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2010 the start of the Debit Card Decade?

With the pain of the Banking induced recession, the ending of the ‘credit on demand' society, the growing animosity of the banking regulators, and the falling from fashion of the credit card, will its ‘poor cousin' the debit card be the payment product for the decade of 2010?

Although the ‘look and feel' of the credit and the debit card are similar, these two ‘animals' are very different beasts.  Their histories and genealogy are very different, and the perceptions of them as products within the banking world radically different.

Whilst the technologies to support them have converged it has always been the credit card that has been glamorous, fashionable and focus of the marketing efforts by card issuers. 

The debit card has been the ‘work horse' payment instrument rolled out as a standard part of a current account service typically an additional service on the ATM card, with no specific or unique marketing hype. On the other hand, the credit card has been marketed as the ‘must have' lifestyle product with a clear message of enticing users to perpetuate the image of a high-class lifestyle of entertainment, travel and expense account glamour. 

With the credit card now rapidly losing its appeal amongst general consumers, card issuers are looking to see how their card business and marketing will address the new decade

Credit Cards

The first credit card, arguably a charge card, first introduced in the US in 1950 by Diners Club, was in many ways a child of the restrictions of the State banking regulations making cheques outside a Bank's own state unacceptable.  The credit card shared the market with the traveller's cheque as a means of payment that was cashless for travellers but one that supported the business as opposed to the tourist traveller.  Diners Club card was always aimed at the business executive who travelled and entertained customers, and in the UK, Barclaycard introduced the credit card in 1966 to provide a UK credit card with limited international usage. UK institutions are still today the major issuers of credit cards in Europe.

By 1980 the two major card schemes Visa and MasterCard had become established as international card schemes and throughout the 1990s and into the beginning of the 21st century the growth of credit cards in the US and UK has been huge.  The credit card has enjoyed great success, particularly in the UK where there has been extremely competitive marketing of cards and sales techniques such as ‘interest-free on balance transfers' that have swollen both the total cards issued and the numbers of credit cards held by individuals. Accourt have recently shown statistics that indicate that, on average, UK adults now have 3 credit cards in their wallet Not only have these selling techniques resulted in the high per capita ownership of credit cards but have also been responsible for the coining phrases such as ‘rate tart' to describe the savvy credit card user who would obtain new credit cards, transfer the balance of an existing card and thus maintain an interest free loan for a considerable period.  Indeed it has been speculated that this fed the consumer led economic growth and the, now vilified, credit practices of the banking industry.  Whether that speculation has any objective truth is hard to determine, but for the majority of the public and the popular media in the UK the credit card has become the sacrificial scapegoat for our current financial ills and we are all being discouraged from its use. 

Debit Cards

Unlike the credit card the debit card's evolution started with the ATM card.  Once the true-networked ATM had superseded the off-line ATM with the single use non magnetic stripe token, it has become almost obligatory for all current accounts and many savings account products to include an ATM card.  The growth in ATM cards prompted the development of bilateral agreements between Banks to allow customers to use each others ATMs and finally these consolidated into central switching services such as LINKã in the UK (finally fully consolidated in 2000 from previous multilateral schemes such as Matrix and MINT).  Domestic debit cards with Schemes like Switch in the UK (formed in 1988) and Dankort in Denmark allowed banks to start to support debit card based transactions. Now, with most National schemes either combined with, or issued as, an International MasterCard debit or Visa Debit Card, the debit card is now as ubiquitous as the credit card. However the debit card being associated directly to a bank account, usually means that customers do not carry a similar ‘clutch' of cards that has become familiar with credit cards. The same analysis of card ownership from Accourt indicates that the ownership of debit cards across the UK population is less than 1.5.

Because of the relationship to the current account the debit card, is still very much associated with the ATM card its perception, management and marketing within the industry are still part of the general retail bank operational business, and its revenue generating capability lost in the general cost of managing ATM card portfolios.  With the growing use of debit cards, as we enter the new decade, the Banking Industry has an opportunity to develop how it will increase the value derived from debit cards.

The Challenge of the debit card Decade

So the challenges for card issuers, as their credit card revenues fall, is how to use their debit cards to replace that revenue and how the technology around the debit card needs to be enhanced to support that challenge.

The way forward?

The industry as a whole needs to continue the process of moving away from domestic schemes to reduce the complexity of clearing transactions and provide issuers with more realistic fees.

Issuers need to address the competition, unlike the credit card the competition is not usually another Issuer's card, customers do not have a bunch of debit cards in their wallet, the competition is cash, and by implication the ATM card.  The Banks need to ensure the payment cards provided as part of a current account have debit card functionality.  Banks need to recognise that a customer who takes cash from a cash machine to make a purchase is a cost to the Bank, that same purchase using a debit card is revenue to the Bank.

The debit card needs active marketing, some of the ideas can be taken from the credit card initiatives, points awarded, cashback, competitions, usage rewards etc.  Significantly Banks need to market the card not necessarily the account.  The debit card needs to become the fashionable manner of payment and needs to be discriminated from the credit card.  We are already seeing this approach with pre-paid cards and I expect to see this developing as a model for all debit cards.

The demands on the technology to aid this transformation will be to provide behavioural low latency information to the business and marketing functions and, importantly, to ensure that the credit and fraud risk associated with debit card transactions are minimised, to provide the confidence to making the debit card a universal part of the bank account based products.

The information provision will need to be enhanced to allow authorisation systems to provide current and historic information on card user behaviour to facilitate contemporaneous, targeted marketing.  This can be achieved by ensuring transactional data gets posted in near real time to a comprehensive business information database.

For reduced risk the card usage controls provided by EMV chip cards will need to be implemented.  The features to dynamically control a cards offline transaction behaviour has been part of the features introduced with ICC cards but there has been very little attempt to utilise these features, other than to block cards.  Enhancing the technology to send the offline usage profile scripts dynamically to the card will reduce the credit risks of the universal introduction of the debit card to all customers.

Is the change coming?

So will the debit card become the preferred and fashionable payment mechanism?  Well, in the UK debit card spending exceeded credit card spending in 2001 well before the ‘credit Crunch' of 2009, and Lafferty research shows that in the first quarter of 2009 debit card transactions outstripped credit card transactions by approximately 40%, so the trend is well established.

Will the card issuers start to focus on the debit card and develop their marketing strategies and technologies?  This will take a significant ‘mind set' change but I suspect the leading players will be developing those strategies; the expertise from management of credit cards exists so can be focussed onto the debit card marketplace. 

To reduce costs and to obtain the technologies to support the marketing efforts of debit card usage the Banks are likely to start to outsource their card operations to providers who can deliver the economies of scale and have those integrated technologies.  This will allow Banks to focus on their business of developing and delivering both a profitable and socially acceptable product.

So projects to implement the technology and the marketing initiatives to change the perception of the debit card may well be the first indicators that the ‘Debit card Decade' is about to commence.



Comments: (1)

A Finextra member
A Finextra member 12 November, 2009, 11:01Be the first to give this comment the thumbs up 0 likes

Very interesting.

From my recollection as a UK branch banker and subsequently a card product manager during the 80's and 90's, debit card fiunctionality was introduced on to ATM cards as a cheque replacement.  The charge to retailers was therefore largely settled as being a fixed charge at something like the levels of the charges for processing cheques.  This is vastly different from the credit card MSC, which is percentage based.  This severely reduces the income a bank obtains from debit card usage, and therefore significantly limits the money available to fund loyalty schemes, etc., compared to the credit card product.  Therefore, I don't see a huge movement towards introducing cashback and points schemes on debit card traffic.

The core product a customer buys is the current account.  The debit card is simply a replacement for the cheque book, i.e. as an access device.  Whilst there might be some mileage in using some form of debit card benefits as a means to attract current account customers (though the comments above show how difficult that will be financially), I think people make their current account decision based on other parameters.  Maybe if and when the card (or some other device with the card app on it) includes additional functionality, it could be seen as a value-add that can attract a premium...

I think one interesting development is the 'decoupled debit' that is emerging in the USA.  Here we might see the 'debit card' coming more into its own as a credit card competitor, and even a means to drive similar linked benefits.

It'll be interesting to see what happens.  I do share the view that debit card usage will continue to outgrow credit card usage, as people seek to establish greater control over their finances (though a credit card is as good as, and maybe better than, a debit card, where a customer has the discipline to only spend what they can aford to pay off in full each month).

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