LAS VEGAS — Debit card programs will continue to play a vital role in most large banks' profit strategies for the foreseeable future, despite new government-mandated price controls that have cut deeply into interchange revenues, executives at several megabanks said.
A series of whiplash-like market developments this month reminded the large banks of the crucial role debit plays in courting and keeping customers.
"I don't think the value proposition [for debit] has changed for the client," Whitney Stewart, senior vice president of SunTrust Banks Inc., said during a roundtable discussion on debit-issuer strategies at the ATM, Debit & Prepaid Forum this week. "We have clients that are fanatical debit users and will continue to be."
SunTrust was among the issuers that recently eliminated a $5 monthly fee for debit card use in the wake of widespread public outrage over such fees.
The Atlanta bank introduced the fee to help offset the effects of new Federal Reserve Board debit-interchange rates that went into effect Oct. 1 and essentially cut in half the money issuers earn when their customers use debit cards to initiate payments.
But as with most large banks, SunTrust has not yet determined an ideal pricing strategy to offset the loss of debit revenues, Stewart said.
Somewhat surprisingly, most customers did not reject the fee when SunTrust introduced it in June, she said.
"Existing customers were sticking with it," Stewart said. "Half our clients don't use debit," so it decided to add the fee "rather than impose a higher fee on those who don't use" debit.
But when Bank of America Corp. in late September announced plans to introduce a similar fee, a broad public groundswell rose against all such fees, forcing SunTrust to cave to market pressure, she said.
SunTrust also did not anticipate President Barack Obama's public criticism of B of A's fee, Stewart said, calling Obama's reaction the "unfortunate comments our president made, which were uncalled for."
Now SunTrust is seeking a more palatable way to price debit services within its broader array of banking products, including "looking at every single element [surrounding] debit and finding how we can get every single cost out so we can continue to offer it," Stewart said.
Even with reduced revenues, debit still drives profits, Scott Qualls, senior vice president with BB&T Corp., told attendees.
"We focus on the overall value equation, and our experience is that versus [the customer] who writes checks, the debit card user tends to have a totally different profile and is a much more profitable customer," he said.
BB&T recently began experimenting with new combinations of bank offerings that include debit to offset the lost debit-interchange revenues, Qualls said.
Debit "pricing has to be account-focused, client-focused and relationship-focused," he said, adding that BB&T is adding fraud-protection products, text alerts and mobile banking to enrich its core products. "You've got to [innovate] around what the customer wants."
To make debit profitable under the new government-capped rates, it must be "tightly integrated to the overall customer retail strategy," Jon Groch, senior vice president with Fifth Third Bancorp, told attendees.
This year Fifth Third eliminated its free debit-rewards program but maintained another fee-based one, Groch said. The bank also allowed its customers with existing debit rewards to shift those points to its credit card rewards program at no cost.
"The vast majority of customers in the fee-based debit-rewards program are sticking with it and continuing to pay a fee," Groch said.
Also this year, Fifth Third introduced a hybrid card that lets customers choose whether to pay by debit or credit with each separate transaction at the point of sale.
The issuer processes debit purchases with the MasterCard Duo Card as PIN-debit transactions, and it routes credit transactions to the customer's separate credit line with the bank, Groch said.
Explaining to customers how the card works has been a challenge, Groch said. "A lot of customers are really entrenched in how they do things. … There's a lot of training and explanation involved," he said.
Debit card services will continue to be a core element of Sovereign Bank's customer-retention strategy, Eduardo Tobon, CEO of its U.S. cards and payments division, told attendees. Sovereign is a unit of Madrid-based Banco Santander S.A.
As part of that strategy, Sovereign wants to price its debit services so it will maintain or increase debit card transaction volume, particularly on purchases less than $20, Tobon said.
But so far the bank has not settled on a formula for pricing debit services within its overall banking services, Tobon said.
"We don't have one solution or even a set of solutions we think will do the trick for us," he told attendees. "It will require quite a bit of work to make debit work."
SourceMedia Inc., publisher of American Banker, sponsored the conference in Las Vegas.