DEBIT AND THE RETAIL BANKING RELATIONSHIP gain front-andcenter status U.S. Customer Delivery BY MICHAEL SOUZA AND TEIK TUNG Shifting Sands in the Debit Landscape The debit marketplace has undergone more dramatic changes during the past few years than it has during any other time since the launch of the product in the late 1980s and its mainstream adoption in the 1990s. Since inception, debit card issuers have had a very solid business model, which basically included: Replacing check and cash transactions with interchange-earning debit transactions. Increasing debit card penetration into their checking account base to grow their revenue-earning card base. Promoting initial activation and then stimulating usage to grow revenue. The recent economic downturn further fueled debit card volume as consumers became more pay as you go focused, even though tighter issuer budgets limited some debit marketing and new product development investment. 50% The Durbin legislation impacted the debit card market with new interchange pricing set by the Federal Reserve pricing which cut interchange revenue by well over 50% for regulated issuers. The Durbin legislation impacted the debit card market with new interchange pricing set by the Federal Reserve pricing which cut interchange revenue by well over 50% for regulated* issuers. This dramatic revenue cut and even the fear of such a cut among exempt issuers is causing many debit card issuers to start asking important strategic questions. What is the best way to approach debit in this new post-durbin environment, an environment in which the product, for regulated issuers, is at a zero or at best a thin margin? Faced with a very different financial business model, many newly regulated issuers are left to consider the following: Should I continue to market debit? Does debit really help me cross-sell other products? Do I need a different strategy? Should I push customers to credit? * The Issuer, together with its affiliates, has assets of $10 billion or more. February 2013
In 2011, MasterCard Advisors advocated that debit was still important, just not as profitable. Most issuers agreed with this position. However, in order to build on that position and write the second chapter of the post-durbin debit card story here in the U.S., we need to dig a bit deeper into more granular measures of debit s level of importance to cardholders and what that importance really means for an issuer. In order to get an updated picture of the market, a research study of debit cardholder importance was conducted. Using a statistically representative national survey, the study yielded over 2,000 respondents among all ages who owned both checking accounts and debit cards. By measuring debit s importance or significance in the retail banking mix, the survey sought to prove a new hypothesis: that all of the work done by issuers and payment networks to market debit over the last 15 to 20 years may have eroded the importance of checking and/or checks as the core representation of what we call the center of the banking relationship. I TEND TO GO TO MY PRIMARY BANK FIRST FOR ADDITIONAL BANK SERVICES WHEN I NEED THEM. In order to get an updated picture of the market, a research study of debit cardholder importance was conducted. Using a statistically representative national survey, the study yielded over 2,000 respondents among all ages and among checking account owners who owned debit cards. Question: I tend to go to my primary bank first for additional bank services when I need them. TOTAL RESPONDENTS 17% 18% 16% 15% 21% 83% 82% 84% 85% 90% 79% YES NO 55+ 45-54 25-29 Bank Primacy is Key It has been a foundational principle for years that a checking account with a box of checks represents the core relationship with the bank. This principle of locking in primacy is what spurred free checking over the last 20-plus years. Banks knew that if they sold a customer checking, that checking customer would think of their institution as their primary bank and go to that bank first for other services. To validate this principle, the first step in this exploration was to confirm the importance and value of being perceived as a primary bank by a customer. The concept of primacy was overwhelmingly confirmed in that a very significant number (83%) of consumers go to their primary bank when they need additional bank services, thus proving that primacy significantly drives need-based account sales. In other words, when customers need another retail banking product, they will go to their primary bank first. Therefore, from an account sales point of view, there is a lot of value in being perceived as a primary bank. 2
What about the value of primacy as it relates to a customer being open to other products when there isn t a specific need? Given that consumers had no specific product need at the time, we assumed that this number would be lower, which it was, but it was still very significant at. This indicates that consumers are much more open to offers from their primary bank than from another bank that is not primary. We can therefore conclude that the perception of primacy will net higher product solicitation results than can be expected by a non-primary bank. Is debit a payment card, banking card, or both? With banks and networks spending millions of dollars for the last 20 years to communicate the advantages of debit versus checks, it is important to examine the perceptual differences between debit versus checking and debit versus checks, since technically a debit card is the access device that is used with a checking account. What about the value of primacy as it relates to a customer being open to other products when there isn t a specific need? Given that consumers had no specific product need at the time, we assumed that this number would be lower, which it was, but it was still very significant at. This indicates that consumers are much more open to offers from their primary bank than from another bank that is not primary. I TEND TO BE MORE OPEN TO MY PRIMARY BANK WHEN THEY SUGGEST ADDITIONAL SERVICES FOR ME Question: I tend to be more open to my primary bank when they suggest additional services for me. TOTAL RESPONDENTS 40% 43% 41% 38% 30% 37% 57% 59% 63% 70% 63% YES NO 55+ 45-54 25-29 Question: How true is the following statement? My debit/banking card is the HOW TRUE IS THE FOLLOWING STATEMENT TO YOU? centerpiece My debit or banking of my card banking is the centerpiece relationship of my banking because relationship it becuase is the it key is the key that that allows allows me me to be to recognized be recognized in the branch, in the operate branch, ATM to operate make deposits, an ATM transfer to money make between deposits, accounts or transfer get cash, and money also make between purchases in person accounts or online. or get cash, and also make purchases in person and online. TOTAL RESPONDENTS 19% 85% 90% 95% 77% 75% 81% VERY/SOMEWHAT TRUE 23% 15% 5% VERY/SOMEWHAT UNTRUE 55+ 45-54 25-29 VERY/SOMEWHAT TRUE VERY/SOMEWHAT UNTRUE 3
In the research study, we used this concept statement: My debit or banking card is the centerpiece of my banking relationship because it is the key that allows me to be recognized in the branch, operate an ATM to make deposits, transfer money between accounts or get cash, and also make purchases in person or online. The results were remarkable, as an overall 81% of the respondents agreed with the statement. This number increased to as much as 95% for some specific segments. In general, the younger the customers were, the more they agreed that debit was the centerpiece of their banking relationship. It wasn t just a payment card. As far as we know, there are no debit accounts currently being marketed in the U.S., so in many ways the deck is stacked in favor of checking as the product or service that is the center of the relationship. To our surprise, even though issuers don t market debit as the core account, we clearly saw movement toward identification with a debit account/card product. A very important finding was that, with the decline in check usage, the relevancy of the checking account seems to be in decline among younger customers. Issuers should start testing debit accounts in place of checking accounts with their younger clients (ages 18 29). When a checkbook is compared to a debit WHICH card, BANKING access PRODUCT device to OR access SERVICE device, IS THE the CENTER results are even more dramatic. OF THE RELATIONSHIP YOU HAVE WITH YOUR BANK? A very important finding was that, with the decline in check usage, the relevancy of the checking account seems to be in decline among younger customers. Issuers should start testing debit accounts in place of checking accounts with their younger clients (ages 18 29). Question: Which banking product or service is the center of the relationship you have with your bank? 85% 75% 71% 23% 13% 0% 2% 55+ 45-54 27% 2% 42% 42% 30% 16% 25-29 DEBIT CARD CHECKING ACCOUNT CREDIT CARD 4
Banks and networks have spent millions of dollars for the last 20 years to communicate the advantages of debit and the disadvantages of checks. Did it pay off? To find out, we looked at debit and checks from many different points of view. In one question, we asked cardholders about the physical representation of their banking relationship. As you can see below, the results were strongly in favor of the debit card for the 18- to 44-year-old segments; some segments preferred debit over checking at levels as high as 90% (ages 25 29). Banks and networks have spent millions of dollars for the last 20 years to communicate the advantages of debit and the disadvantages of checks. Did it pay off? To find out, we looked at debit and checks from many different points of view. Question: When you think of the physical representation of your banking relationship, do you think more about your... 90% 84% 57% 65% 40% 43% 35% 16% 55+ 45-54 25-29 DEBIT CARD CHECKBOOK What is driving these high numbers for debit versus checks? Was it just clever marketing or real utility? The answer: Usefulness. When asked which was more useful in accessing their money, consumers of all ages overwhelmingly chose debit versus checks, 83% to 17%. Therefore, if debit cards are so much more useful than checks for accessing money, it is apparent why the checking category is losing its luster and relevance in the same way record stores did when CDs and MP3s became mainstream. Earlier we proved the importance of primacy for retail bank account sales. Similarly, another important measure is retention. Banks today typically focus less on retention than on new account sales. For some reason it has always been more interesting to bring in new customers than to keep existing ones. However, a customer saved is a customer earned, to paraphrase the old adage, so retention is indeed very important. 5
To test this debit effect on retention, we asked debit cardholders this question: If they were to close their debit card/account, would it be likely that they would close other accounts at that bank? The answer: A resounding yes! Overall, 68% of debit cardholders said that if they closed that card/account, they would close other accounts at that bank, as shown on the chart below. The number went up significantly as the cardholder s age decreased. For example, 79% of the 18- to 24-year-old segment said they would close other accounts at the bank if they closed their debit card/account. WHAT IS MORE USEFUL TO YOU TO ACCESS YOUR MONEY? 68% of debit cardholders said that if they closed that card/ account, they would close other accounts at that bank. Question: What is more useful to you to access your money? 83% 74% 91% 90% 90% 84% 17% 26% 9% 16% TOTAL 55+ 45-54 25-29 CHECKBOOK DEBIT CARD IF I CLOSE MY PRIMARY BANK DEBIT CARD ACCOUNT, I WOULD BE LIEKLY TO CLOSE OTHER ACCOUNTS AT THAT BANK. Question: If they were to close their debit card/account, would it be likely that they would close other accounts at that bank? TOTAL RESPONDENTS 32% 68% 62% 75% 67% 80% 79% 38% 33% YES NO 20% 21% 55+ 45-54 25-29 YES NO 6
IS THE TAIL WAGGING THE DOG TODAY? DRIVING THE CHECKING ACCOUNT WITH DEBIT Over the years, how has the tussle between the checking account and the debit card played out? In the eyes of the consumer, which one drives which in today s banking relationship? Survey respondents were asked to recall the views they held about debit cards versus checking accounts going back in time. The chart below depicts how the consumer view of checking and debit has migrated, with almost three quarters of consumers reporting the preponderance of debit over checking in recent times compared to 20 years ago. This evolving consumer viewpoint calls for a new look at the traditional perspective that banks have used to approach the management of their checking accounts. The functionality of the debit card goes well beyond that of the checkbook. It can be part of an electronic wallet and plays a key role in facilitating e- and m-commerce purchases and payments. Additionally, it can serve as a digital portal to mobile banking and offers greater convenience and access to funds. With the expanded functionality of debit cards over checks and the increasing adoption of debit cards by the younger age groups almost to the exclusion of checkbooks, it is the debit card that is the key to driving checking instead of the reverse. The functionality of the debit card goes well beyond that of the checkbook. It can be part of an electronic wallet and plays a key role in facilitating e- and m-commerce purchases and payments. Additionally, it can serve as a digital portal to mobile banking and offers greater convenience and access to funds. The next table illustrates the sentiment of the debit cardholder in regard to the reasons for perceiving the debit card as more important than the checkbook. By focusing on the expanded and extended use of the debit card, banks can rethink the way they market their checking accounts. CHECK VS. DEBIT. WHICH WAS MORE IMPORANT TO YOU IN THE PAST? Question: Checks vs. Debit - Which was more important to you years ago? 88% 74% 68% 62% 32% 38% 26% 12% 20 YEARS AGO 10 YEARS AGO 5 YEARS AGO 2 YEARS AGO CHECKBOOK DEBIT CARD 7
WHAT MAKES THE DEBIT CARD MORE IMPORTANT THAN THE CHECKBOOK? Question: What makes the debit card more important than the checkbook? 71% 72% 71% 76% Provides me with ATM access Allows me to make purchases Can use for online purchases Can use it in more places than checks THE BIRTH OF THE DA (DEBIT ACCOUNT) Some issuers may argue that checking is now called a DDA (demand deposit account), but we would argue that DDA is an internal banking term that consumers don t use and that banks don t market. Our research suggests that a DA (debit account) would be more accurate as well as more customer focused and should be tested, especially with the under 44-year-old customer segments. More than two thirds of study respondents (68%) feel that a premium debit card confers onto the cardholder a special or preferred status with their bank. PLACING DEBIT AND THE DA IN THE DRIVER S SEAT The research has shown us that debit cardholders view their product as the center of the relationship or primary product. We have also learned that when customers view a bank as their primary bank, it turbocharges account sales and retention. Since we now can see the value of bank primacy and the product at the center of the banking relationship, we will take a look at what tools issuers can use to deepen the debit/retail banking relationship. One of the areas we explored was premium debit. As the role of the debit card continues to grow in importance both as a representation of the banking relationship and as a payment form for the consumer, are there ways that banks can leverage debit to help cement the relationship with their customers? Are there components or features of the debit card that can add further value to the overall banking relationship with the customer? More than two thirds of study respondents (68%) feel that a premium debit card confers onto the cardholder a special or preferred status with their bank. This is similar to how many of today s product marketers, such as airlines and hotel chains, use a premium line of products to build an enhanced status and imagery of their products with their customers. This is evident across most of the age groups in the study, with twice as many consumers in the below 30-year-old customer segment expressing the belief that having a premium debit card is indicative of a preferred relationship with the bank. 8
What would be the ideal new debit strategy for issuers to leverage in this new debit landscape? Banks can tailor banking features and benefits to suit the needs of different groups. This also allows for opportunities to migrate customers to different banking products as their lifestyles change or as they move on to different life stages. A holistic banking strategy would encompass other retail banking products that pivot around the debit card relationship with the bank. As the chart below suggests, every age group surveyed expressed interest in seeing premium card recognition being extended to other banking products. For this extended recognition to succeed, a total banking relationship strategy would need to be formulated across the different silos within the traditional banking structure to place emphasis on multiple product relationships built upon the debit relationship. As discussed earlier, the new Federal Reserve debit pricing has made it difficult for regulated issuers to offer rewards; it is still viable for the unregulated. Debit issuers have historically focused on rewards to generate higher card usage, but in the new regulated debit world, cardholder recognition may be an excellent tool that may actually have a greater impact. DOES HAVING A PREMIUM DEBIT CARD TELL YOU THAT YOU HAVE A PREFERRED RELATIONSHIP WITH YOUR BANK? Question: Does having a premium debit card tell you that you have a preferred relationship with your bank? TOTAL RESPONDENTS Every age group surveyed expressed interest in seeing premium card recognition being extended to other banking products. Debit issuers have historically focused on rewards to generate higher card usage, but in the new regulated debit world, cardholder recognition may be an excellent tool that may actually have a greater impact. 81% 32% 68% 67% 67% 50% 50% 40% 33% 33% 19% YES NO 55+ WOULD YOU APPRECIATE PREMIUM CARD RECOGNITION (GOLD, PLATINUM, AND BLACK/WORLD) TO BE CARRIED THORUGH TO YOUR OTHER RETAIL PRODUCTS? Question: Would you appreciate premium card recognition (Gold, Platinum and Black/World) to be carried through to your other retail products? 45-54 25-29 80% 56% 50% 40% 67% 21% 55+ 45-55 25-29 TOTAL RECOGNITION IS CARRIED THROUGH TO ALL WANT RECOGNITION CARRIED THROUGH TO ALL 9
A newly launched Debit MasterCard Product Suite offers issuers a powerful set of valuable debit products. Replacing Gold and Platinum is Enhanced a value-rich product that is highly customizable so that an issuer can match its debit product to its own unique retail bank branding. For the top 20% of cardholders, MasterCard offers World Debit with its valuable set of features for affluent and high-usage cardholders. Evolving the checking account to a debit account (DA) is an important step for an issuer to take in order to effectively compete in the future world of consumer payments. The Debit MasterCard Product Suite CARD FEATURES AND BENEFITS* Debit MasterCard (Standard) Debit MasterCard (Enhanced) World Debit MasterCard MasterCard Global Service - Emergency Card Replacement - Emergency Cash Advance - Lost/Stolen Card Reporting Mandatory Mandatory Mandatory MasterCard BENEFITS Zero Liability Mandatory Mandatory Mandatory Shopper Benefits - Price Protection - Extended Warranty - Satisfaction Guarantee n/a Core Core - Purchase Assurance - ID Theft Resolution with Wallet Protection n/a n/a Core *Core: These benefits come with the card program and are provided by MasterCard at no additional cost to issuers. Mandatory: These benefits are required and are at the issuer s expense. 1) Debit MasterCard (Enhanced) to launch as a bundle until the Product Code is live in 2013. 2) No more than 20% of a debit portfolio may be issued as World cards, and World design standards must be adhered to. PREPARING FOR THE FUTURE In conclusion, debit cards have evolved into a mature product and have taken significant payment share from checkbooks over the past decade. The phenomenal success of debit in replacing checks will extend and eventually cause the checking account to evolve to a debit account as the center of the retail banking relationship. Issuers that take the step of evolving their checking accounts into debit accounts will position themselves well for the rapidly growing and quickly evolving world of e- and m-commerce. As payments become more and more virtual, the relevance of the check will further evaporate as will the relevance of the term checking account. Issuers will then need to position the DA as the center of any e-wallet or virtual payment strategy to maintain the issuer sales and retention benefits of being perceived as a customer s primary bank. Evolving the checking account to a debit account is an important step for an issuer to take in order to effectively compete in the future world of consumer payments. 10
Authors MICHAEL SOUZA With over 25 years of experience in both the financial product and marketing arenas, Michael Souza has a proven record of delivering innovative consumer and business payment solutions to a wide array of diverse segments and industries. He started his career in product marketing at Bank of the West, and then joined 1st Nationwide Bank (now CitiBank West), where he gained much experience in checking account product management, direct marketing, and packaged accounts. Due to his expertise in checking accounts, Mike was recruited by Visa USA to work in their newly expanding Debit Department, where he spent nearly 10 years managing the product marketing function for the Visa check card together with Interlink, Plus, and smart cards as well as managing the Visa Business Product Group. During Mike s tenure, the number of Visa check cards grew from 6 million to over 100 million. Mike collaborated with the U.S. advertising department and their ad agency to develop and launch the first multi-million-dollar national television and radio advertising campaign for the check card. The ad campaign s success led to Mike s receiving two Gold Effie awards from the American Marketing Association. U.S. Customer Delivery Mike joined MasterCard in 2008 as a Vice President within the Customer Delivery Division, where he acts as a subject matter expert in Consumer Debit for U.S. Issuers and also manages several key sales enablement functions. Mike was instrumental in the design, development, and deployment of the Portfolio Review infrastructure for all core U.S. products. In 2009, Michael was one of five MasterCard employees in the U.S. who were recognized with MasterCard s Annual Award for Superior Performance and Outstanding Teamwork. In 2011, Michael led an important Maestro Sales Research study which he leveraged to create Maestro s very successful post-durbin sales positioning strategy, which significantly contributed to a major increase in Maestro U.S. market share and purchase volume. TEIK TUNG Teik Tung contributes his financial, marketing and operations expertise to MasterCard that is drawn from both the consumer packaged goods and financial services environment. Over the past sixteen years, he has done extensive work on profitability analysis, benchmarking research, new product development, and competitive intelligence in both the payments and consumer packaged goods arena. At MasterCard Advisors, as VP and Principal, Teik is responsible for leading the panel based consumer research from which syndicated studies as well as customized payments research solutions are offered to the payments industry. He helped establish one of the largest and most comprehensive payments panel in the U.S. market which includes a 360 view of consumers wallet and spending. Apart from consumer payments, his research work extends to small business, mobile commerce and prepaid cards in the U.S. and international markets. For additional insights, please visit www.mastercardadvisors.com and insights.mastercard.com. 2013 MasterCard. All rights reserved. Proprietary and Confidential. Insights and recommendations are based on proprietary and third-party research, as well as MasterCard s analysis and opinions, and are presented for your information only.