Most bank and credit union leaders are familiar with ways to optimize their credit card programs, yet surprisingly few of them apply any transferrable techniques to their debit portfolios. Debit interchange is the first or second largest component of non-interest income for most financial institutions, so even nominal improvements can drive big benefits. Although credit card purchases generate more interchange on a per item basis, the reality for many smaller institutions is that they have more tools at their disposal to influence debit use.
The same PAU metrics (Penetration, Activation, Utilization) familiar to credit card program managers can be applied to debit. Let’s look at how these concepts can improve P&L:
Giving Debit Where Credit Is Due
Managers can sometimes be lulled into thinking that if their ratio of debit cards in circulation to transaction accounts approaches 1.0, they’ve done their job on penetration. We’ve found, however, that 1.5 is a more appropriate target. Joint account holders (and in some cases children) given appropriate safeguards provide a pool of potential additional cardholders that can push penetration ratios well above 1.
There’s also an opportunity to convert ATM cards that may be in circulation to debit. These cards may already be enabled for PIN-based point of sale usage. And while some older account holders value the perceived security of disabling their cards for all but ATM withdrawals, a little promotion and education (on existing and available safeguards) can convert some of these limited-use cards to broader applications.
An important tactic on this front is a review of daily spending limits, a number of which most cardholders are unaware. One declined transaction can have significant long-term impact, shifting future behavior away from the card. Consider a review of cards that have fallen into inactive status; look for root cause patterns, and launch reactivation programs based on the findings.
Remember, activation does not refer merely to the presence of a “live” card in an account holder’s wallet. Instead, the focus should be on the percentage of cards that have been used for at least one debit transaction in the past 30 (or 90) days. Two-thirds is a decent rule of thumb for a well-functioning program, but top performers can reach levels of 80 percent and above.
Not all Merchants are Created Equal
Utilization levels drive the dollar amount of debit interchange. Ballpark targets of 12 transactions per card per month and $3,600-$4,200 of annual spend are good benchmarks, but can vary widely based on a bank or credit union’s footprint and customer profile. We find that many debit programs are far below these levels. We counsel our clients in this position to not become discouraged. Instead, we have found those institutions that set reasonable targets, build plans to attain them, and, then after celebrating success, set the bar higher can reach utilization at or near industry averages.
A number of approaches can be used to increase utilization. Promotions offering a gift card or a bonus amount deposited directly into an account after meeting prescribed usage levels have proven effective. Also consider offering a benefit like cellphone protection coverage for linkage of the monthly bill to autopay. Such programs can be sourced through many card networks, and can pay for themselves based on recurring payment behavior.
Just as important as recurring payments is maneuvering into first position in the growing field of in-app payments and digital wallets. Consider how often someone swaps out their card payment credentials for Uber, Netflix or Amazon once they’re entered: almost never. Similarly, although most wallets like Apple Pay support storage of multiple cards, the vast majority of users enter only one and/or rarely toggle away from it.
Financial institutions should query transaction data for missing merchants. If a Millennial has Netflix transactions but none for Amazon, there’s a good chance some transactions are going to a different card. Look too for evidence of digital wallet adoption. Develop a list of these cardholders and develop a special program to move your debit card into one or more of the preferred positions.
If your financial institution lacks available resources to undertake such data mining, firms including SRM stand ready to assist with this task. The upside from a well-oiled debit card program will more than justify the investment.