Financial institutions should focus on building their debit card portfolios as they wait for the Federal Reserve Board to determine the rate at which to cap fees, according to The Members Group, a financial services provider to credit unions and community banks.
Banks that may have been on the fence about their debit strategy should move ahead now that the Senate has decided not to delay implementation of the Durbin amendment, a TMG white paper said.
"Banks seem to be taking a wait-and-see approach," Aris Jerahian, TMG's vice president of client relations, said in an interview. "That's fine, but start making moves to grow business now."
Too many banks see the lowering of interchange rates as a doomsday event, which is leading to irrational decisions, Jerahian said.
"Rather than raising [checking account] fees and stopping rewards, banks can start segmenting [their customers], minimize fraud and capitalize on new technology" such as mobile banking to reduce expenses, he said.
The Fed soon likely will release its final interchange rule. The agency's proposed rate cap, 12 cents per transaction, would be considerably less than the current average of 44 cents. The new rate is scheduled to take effect July 21, and Jerahian said the final rate could be more than 12 cents.
Whatever the rate is, banks should be ready to deal with it, he added.
Jerahian said banks should start seeking ways to increase transaction volume. Marketing checking account products to young adults is one way to accomplish this, he wrote in the report.
Jerahian cited Visa Inc.'s 2010 U.S. debit-tracker report that stated more than half of adults ages 18 to 34 consider debit to be the best overall payment method.
"Going direct to these consumers is a great marketing approach," Jerahian wrote.
Banks also can increase transaction activity by offering customers the ability to personalize their debit cards. Personalization leads to affinity, loyalty and less attrition, Jerahian wrote. "This results in higher card use," he said.
Eliminating debit card rewards could prevent financial institutions from gaining business from new customers who left banks over lost rewards, Jerahian wrote.
"We've trained consumers to use their debit cards," and while debit rewards are relatively new, consumers expect some kind of compensation, he said.
Merchant-funded rewards programs and on-the-spot discounts generated by location-based mobile applications can help banks differentiate themselves in the market, Jerahian wrote.
Jerahian also suggested increasing fraud prevention through services such as mobile text message alerts of transaction activity and making customers aware of these efforts.
