U.S. banks are beginning to ramp up their credit card offerings as part of broader strategies to offset declining debit card revenue resulting from new Federal Reserve debit-interchange rules going into effect Oct. 1, certain analysts suggest.
The recent emergence of several new credit card initiatives underscores issuers’ renewed interest in the category, Darren Peller, an equity analyst with Barclays Capital, said in an Aug. 30 note to investors.
“In anticipation of a lower debit-interchange rate being implemented this October, we are beginning to see a number of banks explore new and somewhat innovative [offerings] to maintain (and in some instances replace) revenues currently derived from debit card usage,” Peller wrote.
Observers expect the Fed’s rule to align PIN-debit and signature-debit interchange pricing (
And because signature-debit fraud losses are relatively higher than PIN debit, “we have seen issuing banks become increasingly more focused on steering customers toward using credit cards for transactions in lieu of signature debit,” Peller noted.
Fifth Third Bank’s MasterCard-branded Duo card, which combines the functions of a credit and a PIN-debit card, is one such product that may help fill the revenue gap, Peller suggested (
Other analysts say new debit pricing may be helping to fuel a resurgence in rewards credit cards
Indeed, August has seen a spate of high-profile new and retooled rewards programs for cards targeting upscale customers (
Credit cards may present certain opportunities for issuers that stand to lose revenue from debit card interchange, but squeezing out profits in credit cards is not easy in an increasingly constrained marketplace, Brian Riley, research director with TowerGroup, tells PaymentsSource.
“You’ve got three main sources of profits in credit cards: interest, which is tough (to earn profits from) when the prime interest rate is so low; fees, which were greatly reduced by the Credit CARD Act; and interchange, which is not even the biggest piece of the profit pie,” Riley notes.
Moreover, as credit card issuers continue to raise the ante in offering richer rewards on cards to lure customers, “that cuts into your bottom line,” he says. “The key to profits in credit cards is finding a certain balance of card users that are not overly risky, and structuring your rewards program precisely to that mix.”
Banks are moving other levers, however, that may force consumers to shift more of their spending to debit cards, analysts say.
Such banks as Regions Financial Corp.’s Regions Bank and SunTrust Banks Inc. recently announced monthly usage fees for customers making purchases with debit cards, Peller noted.
JPMorgan Chase & Co. last year began a test charging Wisconsin customers a $3 debit card fee, and Wells Fargo & Co. earlier this month announced a plan to test a $3 monthly debit-usage fee in five states (
These moves may drive a substantial number of creditworthy customers to using credit cards for more routine purchases, analysts say.
“A lot of customers that got used to pulling out their debit cards aren’t going to use them anymore if they have to pay for it,” Megan Bramlette, a director with Auriemma Consulting, tells PaymentsSource. “If the Wells Fargo example happens in a widespread way, a lot of consumers will walk away from debit cards.”
A shift toward higher credit card use in place of signature debit could be “an incremental positive” for such card networks as Visa Inc. and MasterCard Worldwide, “given the higher revenue per transaction generated from credit cards versus signature debit,” Peller noted.
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