A Practical approach to increasing Checking Account and Debit Card profitability in an economic downturn

1. Grow From Within
A Practical Approach to Increasing Checking Account
and Debit Card Profitability in an Economic Downturn
By Ben Colvin and Michele Tucci
Executive Summary
Banks can expect fewer new retail at the moment. The best way, then, at the full range of products that a
customers in a steep economic downturn to drive net account growth and gain customer uses, measuring customer
like this one, as consumers struggle wallet share appears to be focusing on engagement, and forecasting the lifespan
with unemployment, wage cuts, falling those current customers with potential of each relationship. This article is aimed
home values, and diminished savings. to contribute strongly to your institution’s at showing retail banks a practical
Even in the best of times, attracting bottom line. approach to generate net account growth
a new customer is at least five times through improved account retention
more expensive than getting increased Accurately understanding each customer’s and the deepening of relationships with
revenues from an existing one,1 and the lifetime value to your bank begins with current customers who can bolster your
cost–return ratio is even more exorbitant taking an enterprise perspective—looking institution’s bottom line.
1 Emmett C. Murphy and Mark A. Murphy, Leading on
the Edge of Chaos, 2002.
Profit from Our Perspective™

2. Manage from the Core their behavior and increase their use of prompts many customers to reconsider
The current or demand deposit account debit cards at the point-of-sale instead their banking behaviors. Consider three
(DDA) is at the core of the relationship of using cash, they may see a direct recent trends that have put a damper on
between banks and their customers. It boost in revenues through increased new customer acquisition:
drives cross-sell opportunities for other fees generated by the transactions and
• First, people often switch banks when
financial products as well. Banks would incremental net interest income.
they change jobs. But with weak labor
do well to adopt a “whole customer”
Customers who stop withdrawing large markets around the world, fewer
profitability framework similar to one
amounts of cash at the beginning of each workers are moving into new jobs.
developed by MasterCard Advisors in its
week, and instead increase their debit
payments strategy practice (Figure 1). You • Second, home buyers often move the
card usage may increase the average daily
can determine the value each customer bulk of their banking business to an
balance in their DDAs, thereby generating
segment contributes to your business by institution that has just given them a
higher net interest income for the bank.
adding debit card revenue, net interest new mortgage. But with home sales
When this more profitable behavior is
income, and cross-sell revenue, while still flagging, fewer new mortgages are
spread across the entire customer base,
subtracting expenses, such account service being written.
the bottom-line impact can be substantial,
and maintenance, check processing, ATM
and the bank can acquire a new more • Finally, investor anxiety about the
maintenance, and the cost of rewards.
stable source of low-cost funds for its security of their financial assets has led
Figure 1 demonstrates the sizable lending business. people to withdraw substantial amounts
portion of bank revenue—more than from the stock markets. U.S. banks
a third in the U.S. and one quarter in New Needs Produce have derived some short-term benefit
Europe—that comes directly from the New Behaviors from these worries because consumers
DDA or current account. In addition, if Consumer banking needs are changing have sharply increased their deposits in
banks can persuade customers to shift rapidly as the economic downturn FDIC-insured accounts. Much of that
Figure 1: How Payments Optimization Can Impact Multiple Retail Bank
Revenue Streams and Retail Bank Revenue
U.S. Europe
% of Total Retail % of Total Retail
Bank Revenue Bank Revenue
Credit Credit
Cards 10 Cards 10
CROSS-SALES REVENUE
% of Current
CROSS-SALES REVENUE
% of DDA
Accounts Revenue Accounts Revenue
Mortgages 31 20
Debit Card
Mortgages 36 25
Debit Card Revenues
Revenues
Net Interest
Consumer
6 Consumer 72
Loans Loans 20 Income
Long-term
13 70 Net Interest
Income
Savings
Long-term 8%
Savings 14 Fees and
Other Income
DDA
Accounts: 5% Current
Checking 34 Accounts:
and Fees and
Other Income
Checking 25
Saving and
Saving
Sources: U.S.: Retail Bank Revenue Federal Reserve Bulletin, profits and balance sheet developments at US commercial banks in 2007, June 2008. Current Account Revenues:
MasterCard Advisors estimates on Federal Reserve data. Europe: European Commission Retail Banking Survey, 2005–2006.
GROW FROM WITHIN MASTERCARD ADVISORS 2

3. increase, however, may be due to the
Figure 2: An Accurate Assessment of Engagement Helps Retail Banks
government’s temporary boost in FDIC
Make More Informed Investments in Customer Segments
deposit insurance—to $250,000 per
account from the previous $100,000.
Changing needs and concerns like +
these create ample opportunity for
banks to deepen and broaden customer
relationships by implementing timely
Payments Engagement
marketing strategies that engage current PRIMARY
customers and generate incremental
SECONDARY
revenues from the most promising
segments.
CONVENIENCE
Begin with a Disciplined Approach
to Customer Segmentation SAVERS
Through close analysis of customer activity
and engagement, banks can segment
relationships according to the number, –
combination, and cost of products and
services used by each customer. The bank – Account Relevance & Engagement +
also can identify the behavioral paths most
likely to lead to cross-sell opportunities on
By tracking checking account debits, credits, and average balances as well as debit card payment behaviors,
one hand—or attrition on the other. We customer segments can be plotted across the engagement continuum. Depending on debit card usage patterns,
recommend a two-pronged segmentation Primary and Secondary segments could be found anywhere along the payments engagement axis.
Source: MasterCard Advisors.
approach: First, look at how customers
use their checking accounts; and second,
look at how they spend their funds.
• Convenience users – those with Once banks understand their customer
The first type of analysis measures such
accounts held for pensions or salary relationships, they can identify important
basic factors as checking account debits,
deposits, with singular or regular large customer payment behaviors—such as
credits, and average balances to track
withdrawal amounts spending at point-of-sale (POS), check-
customer engagement and distinguish
writing, direct debits, ACH transactions,
primary from non-primary customers: • Secondary users – those using their
ATM withdrawals, and so on—and use
accounts for specific, limited purposes,
Primary customers are those with the data to track deposit and payment
such as paying for utilities, emergencies
long-established relations with the bank, preferences. These preferences can
or unexpected bills; or those with
more liquid assets, and more frequent identify further sub-segments into
attrited primary accounts that they
transactions compared to the average which customers are divided and can
choose to downgrade due to such
customer. Primary customers may also be used as a basis for offering more
factors as a bad service experience or
have a salary mandate or use direct tailored products and services. Sub-
increased costs
deposit; bank in close proximity to home segment examples might include: cash
or office; have a mortgage or other loans; None of these segments are unprofitable dependents; branch lovers; ATM users;
and hold investments with the bank. by nature, but Savers who park transactors; low debit card users and high
considerable funds in their accounts for debit card users.
Non-primary customers are all those
long periods may be more profitable
customers who don’t regard the bank Once a bank has gained in-depth
than Primary customers who require
as their primary financial institution of knowledge of its debit cardholders’
high levels of service. The old 80/20
choice. They usually fall into one of the attitudes, behaviors, and preferences
rule usually applies: Primary customers
following categories: and determined which changes in
typically generate most bank revenues
cardholder behavior are most profitable,
• Savers – those who use their accounts and non-primary segments contribute
it can turn that knowledge into
primarily to keep funds, not to transact considerably less (see Figure 2).
actionable marketing strategies.
GROW FROM WITHIN MASTERCARD ADVISORS 3

4. STRATEGy ONE: Encourage Convenience customers
Deepen Customer Relationships to increase usage – Salary mandates or Figure 3: Why Debit Cardholders
Strengthening and cultivating customer direct deposits typically produce one large Become Dissatisfied
relationships requires ongoing effort at monthly deposit to the checking account
each point of interaction. Such efforts and an equally large monthly withdrawal
must become habitual—part of business or transfer. Banks can employ a variety of
18%
as usual—and not a random, last- tactics to further engage such customers. 28%
resort strategy in response to customer For example, an estimated 1.5 million
complaints. customers opened new savings accounts
when Bank of America launched its 26%
Retain existing customers – The first
Keep the Change program.2 Consumers
step is to review the existing customer 28%
embraced this simple savings program—
experience as well as your anti-attrition
which transferred the “change” from a
and retention strategies, processes,
debit purchase to a customers’ savings
and performance metrics. Among
account. With every debit card purchase, Non-existent
the common solutions to improving rewards program
the customer was also making small,
retention:
incremental transfers to their savings Overdraft fees
• Employ models to monitor changes in account, which might easily add up
spending behavior—say, a drop in POS to $500 or more in savings in a year.3 ATM surcharge fees
transactions or an increase in outflow Programs that help consumers save in
this economy could be very popular—and Poor rewards program
balances—to detect early indicators of
attrition and take preventative measures demonstrates that their bank is trying to
help them. Reasons for dissatisfaction with their debit issuer.
• Put a Quality Assurance team in place Source: MasterCard Advisors, Comparative
Cardholders Dynamics, Debit and Payment Choices
to identify issues and anomalies in Make a compelling offer to Secondary Study, 2009.
customer relationships before problems users – Customers who use their
are reported checking accounts for only limited
purposes need some compelling reason STRATEGy TWO:
• Make use of a specialized retention unit to increase their business with the Up-Sell and Cross-Sell
that is trained to manage disputes and bank. Using segmentation models, your Leverage the DDA or current account
service problems and to retain valuable bank can gain better understanding by migrating valuable customers to the
customers of Secondary users’ payments needs, products and services that are most
• Consider developing a rewards program attitudes, and behaviors. Based on relevant to them. Customer needs and
if one is not in place these insights, you can design relevant desires change over time as customers
offers—from savings accounts for experience different life stage events.
• Proactively score and offer an overdraft parents of children bound for university Banks that respond to these changing
line of credit to customers who to small business accounts rewarding needs with relevant product offerings
experience frequent overdraft fees, or business owners for their debit card increase the potential for customer
include an application for an overdraft spending through promotion of category satisfaction and engagement at each stop
line of credit in overdraft notices expansion education and promotions. along the engagement continuum. For
• Customers using another bank’s ATMs Each customer is unique, and example, you should periodically evaluate
should be provided easy ways to segmentation is the key to finding the customers who consistently maintain
locate your own ATMs; MasterCard’s right value proposition for each. higher balances in entry-level checking
online ATM Locator—now available accounts. If your bank offers a higher-
on Apple iPhones—lets banks embed tiered relationship product with better
offers in the location information to services, proactively offer to upgrade
prompt customers to in-store promos at them. For customers who accept such an
merchant partners upgrade, quickly follow-up with a cross-
2 Bank of America, Press Release August 28, 2008.
3 TowerGroup, Brian Riley, “Just Rewards: Adapting Credit Card Loyalty Feature to a Debit Card World,” June 2009.
GROW FROM WITHIN MASTERCARD ADVISORS 4

5. sell offer to ensure that they continue Stimulate recurring payments – STRATEGy THREE:
to maintain and grow their checking Online bill pay and recurring payments Increase Debit Card Usage
account balances, as required for that (RP) have been shown to increase spend Another way to deepen engagement
higher-level product. and loyalty. A bank may reward the is to understand customer preferences
debit cardholder who signs up for RPs in for POS, cash, and branch transactions
Savers may have limited migration
such categories as telecommunications, and then use that understanding to
potential – While a more effective
insurance, utilities, and satellite/cable/ help increase debit card usage. The
savings product may attract increased
TV by offering a credit on their next most effective kinds of offers vary with
deposits, the bank may find that
statement. MasterCard has seen a lift in each region and with each region’s
optimization of this segment is more
overall card spend whenever cardholders specific debit-card revenue dynamics. In
likely to come from growth in net interest
use debit cards for recurring payments building the business case, it’s important
income (NII) or through increased or
or set up RPs through a merchant. Debit to consider the broader benefits of
retained balances than from any new
cardholders who use their debit card to debit cards, such as increased balances,
product offerings. Depending on the
make recurring payments also spend improved retention, and cost savings
customer’s age and estimated wealth,
36 percent more with their debit cards associated with reducing costly ATM,
a Saver may turn out to be an affluent
than those who don’t make recurring cash, check, and branch transactions.
customer trying to diversify his or her
payments, and they also are much less
portfolio. One common tip-off: the
likely to stop using their cards in the
customer in question does not have
future (6 percent vs. 11 percent).4
or use a debit card because they don’t
feel they need to. Alternatively, a
customer may simply regard the account
in question as a “piggy bank.” Such Figure 4: Cross-Sales to Customer Segments Moves Them
customers often welcome financial Up the Value Chain
planning and retirement advice from an
in-branch advisor. Offering them liquidity MIGRATION PATH TO INCREASED VALUE AND ENGAGEMENT,
solutions to help manage their affairs WHERE DEBIT IS THE ENTRY POINT
can often lead to increased deposits and Debit Credit Personal Auto Investment
Cards Cards Loans Loans Mortgage Account
growth in net interest income.
Find the sweet spot for Primary
Primary
users – With customers who already are
frequent users of their current accounts,
CUSTOMER SEGMENTS
the secret to cross-selling is determining Secondary
what drives their engagement with
your financial institution. For budget-
minded consumers who spend primarily Convenience
on essentials, merchant discounts on
everyday products may be compelling.
For the more affluent household, rewards Savers
offering unique experiences may be the
strongest motivator. Configuring the right
offer and the right marketing message Potential For Customer Adoption
for each customer segment will help
expand your customer relationships and Best Worst Source: TowerGroup
stimulate profitable payments behaviors.
4 MasterCard Advisors, Comparative Cardholder Dynamics: Debit and Payment Choices, 2008.
GROW FROM WITHIN MASTERCARD ADVISORS 5

6. Position the debit card as the smart Encourage debit usage through Conclusion
way to pay – Those accustomed loyalty or rewards programs Economic uncertainty and growing
to spending cash or who make few Customers averaging just a few solvency concerns are changing what
debit card purchases may respond to transactions per month might be offered consumers want from banks. The
well-crafted educational messages and promotions or rewards with specific historical drivers of account switching—
incentives that encourage debit card merchants in exchange for increasing their a new job or new home—are less
usage. During this global economic card usage—to, say, five times per month. relevant in this environment.
downturn, banks may want to capture as Advisors propensity models can help
Today, generating net account growth
much non-discretionary spend as possible. identify which offers may appeal to certain
is about nurturing commitment and
Banks can promote debit cards as a better debit-inactive cardholders. Cardholders
engagement among key client segments.
way to control spending and stay within can then be invited to use their debit cards
Savvy banks that want to build long-
budget, and emphasize their convenience for eligible purchases in order to qualify
term relationships will measure each
over making multiple trips to the ATM for a reward. By making a $15 debit card
customer’s lifetime value and use
for cash. In addition, such POS migration purchase in a participating department
tools to understand their “migration
efforts can boost the profitability of ATM or hardware store, for example, the
likelihood”—the probability of that
users—especially when they are coupled cardholder might qualify for a $10 gift
customer moving up the value chain
with special offers, or expansion of card, with further purchases qualifying
and welcoming a wider variety of bank
contactless terminals and cards, to capture for additional gifts. Such programs have
products. Only with such customer
more of the spend that might otherwise resulted in 1.5-to-5 percent opt-in rates,
insights can the bank pursue the cross-
be made in cash. with spending lift of up to 60 percent
sell and up-sell strategies that are most
(over control) and a spending increase of
meaningful to each customer segment.
15.5 percent (over control) for customers
who received the offer but did not opt in.
Ben Colvin is a Global Practice Leader at MasterCard Advisors’ Retail
Banking and Debit Practice. He and his team help global client banks leverage
their payments platform to drive the profitable growth of their retail banking
value proposition. Based in Purchase, N.Y., Mr. Colvin can be reached at
ben_colvin@mastercard.com.
Michele Tucci is a Managing Consultant at MasterCard Advisors’ Retail
Banking and Debit Practice. He advises global client banks on strategies
and implementation tactics that promote revenue growth and drive point-
of-sale debit usage. Based in Purchase, N.Y., Mr. Tucci can be reached at
michele_tucci@mastercard.com.
© 2009 MasterCard. All Rights Reserved.