Top-of-wallet status is highly coveted because, once achieved, the incumbent – in this case the card issuer - has the advantage. Old habits die hard. Once a consumer develops a “go-to” card for certain types of purchases, they tend to repeat that pattern of behavior.
Those habits can be cultivated by offering benefits to the user via a rewards program. Sometimes the choice can be situational, with cardholders designating certain cards for specific types of purposes. This may extend to the type of card – e.g., debit or credit – and/or a workflow established by the merchant which makes it easier to use one card rather than another – e.g., Walgreens Express Pay.
The massive behavior shifts brought on by COVID-19 have also altered shopping patterns in ways that are likely to remain long after the pandemic abates. The move of consumer spending to e-commerce, which was already well underway, has shifted into overdrive. SRM data has also confirmed that spending has transitioned from credit cards to debit during the pandemic. This may seem counter-intuitive in a time of economic stress, yet, it is similar to the shift witnessed in 2008, as observed in our most recent payments report.
What does changing consumer behaviors mean for the banking industry? The dramatic rise in online and mobile shopping represents an opportunity for card-issuing banks and credit unions to demonstrate value to their customers. Doing so allows issuers to improve their interchange income at a time when low interest rates are pressuring financial institutions to enhance or find new revenue streams. With debit card use on the rise, this opportunity is especially attractive for the community banks and credit unions under $10 billion in revenue, thanks to Durbin.
Deliver Value, Highlight Value
Other COVID-19 based factors are creating unexpected impacts on some of the more popular reward programs. Consider the most popular reward category – airline miles and related travel perks - suddenly, those extras don’t carry the magnetic appeal they did as recently as February. At the same time, programs dangling bonus points for travel spending are no longer as lucrative or appealing to safer-at-home consumers.
These three vectors – pandemic-fueled online and mobile transactions; the consumer’s shift from credit to debit card transactions; and reduced efficacy of travel-based reward programs – must be considered when developing strategies and tactics to drive higher card utilization. Whether targeting specific delivery-based merchants or the e-commerce category overall, a cash-back premium or instant discount could help encourage a consumer’s choice of cards for such purchases.
To cultivate such a program, a financial institution will need to wrap it in actions that demonstrate a connection not held by some of the largest credit card issuers. For example, an issuer can send a thank you when the card is used, reminding the consumer of what they have earned, reminding them of a threshold in points that has been crossed.
Within certain segments of the market, Durbin’s impact on the profitability within debit card portfolios lead to the termination of reward. With debit spend volumes on the rise, institutions with less than $10 billion in assets can seek to further unlock the value of their debit portfolios. For any institution which views debit as a source of sustainable profit and customer engagement, now may be one of the best times in recent history to solidify that strategy.
Last, financial institutions should look at their overall debit strategy to make sure previous decisions will not negatively affect the debit card usage, e.g., delay in provisional credit, shorting the length of time to close out a chargeback, and setting up automatic account credit for a fraud related item under a certain threshold.
Showing SMBs Some Love
Another opportunity which has existed for years but has gained newfound urgency is with small and medium-sized businesses. Many of these entrepreneurs have been hit especially hard by the pandemic. The “all hands-on deck” effort to process PPP loan applications reflects only the tip of the iceberg of support that could be offered by community bankers to small businesses (SMBs) and, ultimately, cement long-term loyalty in the process.
Here it might be possible to find synergies between increasing consumer debit card use and keeping local small businesses viable. Reward programs might offer multipliers for debit card transactions within local communities. These offers could prioritize those small businesses which are clients but could be extended to all small businesses during certain times of the year. American Express has done an exemplary job in this area with its “Shop Small” campaign. Community institutions can refine the model on a local level.
The Bottom Line:
Rising concerns for financial and physical well-being is affecting how consumers shop and pay for goods and services. These changes offer debit card issuers – especially for issuers that have less than $10 billion in assets – a unique opportunity to mitigate the impact of low-interest rates by increasing their interchange revenue. Adding value to the transactional ecosystem for the cardholder should focus on options that are unique to community financial institutions and their environments. In addition to consumer-focused options, there are opportunities to expand the value of these programs beyond cardholders to local small businesses.
The bank or credit union that can successfully address these pandemic-fueled consumer issues will not only be fit for the top-of-wallet position but will also stay there. Their hidden advantage is in how well they know their audience – and how adaptable they are to the changes and needs in their communities.
For more on this topic, read our latest payments report.