Cathy Pricco: Time to Re-visit Your Debit Card Strategy
Although debit card programs have been around for decades, many banks underutilize them as a source of sustainable fee income. In fact, while most banks communicate debit card benefits at the time a customer opens an account, few consistently follow up to encourage card activation and card use. For banks, a well-utilized debit card program can be attractive for several key reasons—it can provide a capital-free and recurring source of fee income, and it can provide a means for building customer loyalty and retention by offering a valuable product that carries minimal or no fees to the customer.
These characteristics, together with the current market dynamics, make this a good time to dust off your debit card strategy and make sure that you are optimizing this attractive and potentially turn-key source of fee income.
To better understand why, consider these converging banking and consumer trends:
Key trends for banks:
- Deteriorating credit quality
- Loss of loan fee income
- Escalating pressure to reduce overdraft fees and offer greater consumer controls
- Increasing controls on credit card pricing
- Increased scrutiny from regulators and consumer groups
Key trends for consumers:
- Reductions in available credit limits
- Increased interest in monitoring and tracking spending
- Caution in taking on debt
- Increased credit card rates and fees
- Growing movement toward and preference for electronic payment options
What is the current state of your debit card program?
To evaluate the effectiveness of their debit card programs, banks should establish and monitor key “vital signs” for their programs. A good place to start is by considering the following questions:
Do you know what percentage of your eligible deposit customers have debit cards?
Do you know what percentage of your debit cardholders are active card users?
Are you educating customers about the benefits of debit cards?
Do you know what percentage of new debit cardholders activate their cards within the first month?
Do you know the monthly utilization rates of active cardholders and what percentage of their total monthly transactions debit cards comprise?
Do your marketing efforts target the customers who are most likely to produce the greatest return on your investment? Is your branch staff incentivized to increase debit card activation and utilization?
Do you have a systematic program to monitor debit card activity and generate debit card use? If you answered “no” to any of these questions, you are very likely leaving revenue on the table. According to the 2009 Debit Issuer Study commissioned by PULSE, the average debit card penetration rate in 2008 was 73 percent. Among these cardholders, 66 percent were active—that is, they used their cards to conduct any transaction in the past 30 days. If your bank’s debit card program is at or below these levels, you may have significant opportunities for improvement.
How can you increase activation and utilization?
There are a number of ways to increase cardholder activation and utilization. For example, activating cards during the account opening process significantly increases the likelihood a customer will begin using his or her card. In addition, ongoing communication about how and where to use the card also can remove some of a cardholder’s potential psychological hurdles. These steps can be particularly timely, considering the increase in electronic payment options for daily expenses and declining acceptance of checks among certain merchant categories. At the same time, communicating the customer—convenience benefits of features such as debit card-based bill payments and cash back with purchases—could potentially help increase your average ticket size. By segmenting your cardholder base, you can tailor customer communication for particular segments to increase the return on your marketing investment. For example, some of the greatest returns on debit card marketing frequently result from sending targeted communications to cardholders who are “active” but who use their cards relatively infrequently—individuals who are over the initial activation hurdles but have not yet made debit card use a habit.
Developing and implementing a strong debit card program is time well spent.
Once a customer adopts regular debit card use as part of his or her financial behavior, your bank has established an important foundation for higher customer profitability and stronger retention for years to come. In addition, by getting into the practice now of analyzing and learning from your customers’ behavior, your bank will be in a better position to anticipate and respond to their needs and preferences. This also enables you to respond more quickly to potential developments in the financial landscape driven by innovation, regulatory, demographic or competitive changes.
Why not start with a program that can generate solid fee income now while positioning your bank for stronger growth in the future?
For more information and case studies, check out West Monroe Partners’ recent webinar the Federal Home Loan Banks (FHLB) on the topic of customer analytics.
West Monroe Partners works with financial institutions to develop customer analytics strategies and tools that address their unique needs. For more information, please contact Cathy Pricco.