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August 3, 2010

Comment: Debit card fee-charging on the up

Up until a few years ago, debit cards were 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 revenues.

By Verdict Staff

Up until a few years ago, debit cards were 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 revenues.

 

Overdraft fees: Key figures – total overdraft fees earned by US banksRefocusing on fees

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 overdrawn.

The revenues banks make from overdraft fees have not gone unnoticed by regulators however. Pressure in the US has recently forced both Bank of America and Citigroup to stop the automatic approval of debit card and ATM overdrafts.

More from this month’s debit quarterly:

Debit: A case for investment

Time to apply credit innovation to debit

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 5640, Jeannie.Lam@vrlfinancialnews.com

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