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  1. Analysis
July 28, 2011

Making debit work

Debit card strategy dominated the agenda of this years Cards & Payments Europe Conference. James Ratcliff looks back at the days discussions and finds that there are clear ways forward for banks looking to increase revenues from current accounts

By Verdict Staff

Debit card strategy dominated the agenda of this year’s Cards & Payments Europe Conference. James Ratcliff looks back at the days discussions and finds that there are clear ways forward for banks looking to increase revenues from current accounts

 

Graphic showing 'cash addicts' and 'debit lovers' payment behaviourFrankfurt – the centre of European finance and the spiritual home of the Euro – played host to this year’s Cards & Payments Europe conference. And the town that has been the backdrop for some the banking world’s boldest moves saw the European payments industry gather to discuss the significant changes the industry is undergoing.

On the agenda this year were mobile payments, e-commerce, and social media listening. In addition, speakers looked at how to drive profits from debit as more consumers turn away from credit.

On this subject Luke Olbrich, head of debit for MasterCard Europe, encouraged banks to revisit the way they look at their portfolios. “We need to look beyond the device, and beyond the account,” he said. “Credit, debit, prepaid, deferred debit, decoupled debit – the channel to access the account needs to be flexible. We need to offer a more adaptable set of platforms that will allow bank customers to choose exactly what it is they want to use.”

The economic crisis changed the needs of both banks and consumers. According to Olbrich, MasterCard responded to this change by commissioning a number of consumer surveys that continue to inform their product development work.

“When we undertook these consumer insight studies we focused on speaking to consumers and understanding how their needs have changed – what their attitudes are towards mobile and towards the different channels,” he said.

The results of those studies, he explained, highlight four areas in which consumers expressed concern.

 

Consumer concerns

Unsurprisingly, security and fraud was at the top of the list of consumer concerns. “We are not in a remarkably glamorous industry unfortunately,” Olbrich said. When people think about payments – if they think about payments at all – they want their money to be safe. This is one area that we as an industry have not sufficiently communicated.”

And it is communication that’s key here, particularly in Europe, where EMV implementation has seen card fraud levels plummet. “But if you look at consumer attitudes, and read the mainstream media, that is not clear,” he said.

The other issue very high on the consumer’s agenda, when it comes to payments is, of course, the convenience aspect.

Naturally, debit cards create an easy way of accessing bank accounts but a step-change still needs to be made when it comes to making debit “the new cash”, said Olbrich.

“People want the ubiquity of cash – they want to know cards are accepted everywhere. But many merchants still do not offer card payments, when they could.”

There are a number of possible reasons for this. “It could be a problem of location: transit systems, for instance, or it could be problems around speed of through-put. There is also the problem of how to process low-value payments efficiently.”

While those are all problems that mobile payments and NFC professes to solve for retailers, it is not an easy sell. Retailers still remain to be convinced that investment at the point of sale will see solid returns. So what would drive retailers to invest? One answer is customer information – marketing and loyalty – the other is consumer demand. We do not always have to be led by the consumer, said Olbrich.

“We are in a push industry to a great extent. If someone had asked me 20 years ago if I would be interested in buying good through a television, I would have said ‘no’.

“Now the technology is in place, we are able to present the consumer with a mobile payments capability. And the consumer will start to look at their phones differently.”

 

Improving profitability

Debit card portfolios is a particular area banks are being encouraged to look at very differently. Return on investment in debit is hard to gauge but banks’ credit-wary customers are encouraging banks to build on their debit offer. But where are the profits?

Francesco Scanera director of international business at Bluerock Consulting spent some time looking at the specific area of driving profit from debit. While the profit is not a clear as it is on credit portfolios, there is still a clear revenue stream.

“You cannot consider income streams simply as revenue from product fees and interchange alone,” he said. “When you are looking at profits from debit, you need to consider the fact that it encourages higher customer deposits.

“It has been shown that account balances are generally larger where the account holder is using debit cards over cash. The other thing to consider when looking at debit in comparison to credit is that a debit offering targets a bank’s entire base of account holders, unlike credit.”

In addition, even when carefully distributed credit has obvious risk and insolvency issues that debit does not. And those factors, while harder to quantify, do add up to real value.

Olbrich concurred and added: ”We try and get banks to invest in debit and we have a business model for banks that clearly shows the average balance on a current account increasing where ATM transactions are replaced by POS transactions.

“The fact is that debit card users’ money stays in the bank longer – and that’s right to the banks’ bottom lines in terms of interest income.”

So the value of debit needs to be judged by the bank account’s profitability, not that of the cards themselves. And when multiplied across many current accounts, that income is very significant. “It’s not just about the six euro cents the bank earns per transaction,” said Olbrich.

 

Loyalty counts

Encouraging increased use of debit cards at the point of sale, as opposed to ATM usage is something that all the morning speakers agreed was important to portfolio revenues. But achieving this is not easy.

Having already heard that margins on debit are small and tricky to define, finding space to add value for customer (thereby increasing use) is itself difficult to justify.

Loyalty programmes are certainly not easy to implement on debit portfolios, but Banco Posta, the banking division of the Italian post office (Poste Italiane), is one organisation that has looked at this area very creatively.

Luca Leoni, head of market intelligence for Poste Italiane used his afternoon session to outline the innovative approach to loyalty that his organisation is implementing across both debit and prepaid portfolios.

“We decided that a traditional points-based reward scheme was not showing good results,” he said. “So we chose to offer cash back. Our problem, however, was funding the cost of that cashback.”

The Italian bank then entered into lengthy negotiations with retailers. They emphasised the importance of loyalty in terms of customer relationship management and marketing, and eventually retailers began to agree to funding the cash back scheme.

“We have now developed a network of 20,000 retailers, all of which were prepared to fund the cost of the loyalty programme as a way of building their relationship with customers.”

The main thing that convinced such a large number of retailers to join the scheme, Leoni said, was Banco Posta’s very large customer base.

“It was not easy to convince retailers that they would see a return on their investment,” he said. “But the key was the fact that we brought 13.5m cardholders to the table.

“Every loyalty scheme needs a large amount of regular spend to succeed, and around 60 percent of card activity comes from everyday spending.”

And this brings us back to debit. High volumes of everyday spend has, Banco Posta has proven, a significant value to retailers. Admittedly, there are few banking markets quite like Italy, but there are clearly opportunities for banks with large debit portfolios to approach retailers to drive profit from card usage, and see the increased interest income that comes from larger volumes of POS transactions.

Collage showing photographs taken at the Cards & Payments Europe Conference 2011

 

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