Trying to migrate customers from one product habit to another can be slow, and expensive. If you go about it the wrong way, it can even be fatal.
Look at Netflix. Many customers were using both an old product and a new one. To get them to quit using DVDs and switch to streaming, Netflix abruptly made it much more expensive. Result: they lost a million customers, and their stock dropped 31% in 3 days. Inflicting a penalty can lose lots of customers fast, even if the fees involved seem small.
What's that have to do with banking? Well, when JPMorgan Chase decided simply to end its heavily promoted debit card rewards (presumably hoping that customers would switch to credit cards rather than back to checks!) — it wasn't good for their business. Chase retail performed poorly.
Right after announcement of a new fee for debit card use, B of A stock dropped 10% in a day.
Psychologists tell us that carrots generally work better than sticks in motivating desired behavior. They're right.
It took 25 years to migrate consumers from checks to debit cards for purchases, a process not yet completed. One reason is that many banks didn't want to give anything back — rewards, equal fraud protection, anything at all. The card caught on only when there was a new generation of consumers to take it up.
To change habits, you have to offer an inducement for the customer to make the required effort and face the uncertainty of the unfamiliar. Once the new habit is established, the reward can be reduced. That’s why airline cards are usually free only for the first year.
Right now, every customer who uses a debit card could be using a credit card instead — with exactly the same benefits and effective terms, and with no credit risk to the bank. He could also share in the increased interchange income.
But even if we focus on the minority of checking customers who are of prime credit quality, the challenge of moving them to a credit card that emulates the functionality of their habitual debit card may seem awesome.
Why should it be? As St. Bernard said, "It is a fine thing to go from what is already good, to what is better." Just make the credit card better. That's easy.
Our industry, excluding B of A, got ¾ of customers to make a positive choice for overdrafts (and fees) on debit card transactions. Most experts had estimated we’d only get half, or less. Why not act now, and similarly get ¾ to request a credit card to replace that debit card?
For most banks with branches, the percentage of checking account customers with a credit card is very low. Increase it deepens relationships, so that at least they’ll have two accounts instead of one. Copious transaction and balance information shows which customers have the best potential for this — for instance, those with consistent periodic deposits. These customers can lead the migration. They will improve the credit quality as well as the profitability of the overall credit card portfolio.
You don't even have to take the old debit card away. Just make the rewards or other incentives on the new credit card contingent on the customer's reducing use of the debit card. For many customers, this will be easier if the change is made transparently, and to a neutrally-named product such as a "purchase card" or "transaction card" or "check card." It doesn't have to feel like driving on the wrong side of the road. APR=0%.
What's at stake here? In the first instance, it is the difference between 0.5% interchange and 2%+ interchange. On even $500 of monthly purchases, that's $7.50 per month — enough to improve the pricing of the checking account considerably.
I was told the other day, "but, our debit card is still profitable, even though less profitable than before!" Surely a minority opinion — and irrelevant. Overall, our institutions, and in particular their consumer portfolios, are inadequately profitable.
We also need this additional income now because other elements of the checking account revenue structure, the remaining overdraft and similar punitive fees, will soon be more strongly challenged. Recent remarks by Raj Date, acting head of the CFPB, foreshadow this. If you want to add new kinds of fees, add new value first.
Waiting for Congress didn't work, waiting for the Fed didn't work. And after waiting for competitors, hoping they'd detoxify customer-unfriendly pricing, you now have the opportunity to follow some of the biggest over the cliff.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at
