Big Issuers Get Big Financial Benefits

  Consolidation in the banking industry is providing the largest debit card issuers with a much greater share of overall transaction volume in the signature-based, or offline, debit market. As a result, the industry behemoths have attained significantly greater leverage than small and mid-tier issuers to negotiate better prices with vendors.
  In 1999, the top five offline debit card issuers held a 22.7% share of cards issued and a 23.2% share of the offline debit card transactions initiated in the U.S. In 2004, their share of transactions rose to 41% (see chart, page 58).
  Financial institutions tend to pay close attention to their offline debit card programs, which generate higher acquirer-paid interchange revenue than do their PIN-debit cousins. Virtually all signature-debit cards also support PIN-debit functions, but most issuers' card-marketing dollars are used solely to encourage signature use. The nation's two offline debit products are the Visa check card and debit MasterCard.
  The relatively large market share the biggest issuers have can make a material difference in how much they pay providers of card stock, transaction processing, fraud-control tools and risk-management services that price based on volume.
  "We know that there has been as much as a 50% cost advantage for the largest issuers from the smallest ones," says Lee Manfred, a partner with First Annapolis Consulting LLC of Linthicum, Md. "But the delta between market pricing for the large and small guys has decreased the last three years because of increased competition among processors."
  Moreover, regional and community banks have some advantages of their own that enable them to compete rather effectively with bigger issuers, observers say.
  Some debit insiders believe the big gain in transaction market share among the top tier of issuers relative to their card share gain last year is the result of the greater resources larger institutions have to examine their portfolios and to more efficiently promote card usage to their customers. "The larger the portfolio, the more likely the institution will invest in researching who uses their cards and where they use them," says Jeanine Tabaczynski, senior vice president and director of product development at Charlotte, NC-based Wachovia Corp., the nation's fifth-largest debit card issuer in 2004. "They can then invest in the marketing to individuals who don't use their card a lot but research shows they should be using it more."
  Whereas organizations tend to view their credit card programs as specific product lines, the product line behind a debit card is the checking account. So regardless of an issuer's size, the debit card remains essentially an access tool and not a product in itself. In fact, the debit card has become essentially a commodity, as most financial institutions, no matter their size, will offer consumers one when they open an account.
  Though the largest issuers today are making significant market share gains, it should be noted that even the smallest issuers are issuing more cards, notes Tony Hayes, an analyst for Boston-based Hitachi Consulting Inc., formerly Dove Consulting. In 2004, the number of offline debit cards issued rose 12.1%, to 223 million from 199 million the previous year. The number of offline debit transactions grew 15% last year, to 11.3 billion from 9.8 billion the previous year, data collected by Cards&Payments show.
  "The rising tide raises all ships," Hayes says. "People may not realize on a relative basis they are falling behind. If they are growing, they like that growth. But they don't see it based on the overall market."
  National promotions also are helping the largest issuers gain more transaction share, experts say. When Visa USA and MasterCard International promote such benefits as zero-liability protections for consumers holding their offline debit products, their member issuers may all benefit from the promotions at a similar increased rate of card use, Tabaczynski says. But the bigger institutions capture more share because of the relative size of the portfolios, she says.
  "Wachovia could have 5 million cardholders making that same behavioral change, but a credit union may have only 50,000," Tabaczynski notes as an example. Just the same, she says, the credit union would be pleased with the rate increase even though the transaction growth was small relative to Wachovia's.
  Indeed, because retail banks compete primarily on their ability to secure multiple relationships with consumers, debit card managers know their role is different from that of their colleagues in the credit card industry, where card competition is fierce. "In the debit card industry, we have no designs that we offer a lead product," says Tabaczynski. "But from a card standpoint, we want to optimize the investment made to issue the plastic."
  That being the case, the larger the issuer, the greater the financial rewards that can be gleaned from an optimized program.
  Rounding out the top five offline debit card issuers in 2004 are Bank of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co. and Washington Mutual Inc.
  More recently, the largest debit card issuers have become or are attempting to become major players in the credit card industry as well. Bank of America has a pending deal to acquire MBNA Corp., for example, and WAMU has a deal pending to buy Providian Financial Corp. Both MBNA and Providian are large monoline card issuers.
  Some observers believe it is no coincidence that more debit players are venturing into the credit card market. Not only can the organizations gain even greater ability to negotiate price and cross-sell products to customers, but theoretically the staffs of their debit and credit operations can share tactics and improve their ability to sell, manage risk and promote products, says Gail Sneed, market development director for financial services at Maritz Loyalty Marketing.
  However, few organizations that offer both debit and credit cards today combine their programs to secure such benefits. "For the most part they are separate entities, or silos," Sneed says. "But they need to play in each other's space more frequently and share each other's information."
  More organizations are beginning to take a broader look at their overall card operations, says Les Riedl, president of Speer & Associates, an Atlanta-based consultancy. BofA and other major banks, he says, are using a "payment council" process in which senior-level card managers are looking across the organization for ways to streamline operations.
  "Offline debit and credit card businesses are being more closely coordinated," Riedl says. "Institutions are looking at ways to redesign their organizational lines to bring them closer together."
  With the growing arsenal of pricing and other advantages larger debit card issuers enjoy, is there any hope for the regional and community banks that have relatively small card portfolios and little leverage to negotiate better deals? Many observers believe there is. In fact, many smaller institutions have their own advantages and expertise, they say.
  Last year, the top 10 credit card issuers held a 90% share of overall receivables, up from a 76.8% share in 1999 ("Issuers Go on a Buying Spree," September). Observers generally believe large debit card issuers never will reach such sizable market share in cards, transactions or sales volume.
  One of the key reasons is that debit cards essentially are tools to access checking accounts, which are among the chief products through which retail banks compete. "The banking regulations are such that no bank can have a market share greater than 10% of deposits, so the regulators will not allow the banking market to get as concentrated as the credit card market," says Hitachi Consulting's Hayes. "So we will not see the concentration in debit that we see in credit."
  Moreover, debit card issuance is more local in nature. Most consumers' checking accounts are at financial institutions located close to where they live, which gives local community banks with recognized names a chance to compete with megabanks seeking a presence in local communities, says Scott Strumello, associate consultant at Auriemma Consulting of Westbury, N.Y. "It puts them on equal footing with national institutions," he says.
  Smaller banks also have more experience at customer relationship management than larger organizations, Strumello says, noting that most large banks looking to compete locally have begun to offer free checking, something many smaller institutions have done for years. "The real line of competition is the checking account," he says. "I don't think, when charging nothing, it makes it tougher for any one player to price you out of the market, so to speak."
  Where larger organizations have an advantage is their ATM fleets, which enable customers to withdraw funds from their accounts at no charge. Many smaller institutions have countered by forming regional and national alliances in which they agree not to surcharge each other's customers, Strumello notes.
  Smaller institutions also have been able to counter over time the more sophisticated products rolled out by larger organizations, such as online banking, Strumello adds. "If it's something that consumers are demanding or that is truly out there, it won't be long before those things are offered by smaller institutions," he says. "It may take them a bit longer. Does that have an effect on their long-term viability? I'm not sure."
  Big issuers are getting sizable pricing and other advantages. But the local nature of consumer retail banking still provides smaller debit card issuers a chance to compete.
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