The third edition of VRL’s
Debit Cards as Profit Drivers report shows how banks can
build their business models to maximise the current account debit
card’s full revenue potential. However, as debit is often viewed as
a free-of-charge service, achieving a growth in revenue will not be
without its challenges.


Graphic of Debit Cards as Profit Drivers - 3rd EditionDespite the
proliferation of debit cards in recent years, banks have grappled
with the question of how to maximise their revenue potential at a
time when consumer payment preferences are constantly changing.

However with the economic
turbulence of the last two years incentivising customers to gain
control of their everyday spending and shift to debit over credit,
issuers are increasingly positioning the current account debit card
as a crucial customer acquisition, retention and cross-selling

The Debit Cards as
Profit Drivers
report by Cards International’s
parent company VRL, claims banks have chosen to focus of fees
attached to current and checking accounts in a bid to generate more
revenue from debit products.


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Banks refocus on

The most common direct revenue
sources associated with debit cards are interchange, ATM fees,
issuance and card replacement fees and fees for specific

Issuers may look to migrate more
POS transactions away from the ATM withdrawal channel as a way of
generating more interchange revenue. However, while there are
opportunities to profit further from interchange fees it is also
fraught with regulatory challenges all over the world. It is
imperative issuers monitor this situation and factor this
uncertainty into their business models.

Another more recent, aggressive and
notable refocus of strategy is that of overdraft fees.

“Up until the turn of the decade,
banks would usually decline to authorise a debit purchase 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 overlimit or overdraft fees if cardholders exceed their
available fees,” the report says.

It cites a study from the US Centre
for Responsible Lending which found over the past year, 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.

The report says there is no
“one-size-fits-all” income structure for debit card issuers as they
each have their own business objectives and have varying degrees of
the cost/benefit ratios. Instead, there are several components that
make up the income issuers earn both directly and indirectly.

According to the report, indirect
debit card revenue drivers can come from a number of sources and
issuers need to evaluate the entire business model and determine
where the debit card fits into the overall product proposition.

The main indirect drivers of
profitability are:

  • Increasing ‘float income’ by
    tying debit cards to non-interest paying current
  • Substituting debit card
    transactions for more costly banking transactions, including cost
    savings from reducing cash and cheque issuing and
  • Increased customer
    acquisition, retention, loyalty and share of wallet;
  • Cross-selling
  • Attached benefits such as
    loyalty programmes and insurance cover;
  • Improved brand awareness and
    brand strength, and;
  • Increasing float income by
    tying debit cards to non-interest paying current

Issuers are warned, however that
debit card profitability should not be measured in isolation.
Economies of scale will need to be apparent both in the issuer’s
operations and in the depth and breadth of the available POS and
ATM network infrastructure. It is through economies of scale that
key costs can be lowered, while increases in debit transaction
volumes will lead to reduction of cash costs or greater cash


Debit as a ‘free-of-charge’

One of the biggest obstacles
issuers face in their quest to maximise profitability in debit
cards is they are often seen as a ‘free-of-charge’ service.

“The dilemma of how to use the
debit card for maximising current account profitability is
underlined by the entrenched consumer and merchant attitudes
towards payment instruments,” the report says.

“For debit cards attached to a
current account, the perceived view is that it is a public service
provided at low-cost or for free to the end-user.”

In formulating a business strategy
to encourage greater usage of debit cards, the report says banks
will need to weigh up the pros and cons of whether short-term
losses incurred by offering current account/debit card features
will be positively offset in the longer term by growth of

In determining fees related to current accounts and debit card
usage, the report says banks should strive to make the debit card
more convenient for the customer to use than other payment