The Case for Promoting Debit Cards: Why They Are Still a Growth Product


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While debit cards have been commonly used to make consumer retail purchases for more than a decade, many financial institutions may have placed less priority on their debit card business in wake of regulatory changes. After rapid annual growth over the past decade, growth appears to have plateaued for many institutions in the last year or two. However, debit cards remain a profitable product to promote for smaller financial institutions as demonstrated by FIS research findings and supporting case studies with a community bank and credit union outlined in this research brief.

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The Case for Promoting Debit Cards: Why They Are Still a Growth Product

  1. 1. The Case for Promoting Debit Cards:Why They Are Still a Growth ProductFIS Research BriefFebruary
  2. 2. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductIntroductionWhile debit cards have been commonly used to make consumer retail purchases for more than a decade, manyfinancial institutions may have placed less priority on their debit card business in wake of regulatory changes.After rapid annual growth over the past decade, growth appears to have plateaued for many institutions in thelast year or two. According to the Federal Reserve Board and CEB TowerGroup, debit card use grew from 8.3billion transactions in 2000 to 46.7 billion in 2011 – an average growth of about 19 percent annually. There wasa corresponding growth in debit volume from $300 billion in 2000 to $1.8 trillion in 2011 – about a 20 percentannual gain (see Figure 1). 1 Figure 1: U.S. Debit Card Transaction and Dollar Volume (2000 – 2011) $2,000 46.7 50 Number of transactions (billions) $1,800 37.9 40 $1,500 Dollar volume ($ billions) $1,400 30 25.3 $1,000 $1,000 18.0 20 $700 $500 8.3 10 $300 $0 0 2000 2003 2006 2009 2011 Sources: CEB TowerGroup and Federal ReserveAlthough updated numbers are not available from the Fed or CEB TowerGroup, data from Visa’s andMasterCard’s annual reports indicate debit volume growth may have slowed significantly in the past year. Visa®,the largest signature debit network as well as the owner of the Interlink PIN debit network, reported $822 billionin Visa and Interlink-branded U.S. debit card purchase transactions for the nine months ending Sept. 30, 2012,down 4.6 percent from $860 billion the year earlier. Meanwhile, MasterCard’s annual reports showed thatduring the nine months ending Sept. 30, 2012, its U.S. debit card purchase volume of $332 billion was up 15percent from $288 billion during the same period one year earlier (see Figure 2). Taken together, the combinedU.S. debit card purchase volumes of Visa and MasterCard® during the first nine months of 2012 increased byonly 0.5 percent – a far cry from the double-digit growth rates the companies were recording on a combinedbasis just a year or two ago. 1
  3. 3. The Case for Promoting Debit Cards: Why They Are Still a Growth Product Figure 2: Debit Purchase Volume: Visa and MasterCard (First 9 Months of 2012) $1,000 $900 $800 $700 $600 $ billions $500 $400 $300 $200 $100 $0 Visa MasterCard (9 mo. ending Sept. 30) (9 mo. ending Sept. 30) 2011 2012 Sources: Company annual reportsDisenchantment with debit by some financial institutions may be tied to the passage of the Durbin Amendmentto the 2010 Dodd-Frank Financial Reform & Consumer Protection Act. That amendment capped interchangerevenue – the biggest source of fee income for financial institutions that issue debit cards – at a rate that forsome banks is about 45 percent below what it had been prior to 2011. But the Durbin Amendment only appliesto financial institutions with assets of more than $10 billion – a small portion of the number of financialinstitutions in the U.S. that issue debit cards, but a majority of the cards in circulation. As a result, many largerbanks have changed their emphasis on debit cards and some are investing more significantly in credit cards.For smaller institutions, debit largely remains a profitable product to promote. And with the big banks’ emphasison debit changing, there may be an even greater opportunity for other financial institutions to grow their debitcard volume.There are several reasons why financial institutions should promote debit, the biggest being the ability toincrease fee revenue:• The greater debit card transaction volumes financial institutions see, the greater the interchange revenue they can collect.• There are benefits to reducing the cost of processing checks if check volume can be converted to a revenue- generating debit card payment. In addition, there’s the potential to reduce teller and ATM costs associated with providing cash to customers who use it to make purchases. 2
  4. 4. The Case for Promoting Debit Cards: Why They Are Still a Growth Product• Finally, debit cards can be used as a tool to enhance financial institutions’ relationships with their customers. Many consumers are watching their household budgets more carefully and find that debit cards simplify their ability to pay for goods and give them control over spending. Financial institutions that can show their customers how their lives can benefit by using a debit card can themselves benefit from loyal and grateful customers.But while there are definite benefits to promoting debit card use, some institutions may have falsely concludedthat it is a mature product with limited growth potential.Research conducted by FIS shows there is still room for significant growth. Its 2012 consumer survey onpayments showed that about two-thirds of consumers currently use debit cards on a monthly basis for in-personpurchases. That alone indicates that one-third of a financial institution’s customers have yet to get the messageabout the benefits of debit cards. Additionally, of those consumers who do use debit cards, only about half usethe cards heavily. That presents a sizeable customer base that could be motivated to use them more.Clearly, those financial institutions that can identify segments of their customers receptive to greater debit carduse and engage in active educational and promotional programs have a lot to gain.Why promote debit?For financial institutions, there are three major reasons they should encourage customers to make greater useof their debit cards:• Greater fee income• Lower costs associated with processing checks and dispensing cash• Enhanced customer relationshipsClearly the greatest incentive for financial institutions to promote debit cards is fee revenue generation. And thegreatest opportunity for fee generation relates to interchange revenue.Financial institutions that have assets under $10 billion typically generate 1.1 percent in interchange fees (basedon a blended rate for signature and PIN debit transactions) for every dollar spent with a debit card. 2 Based onthe debit card transaction behaviors of FIS’ financial institution clients; it is common for the retail customers of atypical 10-branch financial institution to incur approximately $70 million a year in purchases on their debit cards.A financial institution of this size can then increase its interchange fee revenue by $110,000 annually if it canmotivate customers to put $80 million worth of purchases on their cards, based on the 1.1 percent generatedfrom interchange.Many financial institutions recognize the importance of this revenue. “Debit interchange fee revenue is thelargest single deposit revenue generator we have outside the margins,” says Rule Loving, Assistant VicePresident at $430 million asset StonehamBank in Stoneham, Mass. “We cannot charge a lot of fees on ourdeposit accounts, so debit is clearly the strongest and most significant income source we have.” (See theStonehamBank case study on page 14 for details on StonehamBank’s success in increasing debit card revenue). 3
  5. 5. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductSome financial institutions, however, are concerned about the effects of the Durbin Amendment. Thatlegislation took effect Oct. 1, 2011 and capped interchange on debit transactions to 21 cents per transactionplus 0.05 percent multiplied times the value of the transaction, plus a 1-cent fraud adjustment, if eligible, forinstitutions with assets of $10 billion or more. Institutions with assets below that level are exempt.A study by the Federal Reserve Board shows the effect this cap had on the two groups of financial institutions.The Fed reported that nonexempt institutions (those exceeding $10 billion in assets) saw a 45 percent decline inaverage fees per transactions from 2009 – from 43 cents to 23 cents. However, exempt institutions (those under$10 billion in assets) showed no change in average interchange fees since 2009 (see Figure 3). 3 Figure 3: Average Interchange Fee Per Transaction $0.43 $0.43 $0.43 $0.23 Larger Financial Institutions Smaller Financial Institutions (> $10 billion in assets) (< $10 billion in assets) 2009 2011 Source: Press release from the Federal Reserve Board issued May 1, 2012Clearly, even with the Durbin Amendment, there is still a substantial amount of interchange revenue for afinancial institution that actively promotes debit card use by its customers. Even large banks whose averagetransaction fees have declined may find some benefit by offsetting the decline in revenue per transaction byincreasing the overall volume. Plus, even at a lower average rate of 23 cents, debit interchange revenue stillcompares very favorably to the expenses financial institutions incur if consumers were to shift transaction shareback to checks and cash. 4
  6. 6. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductOther Fee RevenueIn addition to interchange revenue, some banks have found additional fee revenue in charging customers cardor transaction fees. Many institutions, however, do not want to charge debit card fees to customers for fear thatcould discourage usage. There may be one exception to this theory: reward cards.Some financial institutions have found that a sizeable number of customers will pay an annual or monthly fee fora debit card if they get rewards for that card’s use. A study by Synergistics Research released in June, 2012 foundthat about half of debit card users surveyed were offered some type of reward program with their card. Morethan 40 percent of those said they pay a fee for their card. 4In addition, when debit card users were asked if they would pay a fee for a debit rewards card, nearly 45 percentsaid they would pay at some level. About 25 percent said they would pay $50 per year for a card, nearly 10percent said they would pay $30 a year and another 10 percent said they would pay $20 a year. While theimplications of charging an annual fee for debit rewards participation must be carefully considered, theseconsumer research results do reveal the level of value that some consumers place on loyalty programparticipation, which represents a potential source of revenue to offset reduced interchange income.Cost ReductionsWhile increased fee income may be the biggest reason for financial institutions to encourage debit card use, costreduction is also a factor. Much of debit card use today represents a substitution for paper checks. Andprocessing paper checks represents a sizeable cost that financial institutions want to reduce.According to the Federal Reserve Payments Study, U.S. consumers wrote 14.5 billion in checks in 2009,representing $5.5 trillion in value. The Fed estimated that 83 percent of these checks were for consumer retailpurchases and bill payments. 5While the number of consumer-generated checks is declining, banks can accelerate that decline by promotingdebit cards. This accelerated demise of checks represents a substantial expense reduction opportunity tofinancial institutions. According to IDC Financial Insights, U.S. depository institutions spend about $1.5 billionannually on item processing. While paper has largely been eliminated from the check processing productionstream, it’s still the case that financial institutions typically incur fully-loaded unit costs of 6 – 7 cents for checkprocessing.Debit card use also can substantially reduce the number of trips cash users make to ATMs and branch tellers.According to William Demchak, President of PNC Financial Services Group, the cost of an ATM transaction to thebank is 59 cents.6 CEB TowerGroup estimates the average fully-loaded cost of an ATM transaction to a financialinstitution is 61 cents and the average cost of a branch teller transaction is $1.36. 7 5
  7. 7. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductEnhancing RelationshipsNot all the advantages of customers’ increased debit card use can be seen directly. Financial institutions thatrecognize the benefits debit cards offer to their customers − and can promote those benefits – can potentiallydeepen the relationships with their customers.At a time when many financial institutions are talking about the need to enhance their customer relationships,what better opportunity than to promote a product that customers say they like and improves their daily lives?“Our members love debit cards,” says Kristina Latoszewski, Vice President of Marketing for $250 million assetAmerican 1 Credit Union in Jackson, Mich. “Debit helps them not make as many mistakes and it seems the wayto go for so many people.” (See the American 1 Credit Union case study on page 15 for details on how toimprove debit card use through quick activation and promotions).FIS’ study of consumer attitudes about debit found that the majority of card users believe the card helped themcontrol their spending and gave them control over when funds are taken out of their account (see Figure 4). Infact, more debit card users recognized that their payment method helps them not spend beyond their meansmore effectively than check writers and cash users. The percentage recognizing that debit provides control overthe time when funds were taken out of their account was about the same as check writers and greater than cashusers. Figure 4: Importance when making in-person payment for goods or services (Top 2-box score on 7-point importance scale) 56%* Helps me to not spend beyond my means 62% 56% 56% Allows control over the timing of when 56% funds are taken out of my account 52% 26% Paper check writers Provides loyalty points / rewards 24% Debit carders 28% Cash users Read as: 56% of Paper Check Writers rate “helps me to not spend beyond my means” as extremely or very important. Source: FIS, February 2012; n = 3,205Recognizing the benefits their cards give to consumers and clearly communicating those benefits to customerscan help financial institutions show they really care about their customers and their customers’ financial needs. 6
  8. 8. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductTargets of PromotionOnce a financial institution has decided it wants to promote debit card use, the first step should be to identifycustomer segments that are most likely to respond to promotions.FIS research in February 2012 with 3,205 consumers about their payment preferences shows that growth indebit card use is possible for most financial institutions and there are segments most likely to respond to debitpromotions. Prime segments for debit promotions include:• Light users of debit cards who can be convinced to use their cards more• Paper Check Writers – defined by their relatively heavy usage of paper checks including POS usage vs. usage of other payment methods – who can be converted to become debit card users• Cash Users – defined by their relatively heavy usage of cash vs. other payment methods – who can be converted to debit card usersAlthough Paper Check Writers and Cash Users are distinct segments, light users of debit cards are presentamong all five payment groups identified in the research.The FIS study found that about two-thirds of the consumers surveyed use debit cards. However, only about halfthose use their card more than 10 times a month. The study also showed that heavy debit card users account for86 percent of in-person debit transactions (see Figure 5). That indicates potential to increase debit card volumeby motivating light debit card users to use their cards more. Figure 5: Distribution of Debit Card usage for In-person Payments 86% 36%* 35% 29% 14% 0% Debit Non-user Light Debit User Heavy Debit User Percentage of consumers Percentage of in-person debit payments * Read as: Debit Non-users represent 36% of adult consumers. Note: Light Debit Users used their debit card between 1 and 9 times and Heavy Debit Users used their debit card 10+ times in the past 30 days to make an in- person purchase. Source: FIS, February 2012; n = 3,205 7
  9. 9. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductWhile 65 percent of consumers use debit cards, 88 percent use cash, 63 percent use credit cards and 51 percentuse paper checks to make purchases, according to the FIS research (see Figure 6). Figure 6: Percentage of Consumers Who Used Payment Method for In-person Purchases in Past 30 Days and Average Number of Times Used Each Payment Method Use of Payments for In-person Purchases (last 30 days) 100% 14 Avg. number of times used payment method Percent who used payment method 90% 88% % of consumers who used 12 80% Avg. # of times used 70% 10 65% 63% 60% 51% 8 50% 6 40% 33% 30% 4 20% 12% 2 10% 0% 0 Cash Debit Credit Paper Gift Prepaid card card checks card card * Read as: 88% of consumers used cash within the past 30 days for in-person payments. They used cash ~11 times on average. Source: FIS, February 2012; n = 3,205Among those individuals who use debit cards, but not as often as other payment options, are Paper CheckWriters and Cash Users. Paper Check Writers consist of about 11 percent of adults surveyed. This group includesolder, middle-income consumers who are concerned with record keeping, security, over spending andsettlement timing. About half of consumers who would be considered Paper Check Writers also use debit cardsalthough the largest portion of that group (36 percent) are light debit card users.By contrast, Cash Users consist of 27 percent of adults. They are a younger and lower-middle income group andthey view cash as convenient and cheap. They are concerned about spending too much and settlement timing.They represent the biggest opportunity for debit card use from a pure volume standpoint (see Figure 7). 8
  10. 10. The Case for Promoting Debit Cards: Why They Are Still a Growth Product Figure 7: Distribution of Payment User Segments vs. Distribution of Heavy Debit Users Distribution of Payment User Segments Distribution of Heavy Debit Users Paper Check Credit Writers Carders Innovators 4% 4% 3% Cash Users 14% Credit carders Cash users 26% 27% Debit Debit carders Paper check Carders 34% writers 75% 11%* Innovators 2% * Read as: Consumers who show a preference for paper checks through high usage relative to others represent 11% of the adult population. Source: FIS, February 2012; n = 3,205In addition, demographic profiles of the various payment users show that Cash Users are very similar to DebitCarders. It follows that many of the tactics employed to promote debit card usage would appeal to bothsegments (see Figure 8). Figure 8: Average Age and Income of Payment Segments 60 Paper check writers 11%* 55 Credit carders 26% 50 Cash users Average age 27% 45 Debit carders 34% 40 Innovators 2% 35 30 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000 $75,000 $80,000 $85,000 Average income * Read as: Paper check writers are 11 percent of the U.S. population and have an average age of 58 and an average annual household income of $55,269. Source: FIS, February 2012; n = 3,205 9
  11. 11. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductClearly, financial institutions that can identify which of its customers are light debit card users, heavy checkwriters at the point of sale and heavy users of cash payments are headed in the right direction with debitpromotions. Analysis of customers’ payment behaviors and cash withdrawals provides insight into whichindividuals are the most likely targets for migration to debit.Winning StrategiesOnce a financial institution has identified customers most likely to increase their debit card use, the next step isto identify strategies that are likely to motivate those segments.One of the most common strategies banks use to stimulate debit card use has been to issue rewards cards.These cards typically either offer cash rewards or allow card users to accumulate points that can be redeemedfor gift items or airline or hotel travel benefits.And there is evidence that rewards do indeed motivate debit card use. The FIS consumer study found that 24percent of the Paper Check Writers segment said they could be moved to debit cards if they got rewards forusing debit cards instead of writing checks.However, after the Durbin Amendment was implemented in 2011, some larger banks in particular began to dropor significantly scale back debit rewards. A 2011 Debit Issuer Study by the Pulse ATM network found that 54 ofthe respondents in their survey were looking to restructure or terminate debit rewards in response to Durbin.Instead, issuers are expressing increased interest in merchant-funded rewards programs and relationship-basedprograms. While the percentage offering debit rewards programs grew from 53 percent in 2008 to 58 percent in2009, the percentage has since declined to 56 percent in 2010. 8More recent research confirms this trend. In October 2012, First Annapolis Consulting released analysis of the100 largest U.S. issuers of debit cards. They found that 37 of the top 100 now offer a rewards program, downfrom 52 three years ago. But among the sub $10 billion institutions within the top 100 issuers, more areattaching rewards to their debit cards. Eighteen are now offering debit rewards, up from 15 three years ago. 9An FIS Loyalty Service study in 2012 found a 13 percent decrease in the number of total debit accounts in itsdebit card loyalty program compared to 2011.10 However, the greatest decline in interest is associated withbanks with more than $10 billion in assets – those that have seen interchange revenue decline substantially postDurbin.The decline in big bank debit rewards programs could present an opportunity for small and mid-sized financialinstitutions not only to promote debit cards, but also to promote their entire demand deposit account portfolio.If they can offer customers rewards the larger banks cannot offer, they have a clear advantage in attracting newcustomers.Additionally, the entire landscape of debit rewards is changing. Whereas debit card rewards programs oncemirrored those of credit cards, new options are emerging that may be less costly to all financial institutions,regardless of their sizes. 10
  12. 12. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductIn the past year, new offerings include merchant-funded rewards, relationship rewards and cash back rewards.With merchant-funded rewards, financial institutions have relationships with specific merchants to offerdiscounts or special offerings to customers who use debit cards at those merchants’ stores. The merchants arewilling to pay for the rewards because customers have to shop at their stores in order to get any rewards.Indeed, financial institutions have the potential today to revise programs to lower their costs through a varietyof methods including:• Adjusting points-earning ratios to reduce the cost of redemptions• Selectively offering rewards to premium customers who maintain a high balance or multiple products with the financial institution• Combining debit with credit reward products• Offering alternative funding sources, such as merchant-funded networks or relationship rewards• Incorporating annual fees on rewards cardsOutside of formal rewards card offerings, financial institutions are finding a wide range of other activities theycan implement to encourage customers to make greater use of their debit cards.A good place to start in promoting debit is at the financial institutions’ branches and call centers. Staff memberswho are informed of debit card benefits and are incented to promote the cards can go a long way towardstimulating debit card use.“We get our staff on board with debit through incentives and then it’s an easy sell for them,” says Loving ofStonehamBank.When developing any promotional strategy financial institutions should consider the customer segment they areappealing to. Those targeting light debit card users might send out offers to customers whose debit card usefalls below a certain transaction or dollar threshold. These offers would provide gift cards or account rebates tocustomers who increase their card use to a specified amount during the next month.Also, if Cash Users are the targeted audience, a financial institution could identify customers who are making alarge number of foreign ATM withdrawals and remind them via an e-mail or phone call that they can avoidforeign fees by requesting cash back with a debit purchase. 11
  13. 13. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductDefining the MessageRegardless of what strategy is used, financial institutions promoting debit card use should make sure theirmessaging fits the targeted segments. This requires some understanding of the current perceptions andmisperceptions consumers have about debit.The first thing to look at is what current debit cardholders like about debit. The most desirable attribute is thecards help them not to spend beyond their means (See Figure 4). That is followed by the perception that thecards allow greater control over the timing of when funds are taken out of customers’ accounts.Another perception that financial institutions need to consider is that a larger number of Paper Check Writersand Cash Users believe their current payment method is less expensive to use than debit cards (see Figure 9).Debit card promotions should address this by showing the low cost to consumers to use a card relative to paper-payment alternatives. Figure 9: Percentage rating cost of payment methods “very low” or “low” Paper Check Writers Cash Users Cash 87%* Cash 81% Gift card(s) 81% Gift card(s) 79% Paper checks 78% Paper checks 78% Debit card(s) 71% Debit card(s) 69% Prepaid card(s) 62% Prepaid card(s) 60% Credit card(s) 48% Mobile payments 58% Mobile payments 43% Credit card(s) 44% Read as: 87% of paper check writers rate the cost of cash as “very low” or “low.”. Source: FIS, February 2012; n = 3,205 9This is particularly the case for the Paper Check Writer segment, which according to FIS’ consumer research,writes an average of more than 200 checks annually between in-person purchases and bill payments.Furthermore, the FIS research found that 64 percent of the avid Check Writer segment pays to receive paperchecks while only 36 percent receives them free of charge from their financial institution. Even among the leastexpensive options, a box of 200 basic paper checks typically costs a consumer at least $20. So the money thatcan be saved by increasing debit card transactions over paper checks is clearly a consumer benefit that financialinstitutions should be able to leverage. 12
  14. 14. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductThe FIS study also shows that even more Debit Carders could be motivated to use less cash if institutionspromoted the benefits that many Debit Carders value the most – such as helping them control their spending –as well as emphasizing the convenience of debit cards vs. cash (see Figure 10). Figure 10: Percentage of Debit Carders in Agreement with Motivators to Use Less Cash (multiple response) I got rewards for using a credit / debit card instead of 28%* using cash I felt other payment methods were just as convenient as cash 23% More places and people accepted credit / debit cards 21% I felt other payment methods helped me control my 19% spending as well as I can with cash I felt other payment methods provided protections 15% against disclosure of personal information I was not concerned about overdrawing my checking 13% account Nothing would persuade me to use cash less for in-person 11% purchases Prepaid cards were as cheap to use as cash 7% * Read as: 28% of Debit Carders would use less cash for in-person purchases if they got rewards for using a credit/debit card instead of cash Source: FIS, February 2012; n = 3,205Clearly, this research indicates than any communication about debit cards must emphasize that debit cards:• Give customers ability to control spending• Give customers control over when funds are withdrawn• Are inexpensive to use• Are convenient to use 13
  15. 15. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductConclusionWhile debit card transaction growth may have slowed in recent years from the red-hot growth during the early2000s, there clearly is room for expansion in the use of debit cards by a financial institution’s customer base.However, it will require a strong commitment to promoting debit by that institution and a well-defined strategy.Financial institutions will need to define which customer segments they want to approach with the most likelycandidates being Cash Users followed by Paper Check Writers and then Debit Carders, who are currently lightusers.To motivate these segments, financial institutions will need to develop strategies that address these segments’perceptions about debit and offer some incentives for usage. Financial institutions may want to take a secondlook at debit rewards cards and see if some modifications to the old rewards card models can make new cardofferings viable in the post-Durbin world.Finally, institutions need to make sure their entire front-line staff is on board with promoting debit cards and isincented to do so.But in the end, those financial institutions that have developed strong, clearly defined strategies to supportdebit card use will be rewarded. There is considerable additional interchange and other fee revenue to be madeby those institutions committed to their debit card offerings as well as the opportunity to reduce operationalcosts and enhance relationships with their customers.The following case studies of StonehamBank and American 1 Credit Union profile opportunities that financialinstitutions have to promote debit cards and drive additional usage and revenue growth.Case Study: StonehamBankHeadquarters: Stoneham, Mass.Assets: $430 millionNumber of Branches: TwoAlthough financial institutions need to carefully monitor the potential for fraudulent and disputed cardtransactions, sometimes trying to reduce fraud by setting too low of a daily limit on debit card activity canhinder card use.StonehamBank found that raising the daily limits on debit card transactions can significantly increase debit cardvolume while not increasing chargebacks or fraud. Three years ago, the community bank’s daily limit for point-of-sale (POS) purchases was $1,000. But the bank then took a close look at how many transactions were beingdenied because they exceeded that daily limit. StonehamBank found it had been declining about $300,000 indebit transactions each month, explains Rule Loving, Assistant Vice President of Retail Services. That was costingthe bank about $4,500 in lost interchange revenue each month, based on a 1.5 percent interchange rate.After making this observation, the bank raised its daily POS limit to $2,000, and after one year, noticed noincrease in the number of disputed transactions. So the following year, it again raised the limit, this time to$3,500. 14
  16. 16. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductLoving says the bank has reduced its denied transactions level to between $10,000 and $15,000 a month,compared to the $300,000 level three years earlier, without any corresponding problems. “We may raise thelimits again in the future if we think it is necessary,” says Loving.Raising daily limits is just one part of an aggressive effort at StonehamBank to encourage customers to use theirdebit cards more. Although rewards cards are a popular incentive used by many financial institutions,StonehamBank instead chose to look at what it could do internally to boost debit volume.StonehamBank starts by making debit card promotion part of its sales incentive plan. “Our universal associateshave quarterly sales goals and we designed the point structure so they get bonus points for promoting the useof debit cards,” says Loving.As a result, about 86 percent of the debit cards issued by the bank can be used at the point of sale – not just atthe ATM, and about 70 percent of the bank’s customers are actually using their debit cards to make retailpurchases. The bank processes about $5.5 million debit transactions per month.That is a significant accomplishment considering the bank’s main branch customers trend a little older as about22 percent are seniors, a group that does not exhibit high usage of debit cards.Other efforts to get customers to use debit cards include a program in which the bank offers a $2 monthly creditfor each of the first three full months on a new account if the customer conducts 20 debit transactions. The bankalso refunds any foreign ATM surcharge fees for customers in the top tiers of the bank.Finally, the bank identifies and contacts customers who are found to be making a lot of foreign ATM transactionsto remind them that they can avoid paying ATM surcharges by using their debit cards for cash back at the pointof sale.Case Study: American 1 Credit UnionHeadquarters: Jackson, Mich.Assets: $250 millionNumber of branches: TwelveGetting debit cards into the hands of members quickly so that they can start using them right after opening anaccount can significantly increase members’ use of their cards. American 1 Credit Union originally moved toinstant card issuance to reduce the cost of sending out cards. But it has seen a positive impact on the use ofcards by members as well. Under the prior system, members who opened a new account or needed to renew adebit card had to wait 10 days to get their cards. Now they can start using them immediately.“Our activation has gone to day one and as a result, we’ve seen the usage start earlier in the process,” saysKristina Latoszewski, Vice President of Marketing. And if nothing else, “that gives us an extra 10 days of income,”she adds. 15
  17. 17. The Case for Promoting Debit Cards: Why They Are Still a Growth ProductAdditionally, the sooner members can start using their cards after they are sold on the benefits by a teller, themore they are likely to realize those benefits. If they have to wait 10 days from when they are told about thecard, they might forget the message of the card’s benefits.American 1 has seen the benefits of promoting debit card use in its 25 percent year-to-year increase ininterchange income from March − September.American 1 is now looking at other ways to increase debit card use. It began a FIS Debit Insights campaign inNovember 2012. Members who make a lot of purchases receive a $20 gift card that they can choose to redeemfrom one of 45 different retailers. The campaign is designed with the intent of converting light debit card usersto become heavy debit card users. Members chosen to participate had debit card purchases of less than $250during August and they must make $650 or more in monthly debit card purchases to get the reward. About8,000 members are participating.American 1 also is hoping to analyze purchase data from the campaign to see how its members use debit so thatit can tailor promotions even better.“We definitely will be looking at different groups. We can slice and dice this information any way we want.We’ve developed a committee internally to figure out how to increase revenue for the credit union,” saysLatoszewski.In addition, the credit union is looking at whether members who request customized images on their cards usetheir cards more. Credit union management suspects that those members who really like the image they haveselected for their card are more likely to pull it out to make a purchase. While the credit union currently charges$6 to cover the cost of customization, it may begin to waive the fee if it finds out that members with customizedcards do indeed use them more. About 40 percent of the cards issued by American 1 have the premiumupgrades.Endnotes:1 TowerGroup, “Trends in U.S. Payments: Noncash Transaction Volume Growing Despite Uncertainty,” December20112 Press Release and analysis published by the Federal Reserve Board, “Average Debit Card Interchange Fee byPayment Card Network,” May 1, 20123 ibid4 Synergistics Research, “The Future of Debit Card Programs,” June 20125 Federal Reserve System, “The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the UnitedStates: 2006 – 2009,” Updated April 5, 20116 William Demchak, President of PNC Financial Services Group at Banks of America/Merrill Lynch Banking andFinancial Services Conference, November 13, 2012 16
  18. 18. The Case for Promoting Debit Cards: Why They Are Still a Growth Product7Analysis conducted for FIS by Nicole Sturgill of CEB TowerGroup, October 20128 Pulse, “2011 Debit Issuer Study,” May/June 20119 Digital Transactions, “Debit Card Rewards Hang Tough after One Year of Durbin Interchange Caps,” October 8,201210 FIS, “Post-Durbin Loyalty and Rewards Programs – A Whole New World,” presented at ICBA TechWorld onMarch 12, 2012About the Research“The Case for Promoting Debit Cards: Why They Are Still a Growth Product” is part of a series of research briefsbased on primary research conducted by FIS Strategic Thought Leadership. The research findings herein arebased on a 75-question online survey completed by a representative sample of 3,205 adults in February 2012.The survey was fielded by FIS to a consumer panel maintained by Toluna.The study’s primary objective was to determine strategies and tactics to migrate paper to electronic payments.Supporting study objectives included: 1) segmenting consumers based on payment method preferences, 2)determining how payment methods differ by payment contexts and 3) identifying obstacles to and incentives formigration away from paper.About FISFIS delivers banking and payments technologies to more than 14,000 financial institutions and businesses inover 100 countries worldwide. FIS provides financial institution core processing and card issuer and transactionprocessing services, including the NYCE® Payments Network. FIS maintains processing and technologyrelationships with 40 of the top 50 global banks, including nine of the top 10. FIS is a member of Standard &Poors (S&P) 500® Index and is currently ranked No. 1 in the annual FinTech 100 rankings. Headquartered inJacksonville, Fla., FIS employs more than 32,000 on a global basis. FIS is listed on the New York Stock Exchangeunder the “FIS” ticker symbol. For more information about FIS, see“The Case for Promoting Debit Cards: Why They Are Still a Growth Product” was authored by Paul McAdam,Senior Vice President of Strategic Thought Leadership at FIS, and Mandy Putnam, Director of Strategic ThoughtLeadership at FIS.Please contact the authors if you have questions about the research or how the results apply to yourorganization.Paul McAdam708.449.7743paul.mcadam@fisglobal.comMandy 17