Why Free Checking Has No Future
FRANKLIN, Tenn. — The Durbin amendment will kill free checking, but debit rewards programs will survive — and flourish at credit unions — if structured properly.
Dennis Driscoll, a former SVP at FIS who built that company's loyalty program from the ground up, told Credit Union Journal that not enough revenue will be left post-Durbin to permit free checking — and the same could be said for debit rewards if programs continue to be "expensive," such as returning points for dollars spent.
Driscoll's checking stance counters the viewpoint held by Bob Giltner, consulting partner with Velocity Solutions (see related story).
"If the new interchange rules go through, debit rewards programs will have to live within their funding," said Driscoll. "Some of the major banks built rich credit card programs and then brought in debit rewards at half the rate. But at .75% to 1% of the sale, that price for debit is still too rich with the interchange cut. There will not be enough money left for those types of programs."
Rewards programs need to be structured so they include more offers outside the credit union to help with funding, particularly merchant-funded rewards, insisted Driscoll. In addition, he said points should be given to encourage retention and drive long-term growth, such as points for the number of years a person is a member and for using sticky products such as bill pay.
Debit programs will also need to incent members to perform a higher number of signature transactions. "As much as half of the transactions in some debit programs are signature, which makes more money than PIN. So to make more money you will have to generate more transactions and have a higher percentage of signature. That is what rewards programs are meant to do."
Consumers To See Value
With many banks already dumping debit rewards, consumers will see greater value in rewards programs that continue on, pointed out Driscoll. "Large banks like Chase and BofA are discontinuing debit rewards and many more banks are following suit. Some have been waiting on the sidelines but now most realize they can't wait any longer and are ending rewards. In my estimation, this may be one of the best times for credit unions to offer debit rewards."
But there will be no way to avoid charging for checking, stated Driscoll. "No way around it, looking at the loss of interchange, the drop in NFS revenue, and no float." But the credit union should not charge a flat fee. They should give members something in return.
"The answer to me is a combination of an efficiently run rewards program and charging for checking, maybe $6 a month, but giving value back," offered Driscoll. "Not unlike the old club accounts where you get a $10,000 AD&D policy, travel accident insurance, and today maybe cell phone insurance. Things like that all have in common savings, convenience, and security, which in the minds of consumers equal added value. I think this structure will provide profitability equal or better to what credit unions had before."
Plus attract more members. "What would you rather have? A national bank issuer's checking account that costs you $10 a month and gives you nothing in return?" offered Driscoll. "Or take the credit union's checking account that costs you $6 and gives you a rewards program for using debit and a number of other value-added products."
Driscoll recently retired from FIS and now heads Driscoll & Associates.