Banks must apply more energy and innovation to
developing their debit card programmes, to make debit usage a more
valuable proposition for themselves and their cardholders,
according to a multinational study released by global payment
processor First Data. Victoria Conroy reports.

 

The debit card is the primary account access instrument to the
payment account. It is key to controlling and developing the retail
banking client relationship. A new report from global payment
processor First Data, Worldwide Opportunities for Debit,
shows the growth of debit is being driven by a range of factors,
most notably:

  • The increasing use of electronic
    payments in all markets as cash and cheques are displaced;
  • A steady decline in the use of
    credit cards as consumers migrate more transactions to debit;
  • The development of card acceptance
    infrastructures in emerging markets which have enabled banks to
    roll out mass issuance debit programmes;
  • Increasing use of debit through
    emerging payment channels such as mobile, contactless and over the
    internet, and
  • Regulation at both national and
    international level.

 

Debit trends in mature
markets

In mature payment markets such as the US, UK, Canada and the
Benelux countries, the use of cash is steadily declining. In
markets where cheques are still used, the speed of their decline
has been faster than cash.

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Debit’s growth in mature debit and
credit markets is helped by the existence of a well-developed card
acceptance infrastructure in these countries. In contrast, a
limited acceptance network is hampering the take-up of electronic
payments in many emerging markets.

Consumer research in the US showed
that, in 2008, debit was the preferred means of payment at the
point of sale for 37% of consumers. Debit was followed by cash
(32%), credit cards (25%), cheques (4%) and prepaid cards (1%).

The rapid decline of paper-based
payments in the US contrasts with a number of mature continental
European markets such as Germany. In a country with over 90m debit
cards in issue, cash still accounts for over 60% of consumer
payments there. In addition, debit cards are used mainly for cash
withdrawals at the ATM.

While cash remains dominant across
most of central Europe, markets such as Norway, Belgium and the
Netherlands show much higher use of debit at the point of sale.
Debit cards are becoming almost the only means of payment in some
retail segments such as at filling stations in the Benelux
countries.

 

The impact of the
recession

Industry analysts are agreed that the recession has had a major
impact on driving down credit card usage. In strong credit markets,
pressure has increased on banks’ balance sheets and managing
liquidity has become a priority. With many credit card borrowers
overstretched, banks have reduced cardholders’ credit limits,
ramped up their collections operations and tightened criteria for
issuing new cards.

However, several US banks believe
that, while credit card usage has declined, those transactions have
not migrated to debit cards – a sign perhaps of a fall-off in total
consumer spending as a result of the recession.

In the UK, traditionally a strong
credit market, debit has grown rapidly in recent years. This has
been helped by a combination of free current account banking, a
developed ATM and Point of Sale (POS) infrastructure and, with
recession, a growing level of caution over spending.

This caution is also evident in
Turkey, where the recession has had less impact and where most
credit cardholders regularly clear their balances every month.
Although credit cards are used mainly for high-value purchases,
many Turkish consumers use them more like deferred debit cards and
do not revolve their balances.

One of the participating banks in
Turkey reported a 58% to 76% year-on-year increase in debit volume,
attributed to both organic growth and cannibalisation from credit
cards. Another bank in Turkey believes debit card growth is fuelled
by weakness in the economy and saturation in the credit card
market.

First Data debit study: Major opportunities for debit in next 12-24 months (% of participating banks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The impact of
regulation

Debit has not escaped the wide-ranging regulation impacting the
payments industry. Financial institutions in the US are facing two
significant regulatory changes – interchange and overdraft reforms
– both with a potentially game-changing impact. Meanwhile, many
banks in Europe have to decide the fate of domestic debit schemes
and debit brands as a result of SEPA.

Banks in the US are well aware of
the dangers of the planned new legislation. One of the US banks
interviewed says that, if the interchange rate is cut, “there is no
money to pay for rewards”.

Another bank plans to overhaul
debit pricing and forecasts that most debit rewards programmes will
be cut. A third is developing action plans for 2011 based on three
or four different scenarios.

All US banks are also concerned
about the new demand deposit account overdraft regulations from the
Federal Reserve Board, with one bank anticipating that 10% to 15%
of transactions will be turned down at the point of sale, a
potential customer service disaster. Overdraft regulations will
require enhancements to debit processing in that one-time debit and
ATM transactions have to be uniquely identified for charging or
overdraft fees.

These regulations also have the
potential to negatively impact the underlying profitability of a
financial institution’s demand deposit account portfolio if the
financial institution does not incentivise customers to opt into
overdraft programmes.

 

Understanding debit
economics

Banks face several challenges in achieving greater clarity
around the economics of debit, especially where debit is one
component in a bundled package of current/chequing account
services.

Financial institutions interviewed
for this study express confidence in their understanding of debit
card economics and the attribution of costs and revenues. That
said, many report having limited visibility on many of the metrics
of their debit operations – and note that they do not treat debit
as a business in its own right.

Participating banks comment that
costs are often shared across several product areas and are blended
between debit cards, credit cards and other retail bank
products.

Interviews with participating banks
reveal that those who outsource their debit processing have clearer
visibility of the costs of their debit business than those who
don’t. Whatever the levels of understanding, the challenges facing
banks as they try to build a profitable debit business are
significant.

Among the major challenges around
debit economics:

  • Many banks are operating debit
    programmes near break-even or even at a loss on the basis that
    debit offers substantial cost savings by moving customers from the
    branch and ATM to make purchases at the POS. However, there has
    been limited success in achieving this migration in many
    markets;
  • Bankers from the credit card
    business are more focused on moving only low-value payments to
    debit in order to ensure that large payments continue to be made on
    revolving credit cards; and
  • Banks in the UK and Germany report
    that investment in product development and innovation has been
    negatively impacted by the economics of debit in their markets.
    However, one of the Turkish banks interviewed for the study advises
    that innovations on the credit card side of the business are also
    being applied in the debit business where appropriate.

Packaging of current accounts has
become the norm in many markets, in some cases further obscuring
the transparency of debit card economics. In many European markets
there has been a steady move from individual product pricing to
bundled offerings to improve customer retention.

 

First Data debit study: Forecast debit growth in emerging markets, transaction valuesEnhancing
profitability

Analysts interviewed for this study urge banks to be more
rigorous in building debit programmes that can be measured
accurately and developed profitably. In mature debit markets,
issuers could learn from the credit card business where banks tend
to have a better grasp of the economics and make far more use of
innovation and analytics in developing their product
propositions.

However, while credit card
programmes can be run solo, debit is often bundled with other
components of a current account offering and needs to be managed in
a joint strategy with these as well as other retail bank channels.
Among the initiatives being taken by banks to reduce costs or
improve revenues are imposing transaction fees, annual fees and
activity fees and lowering the frequency of re-issuing cards.

Outsourcing is also being used to
both lower costs and bring new products and features to market.

The banks interviewed for the study
identify significant opportunities for debit business growth. These
include more effective marketing and customer segmentation,
contactless technology, organic growth and moving low-value
payments from cash to debit. By far the largest opportunity lies in
increasing card usage at the POS.

 

Increasing debit usage at
the POS

When it comes to growing debit profitability, increasing debit
card usage at the POS is at the top of banks’ agendas. While the US
reports activation rates of 70% to 80%, rates in most other markets
are much lower. This is understandably so in emerging markets, but
the upside in driving POS activation in these countries is clear.
One bank in India reports that, for every 1% increase in
activation, there is a 20% increase in transaction volumes.

In many European markets, POS
activation also needs to be a priority. Consumers in countries such
as Germany, Greece and Turkey tend to use debit cards only for cash
withdrawals at ATMs. Innovative strategies are being used by some
banks to incentivise card usage at the POS.

One bank in Turkey uses ATM
receipts, banner advertising and in-branch promotions to target
customers who have not used their cards at the POS. It has offered
increased cashback to those customers who reach set spending
targets. The campaign has generated a 5% increase in customers who
use their debit cards at the POS, with an increase in average
purchase volume.

Advertising can be an effective
medium to educate card users about the benefits of using their
debit card at the POS. However, in India, banks report that the
Reserve Bank of India, the country’s central bank, has imposed
advertising spending limits per debit card account. These limits
have been relaxed for campaigns aimed at stimulating POS
activation.

The youth market, which has little
legacy of using either credit cards or cash, is a prime target for
driving POS activation. A Turkish bank says that its POS activation
strategy is targeted at the youth market to drive out cash usage at
the POS. Several banks in other markets also mention this as one of
their strongest areas of growth.

 

First Data debit study: Forecast debit growth in emerging markets, number of transactions Segmentation

Customer segmentation, a key element of credit card marketing,
is little used by debit card issuers. The study found that
segmentation has been ignored by many participating banks. Where
customer segmentation has been tried, results have been mixed.

On the positive side, several banks
in Mexico are using enterprise data, including securities held at
the bank, to place qualifying customers in a higher-tier debit
product. A number of banks are considering launching debit cards
for more affluent customers but, even in saturated debit markets
such as Germany, segmentation is not widely used.

Given the country’s expertise in
credit card marketing, segmentation is surprisingly also a
challenge for some of the US banks. One bank reports difficulty
with segmentation due to the challenges of monitoring segments of
customers over a period of time. In spite of these issues, debit
segmentation is now starting to take more of a central role.

With limited resources to dedicate
to customer marketing and direct mail, banks in Mexico and India
are focusing on efficient, high impact spending targeted at
specific customer segments.

One of the Turkish banks says that it segments customers with
no, or low, purchase activity and provides special incentives for
debit card usage, but only if the customer does not have a credit
card with the bank. This strategy works to migrate card spending
away from credit and could be applicable in other markets.