardholder retention and
loyalty as well. Many issuers have found that the reward-earning
segment of their portfolios noticeably outperforms the segment that
does not earn rewards.

JPMorgan Chase is putting an increased focus on rewards
programmes to drive loyalty and engagement, and higher revenue. The
bank views its rewards programmes as a key differentiator in a
competitive market, and delivers increased spending, greater levels
of retention and better credit performance.

Marketing initiatives incorporating a comprehensive educational
programme are important in communicating the key benefits of debit
card usage and reducing consumer concerns.

Issuers must not over-estimate the level of education that
potential or existing customers may have in relation to card usage
– an integrated educational/marketing strategy that encompasses all
viable customer touchpoints should be used to ensure that
cardholders are informed about the benefits and features of the
debit card when they interact with the bank.

An example of a comprehensive educational programme comes from
Bank of America, which has a dedicated web page on debit card
usage. Not only does Bank of America highlight its standard
checking account debit card features, it promotes its
savings-linked Keep the Change programme. It also contains a link
that cardholders can click on to see which merchants are
participating in Bank of America’s loyalty programmes and the perks
on offer to its customers.