Debit issuers need "radical thinking" to generate more volume and more revenue from their cards, a survey report from First Data Corp. concluded.
While transaction volume is rising around the world, many issuers are operating their debit programs at breakeven levels or at a loss because they lack coordinated strategies for developing new products, driving card use and controlling fraud costs, First Data said.
Moreover, new regulations covering debit payments in many regions are complicating efforts to boost profits, the Atlanta company's report said.
To increase revenues and maximize debit profits, issuers should revamp internal processes and take a more strategic look at opportunities and costs, the Kohlberg Kravis Roberts & Co. unit said.
Consumers are showing a growing preference for debit over checks and cash, which is driving up transaction volume worldwide, said the report, published July 15. In some regions, merchants are pushing consumer use of debit cards; in Belgium, the Netherlands and Luxembourg, for example, debit cards are emerging as the dominant means of payment in some retail segments, such as gas.
The economic downturn has accelerated the use of debit, as many consumers are see it as a way to manage their routine expenses, and are reserving credit only for certain occasions.
And in some emerging markets, the spread of card-acceptance infrastructures is enabling banks to roll out debit programs on a mass scale.
The Boston research company TowerGroup conducted the survey, polling executives at 34 banks in 10 countries; 55% of participating banks are in the top 10 debit issuers in their markets.
Credit cards have been the focus of much innovation and investment in recent years, and debit cards have not received as much attention. "Much remains to be done on [debit] product development and service delivery," the report said.
New payment technologies, including contactless, mobile and e-commerce, could play a vital role in increasing debit revenues and profitability. Younger consumers, who tend to prefer debit over other payment channels, are the prime market for such new technologies, First Data said.
It said unbanked consumers are another important potential market for mobile and prepaid debit, particularly in countries such as Mexico, Brazil and Turkey.
New debit payment regulations in many countries are hampering investment in innovation by putting downward pressure on debit interchange and other fees.
The Dodd-Frank Act, which was signed into law July 19, is widely expected to drive down debit interchange rates. The report, however, was based on research conducted before the debit amendment to that legislation was introduced.
New overdraft-fee rules that take effect in August "threaten to undermine the business case for innovation and customer retention initiatives, such as [debit] rewards programs," the report said.
Another major constraint on debit card profit growth is the rise of fraud. Controlling such fraud is crucial to maximizing debit profits. "Given the tight margins on debit, fraud levels can determine whether a debit business is profitable or not," First Data said.
Many countries have seen improved security on debit cards resulting from the EMV Integrated Circuit Card Specifications, but these chip-based cards are not a panacea for all debit fraud, the report said. For example, fraud continues to rise for card-not-present transactions.
But debit issuers can do a better job of protecting against fraud, First Data said. Many issuers direct holders of credit, signature-debit and PIN-debit cards to call a different toll-free telephone number to report fraud for reach type of card. Banks should consider centralizing their fraud-reporting services to gain efficiencies and control expenses, the report said.
Improving card activation and use at the point of sale also could boost debit card profits. Debit card activation rates are 70%-80% in the U.S., and debit transaction volume surpassed credit card volume in 2008. But in many markets around the globe, cash continues to dominate. In Germany, Greece and Turkey, many consumers use debit cards only for cash withdrawals at automated teller machines, First Data found.
A clearer understanding of the elements of debit card economics could go a long way toward improving many banks' debit-program profits, First Data said. For example, some issuers struggle to sort out the revenues and costs generated by their debit programs, especially where debit is one component in a bundled package of bank account offerings.
Many banks are operating debit programs near breakeven levels or at a loss on the basis that debit transactions are less expensive than those conducted at branches and ATMs, but "there has been limited success in achieving this migration in many markets," First Data said.
Moreover, some banks are intent on moving only low-value payments to debit cards to encourage consumers to pile higher-value transactions on more-lucrative credit cards.
