Debit card issuers worldwide struggling to find the best path to profits need “radical thinking” to develop commercially viable incentives aimed at driving heavier debit card use among specific customer groups, First Data Corp. says in a study released this month.
Debit card use is rising around the globe, but many issuers are operating debit card programs at break-even levels or at a loss because they lack coordinated strategies to developing new products, driving card use and controlling fraud costs. Moreover, the rise of regulations surrounding debit card payments in most global markets is complicating efforts to boost debit profits.
To increase revenues and maximize debit profits, issuers must revamp certain internal processes and take a more strategic look at opportunities and costs, First Data concludes in its 24-page report “Worldwide Opportunities for Debit.”
The Atlanta-based payment processor commissioned TowerGroup to conduct interviews with 34 banks in 10 countries for the report; 55% of participating banks are among the top 10 debit issuers in their markets. Analysts from several other advisory firms, including Aite Group, Accenture PLC, IDC Financial Insights, Javelin Strategy & Research, Mercator Advisory Group and Value Partners also provided insights for the report.
According to the report, debit card transaction volumes have risen significantly worldwide, and the trend is likely to continue as more consumers show a preference for debit over paying with checks and cash.
In some commercial channels, merchants are driving consumers to use debit cards over all other payment types. In Belgium, Netherlands and Luxembourg, debit cards are becoming almost the only means of payment in some retail segments, such as fuel.
The economic downturn has accelerated the use of debit, as many consumers are using the pay-as-you-go benefits to help control their routine expenses, reserving credit only for certain occasions. And in some emerging markets, the spread of card-acceptance infrastructures is enabling banks to roll out debit programs on a mass scale.
Though credit cards have been the focus of much innovation and investment in recent decades, debit cards have not received as much attention. “Much remains to be done on (debit) product development and service delivery,” the report contends.
New payment technologies, including contactless, mobile and e-commerce, could play a key role in increasing debit revenues and profitability. Younger consumers, which tend to prefer debit over other payment channels, are the prime market for such new technologies.
Unbanked consumers are another important potential market for mobile and prepaid debit products, particularly in countries such as Mexico, Brazil and Turkey.
Despite the need for further innovation to enhance debit profits, the rise of new regulations surrounding debit card payments in markets around the world is hampering such investment by putting downward pressure on debit interchange and other transaction fees.
A new law that will regulate debit interchange in the U.S. beginning next year, along with new overdraft-fee rules going into effect this summer, “threaten to undermine the business case for innovation and customer retention initiatives, such as (debit) rewards programs,” the report says. In Europe, the implementation of the Single Euro Payments Area in 2008 has complicated debit issuers’ efforts to unify products and drive new revenue.
Another major constraint on debit card profit growth is the rise of debit card fraud. Controlling such fraud is crucial in maximizing debit profits. “Given the tight margins on debit, fraud levels can determine whether a debit business is profitable or not,” the report states.
Many countries have seen improved security on debit cards from the introduction of chip-and-PIN technology at the point of sale, but chip-based cards are not a panacea for all debit card fraud, the report notes. For example, debit card fraud continues to rise in card-not-present transactions.
But debit card issuers could do a better job of protecting against fraud, First Data contends. Many issuers direct credit, signature-debit and PIN-debit cardholders to call a different toll-free telephone number to report fraud for reach type of card. Financial institutions might consider centralizing fraud-reporting services to gain efficiencies and control expenses.
Better debit card consumer education also could cut fraud levels because many consumers seem unaware of fraud risk and how to prevent it, the report suggests.
Improving card activation and use at the point of sale also could boost debit card profits, the report says. Debit card activation rates are 70% to 80% in the U.S., and debit transaction volume surpassed credit card volume beginning in 2008. But in many markets around the globe, including Europe, cash continues to dominate. In Germany, Greece and Turkey, many consumers use debit cards only for cash withdrawals at ATMs, First Data states.
A clearer understanding of the elements of debit card economics could go a long way toward improving many banks’ debit-program profits, First Data suggests. For example, some issuers struggle to sort out the revenues and costs debit programs generate, especially where debit is one component in a bundled package of bank account offerings, according to the report.
Many banks are operating debit programs near break-even levels or at a loss on the basis that debit transactions are less expensive than those conducted at branches and ATMs, but “there has been limited success in achieving this migration in many markets,” First Data contends.
Moreover, some banks are intent on moving only low-value payments to debit cards to encourage consumers to pile higher-value transactions on more-lucrative credit cards.
Hybrid debit/credit cards could solve some of these dilemmas. In Brazil, the report says, a number of banks are offering a line of credit on debit cards, which consumers pay off in installments.
New product innovation and strategic packaging of products and services will become a major factor in driving profits as the debit industry evolves, First Data suggests.
Segmentation of debit customers and behavior analysis are essential in helping to maximize debit profits, but many issuers struggle with it. Challenges include internal reporting systems that make it difficult to identify different types of debit users, and obstacles to monitoring customer behavior over time. But to squeeze profits out of debit card programs, issuers must solve their data-analysis problems and take action.
Merchant-funded rewards programs may become more significant in debit offerings, according to the report.
“Given debit card economics, rewards programs are likely to be profitable only if they are integrated with other retail banking loyalty programs or if issuers partner with other organizations as part of a wider rewards scheme,” the report says.
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