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
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
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
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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
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
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
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
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.
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
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.