Visa Europe’s agreement to cap cross-border debit fees
at 20 basis points in April heaped more pressure on banks’ debit
card businesses. Will Cain looks at how the industry has responded
to declining margins on their debit products and the most effective
ways to measure profitability


Maria Lorenzo, Banco PopularInnovation, process efficiency and the need to evolve
business models are themes present throughout the cards industry,
and this is particularly the case for the debit payments

This is being driven by
ever-changing regulations which are pressurising both debit and
credit card industry profitability. It is not new that financial
services businesses are being forced to change as a result of
regulation – in fact it is the one of the few things they can
depend on in the current financial environment.

Regulatory change has been more
sudden in the credit card world, where recent changes, notably in
the US, have represented some of the most wide-ranging reforms the
industry has ever seen.

In debit card payments, regulatory
pressure has been of a more ongoing nature, with EU and US
investigations into interchange fees. On 26 April this year, the
European Commission and Visa agreed to cap interchange, the fee
paid by an acquiring bank to a card issuer on each card
transaction, at 20 basis points for cross border debit transactions
in the EU.

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The cap also applies to so-called
“immediate debit interchange fees” on domestic transactions in
Greece, Hungary, Iceland, Ireland, Italy, Malta, Sweden,
Luxembourg, and the Netherlands.


Opportunities despite

Clearly, margins in debit are under pressure, but there are also
opportunities because a sizeable proportion of low value
transactions are being performed using cash and cheques.

“The current environment is risk
averse, lending is in decline,” said Maria Lorenzo, head of
payments at Spain’s Banco Popular. “Debit brings an opportunity to
all of us. It means we can provide a payment method to new and
existing customers and for the consumer this means they have more

“Last year, across many markets,
debit proved a resilient payment mechanism compared to credit.
Nevertheless it is a low-margin transaction which requires high
volume to make it profitable.”

Lorenzo cited examples from the
Spanish market, which has around 70m cards in circulation. The
majority of growth over the past 10 years has been in credit, with
debit stagnant in terms of volume increases. In 2000, debit volume
stood at around 65% of the entire cards market, compared to around
45% today.

In terms of the number of
transactions, credit overtook debit four or five years ago. The
share of debit transactions in the market has gone down from 56% to

“In terms of volume, it’s
interesting,” said Lorenzo. “Even though of course credit rapidly
surpassed debit in the last 10 years, the gap is not any higher
than would be expected. This is more to do with the fact that in
Spain, banks have not been able to activate and generate spending
on credit products.

“Also, in the last five years,
debit interchange has been under pressure, so we have not been
pushing debit so much at the POS and have been pushing credit

The average transaction for debit
has grown very little over the past 10 years, according to figures
quoted by Lorenzo. It has increased from €39 ($50) in 2000 to €43
in 2009.

“What has really been dramatically
dropping is the average transaction on credit card product, and
this is a good thing, because it means people are using them to pay
for low value items as well as the large items traditionally
favoured by consumers on credit,” she said.

“The fact that the average
transaction for debit has not dropped faster shows we have not been
able to penetrate those cash-intensive industries where people
prefer cash to cards. I believe this is an opportunity for

Spain is a competitive market for
cards with 4.9 cards per household, out of which 1.9 are debit.
Increasing the activation and level of spend on these cards is seen
as the key challenge.


Debit: Three key areas to develop, by Maria Lorenzo, Banco PopularSegmentation

New entrants and youth clients are considered one of the most
important areas of potential new clients for banks looking to grow
market share in both debit and prepaid. As there is less financial
information available on these clients, the extension of basic
payments products is seen as a less risky way of engaging with
these types of customers.

“These types of purchases tend to
be done locally and there may be an element of remittances here as
well with migrant workers sending funds back home,” added

In the youth segment, debit
innovation in the Spanish market has included the doubling up of
debit cards as an identification tool at universities. Payments can
also be made in a closed circuit in the university, or in an open
loop outside.

The mass market is fairly generic,
Lorenzo added, although within this the retirement population is
important and growing. There is evidence they prefer debit products
to credit.

Another important segment was
businesses, she said, particularly small and medium-sized
companies, which often have a preference for debit. Tailoring
products to the high net worth segment, which tend to be a bank’s
most profitable segment, is also an important area.

“Among high net worth individuals,
it is too easy to give them a gold card, premium bank account and
forget about them,” she said. “Segmenting these clients will make
them profitable for you.”



One of the primary means of extending profitability is through
network expansion. This can drive volumes, and debit and prepaid
offer a way of doing this in different markets with less financial
information about the clients.

By extending networks and
acceptance infrastructure, debit cards can also replace cash

“It really depends where you are
coming from,” said Lorenzo. “People say debit has low margins, it
makes us less money. And of course, if you are coming from
lending-based products, debit at this point has lower margins.
However, if you are talking about cash, debit has a lot to offer.
For example, in markets that are cash- or cheque-intensive, a move
to debit would show good profitability measures.”

One area of particular importance
in migrating cash usage onto debit is increasing the use of cards
at the point of sale. In 2000, around 65% of transactions on debit
and credit cards were ATM or branch cash withdrawals, a figure
which had reduced to 55% by 2009.

Lorenzo said this has been a
particular focus at Banco Popular. She added that the ability to
build relationships with customers through debit as their primary
payment mechanism was one of the key drivers of value.

Spain: Cards and payments market – card payments value“Profitability depends on
transformation,” she said. “It is about how we can transform debit
transactions, with declining margins, to be a profitable business
through relationships.

“I am not saying it is magic. Debit
transactions are under pressure and we cannot achieve profitability
easily. It is not going to be transaction but the relationship
where we will get margins and profits. We have to look at cost. As
banks, we have focused a lot on increasing our revenues, but we
also need to look at cost. How can a processor help us reduce those
costs will also be a consideration. The way to transform these
businesses is about developing segmentation, innovation and
increasing usage.”

With interchange pressures and
relatively inflexible cost bases, debit margins look unlikely to
improve. There are of course some exceptions – notably India, where
debit interchange averages above 200 basis points – but for the
majority of markets, generating profitability from debit lies
increasing volume rather than margin.

The other way to approach debit is
through the concept of bank-wide loyalty, cross-subsidising the
costs of debit programmes with the ability to build margin in other
bank departments. Lorenzo said insurance products were a good

“Margins will improve through
enhancing the relationships with our clients through cross-selling
of insurance products, which can generate 20-30% margins to debit
products within a year,” she said.

“New services are also important – remittances for the unbanked
is one example.”