Banks looking to generate profit from low-margin debit products are being encouraged to apply the same methods they use in their credit portfolios. Research from processor First Data suggests this is the best way for banks to harness the ongoing switch from credit to debit
Banks are missing out on major opportunities to improve the profitability of their debit card programmes, according to a report from payment processors First Data.
Paul Stanley, First Data’s managing director for Europe, Middle East and Asia, told CI this was particularly important now that debit volumes have exceeded credit at both MasterCard and Visa in the US and the UK. Payments markets across the world are seeing a shift from credit to debit, driven by improving levels of acceptance of debit cards both domestically and internationally. There is also a consumer preference to make discretionary purchases via card payments rather than cash and cheque, and a growing aversion to credit.
But wafer-thin margins on debit card products means banks need to be clear about the profitability of the business, an area Stanley said banks are currently failing to address.
Banks typically bundle their debit offerings with other products, but this makes it hard to truly understand the economics of their debit programmes. Greater awareness of the relationship between channels and products, the alignment of credit and debit strategies and improved account packaging are all essential to driving profitable consumer behaviour.
On the cost side, banks need to consider network membership, ATM network costs, ATM transactions, issuing, customer acquisition and, particularly, fraud. On the revenue side, interchange, ATM revenues and fees can also be broken down.
First Data’s survey, Worldwide Opportunities for Debit, found that 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.
In addition, the report recommended growth strategies banks should adopt and warned of impending threats to their ability to take full advantage of the opportunity debit programmes represent.
In emerging markets, the study concluded that banks need a more vigorous approach to both customer education and co-operation with retailers to increase debit card usage, especially at the point of sale.
It added that real opportunities exist to improve the profitability of debit programmes through the use of new payment channels such as mobile, prepaid, contactless and e-commerce.
The survey found little evidence that banks are using best practice developed in support of credit cards to drive debit growth and performance.
“Banks can capitalise on consumers’ move to debit if they develop a sophisticated understanding of the economics of their debit offerings and put the same innovative energy behind debit as they do behind credit,” said Stanley. “However, our study warns that fraud and increased regulation could dampen the debit experience for both banks and their customers.”
The report said there was typically little emphasis in innovation on debit programmes, but there were some exceptions. In Brazil and Turkey, a number of banks offer instalment debit card payments (similar to credit cards, which generate fee income). The packaging of current accounts has become the norm in many markets, which can promote debit card profitability through charging fees.
Maximising debit profitability
The report said maximising debit profitability is best achieved through segmentation and rewards programmes, which will help promote customer loyalty. These are likely to be profitable only when integrated with other retail banking offers or in partnership with retailers and other third parties. This concept – bank-wide loyalty – refers to using the debit card as a tool for loyalty across the bank’s portfolio.
Loyalty programmes can also increase debit usage at the point of sale, which is a clear priority for banks in Europe and in emerging markets, where ATM withdrawals can account for up to 90% of debit card transactions.
In India, banks reported that a 1% increase in debit activation can drive a 20% increase in transaction volumes, demonstrating the potential upside for banks in emerging markets. Regulation of debit usage is increasing in nearly all of the markets included in the study and is challenging current debit business models, notably SEPA in Europe.
Tight margins on debit mean fraud levels can make the difference between profit and loss. ‘Chip and PIN’ is an effective weapon against fraud for card-present transactions, although limited merchant acceptance undermines the business case in the US.
The report, published on 15 July, incorporated data from interviews of 34 banks across a mix of 10 mature and emerging markets around the world.