Understanding How Consumers Adopt A Debit Card Payment Preference By Martin Bunn, Ben Colvin, Carlos Pittier and Anna Zanghi From Australia to Zimbabwe, financial institutions the world over have long sought to achieve enhanced profitability by getting their customers to increase their debit card usage for point-of-sale (POS) transactions. Now a new MasterCard Advisors study that expands on rigorous analysis and research conducted in 2011and 2012 has confirmed that in all types of markets, a common five-step framework exists for how consumers gradually overcome their reliance on cash and adopt a debit card payment habit. Understanding this framework and some of the attitudes shared by consumers across various markets as well as those behaviours that are not necessarily mutual can help card issuers design programs that accelerate the adoption process. In particular, banks should be conscious of the influence of category breadth on card usage, which our latest study has reaffirmed to be the most vital consideration of all. 83% The amount of total purchases made with debit cards by those consumers in an emerging debit market who, based on a recent study, were found to have used their card for point-of-sale transactions in at least 14 categories. Executive Summary In a ground-breaking study last year of a mature debit market in western Europe, MasterCard Advisors determined that as consumers migrate from only using cash for their purchases to embracing debit cards as their primary payment tool, they progress through five distinct steps. Moreover, the analysis identified the key driver of habitual debit card activity to be the breadth of categories in which consumers are comfortable using their card not the sheer volume of transactions, as has always been the prevailing belief. Expanding on these findings, MasterCard Advisors has now conducted the same in-depth examination in two other distinctly different markets: one in eastern Europe where debit usage is just emerging, and another in northern Europe where it is already advanced. Although external factors make these markets almost polar opposites with the former s card activity inhibited by a shadow economy, while the latter s is robust because of a high rate of merchant penetration our findings confirm solid evidence of a five-step framework within each. At the same time, our results prove unquestionably that category breadth is the critical factor defining cardholder engagement, thus leading to the overarching conclusion that these are global realities applicable to any environment. NOVember 2012
Also, the new study reveals there are a number of other universal truths that financial institutions should be keenly aware of as they seek to encourage greater debit adoption and usage in whatever market they operate. Some of the most notable include the following: Control of spend and strong money management are key needs across all steps, with cash providing the means of achieving those goals at the lower steps and debit at the higher ones. Increased debit usage doesn t eliminate the need for cash, but as debit adoption grows, cash becomes less prominent in the payments mix. Fear of fraud and loss are primary influences that affect debit usage in varying ways at each step, with consumers consistently unaware of existing card security features. Likewise, the analysis showed some interesting examples of consumer behaviour not being identical in every market. For instance, in emerging and mature markets only, increased debit activity results in a growing rate of ATM disloyalty, meaning consumers opting to use ATMs that are not part of their own financial institution s network. In both of these markets, as consumers increase their debit habit, they become less sensitive to out-of-network ATM fees and more likely to accept the value of whatever ATMs are most conveniently located. However, generally speaking, the costs to banks associated with that disloyalty are more than offset by the increased revenues the POS transactions generate. Around the globe today, usage of debit cards is increasing as consumers discover the value they provide in terms of convenience and money management. But how do consumers actually acquire a debit card payment habit for pointof-sale (POS) transactions and what are the implications of their adopting that behaviour? SYNOPSIS OF THE ORIGINAL STUDY Around the globe today, usage of debit cards is increasing as consumers discover the value they provide in terms of convenience and money management. But how do consumers actually acquire a debit card payment habit for point-ofsale (POS) transactions and what are the implications of their adopting that behaviour? Likewise, what can financial institutions do to advocate such a habit, given the significant potential it offers for added revenue and enhanced cost savings versus other payment methods? These are some of the questions that MasterCard Advisors set out to answer in 2011 when it did a deep-dive analysis of a mature western European debit market to better comprehend consumer attitudes as they migrated toward greater debit usage. The study produced a landmark report that revealed that the transition from making purchases exclusively with cash to having a strong debit preference involves five clearly delineated steps. Just as significantly, the report found that contrary to conventional wisdom, what most defined each of those steps was the number of categories in which consumers were comfortable using their debit card, rather than the actual quantity of transactions completed. 2
The following are the brief definitions that were assigned to the steps, including how many categories were initially associated with each, as well as some of the attitudes and behaviours of consumers at the various levels: DEFINITION Step 0 Cash Only NUMBER OF CATEGORIES None ATTITUDES AND BEHAVIOURS Have a strong emotional connection to cash. Have routinely made withdrawals from ATMs for years and see no reason to change. Step 1 Debit Necessity or Confined Use Step 2 Incidental Use 1 Still tied very strongly to cash, but have overcome the first-time-usage barrier, whether out of necessity, an emergency or a planned one-off acquisition. 2-4 Prefer cash for its immediacy and tangibility, yet have subconsciously expanded debit usage to include purchases with trusted retailers in multiple first-use categories. Step 3 Building to Regular Use Step 4 Habit Is Formed 5-10 Cash remains a part of everyday life, but are increasingly choosing debit for use in such core categories as grocery, fuel and clothing. 11-19 Confident debit users whose card usage is tempered by a need for reassurance in unfamiliar surroundings and visible evidence of merchant acceptance. Step 5 Debit Devoted 20-41 Want to use their card whenever and wherever possible. Typically carry very little cash, if any, and may become frustrated when merchants don t accept debit. The 2011 research also produced extensive portraits of consumers at each step. These captured not just their feelings about money management and their openness to change, but such details as their average number of debit transactions per month, the combined value of those transactions, and the categories in which they were most likely to use their card. As a result, a number of other key insights were generated about the mature market, including the following: Merchant trust and individual approaches to money management are key drivers of consumer confidence to use debit in different categories. Necessity whether because of an online purchase or simply because no other payment option is available is even more of a critical trigger for first-time debit usage than an emergency or a planned one-off acquisition. The 2011 research also produced extensive portraits of consumers at each step. These captured not just their feelings about money management and their openness to change, but such details as their average number of debit transactions per month, the combined value of those transactions, and the categories in which they were most likely to use their card. Grocery, fuel and big ticket industries, such as insurance premiums or electronics home furnishings, are categories that often prompt early card usage. 3
2012 EXPANSION OF THE STUDY Seeking to further establish the efficacy of the earlier analysis and understand its applicability in other markets at different stages of debit evolution, Advisors this year embarked on similar comprehensive studies of two other types of markets. The first occurred in an emerging eastern European country where debit usage is still limited, while the other took place in a progressive northern European country where it is ingrained as part of the culture. Once again, our methodology involved analyzing proprietary consumer research and market data. We also performed a longitudinal analysis of account transactions from customers of a major MasterCard issuer to gain a deep understanding of what motivates consumers payment choices in each market. Not surprisingly, the examinations revealed that consumers tendency to employ debit cards was affected by several fundamental differences between the two markets: In the emerging market, a shadow economy remains very prevalent and is a strong driver of cash for consumers wanting to make discounted purchases or minimize their level of reported income. In addition, the cash cycle is reinforced by poor debit card acceptance and an under-developed ATM infrastructure. Consequently, almost one-third of consumers do not currently use debit at all. Our methodology involved analyzing proprietary consumer research and market data. We also performed a longitudinal analysis of account transactions from customers of a major MasterCard issuer to gain a deep understanding of what motivates consumers payment choices in each market. In the advanced market, merchant penetration and debit card acceptance are far higher and consumers are more comfortable with leading-edge banking practices, such as the use of mobile applications. As a result, those who prefer to use cash exclusively comprise just over 8 percent of the market. Nevertheless, after thoroughly investigating both markets, it became clear that a five-step framework for debit adoption is definitely present in each, albeit with different numbers of categories defining some of the steps: EMERGING MARKET ADVANCED MARKET Step 1 Card Necessity or Confined Use Step 2 Incidental Use Step 3 Building to Regular Use Step 4 Habit Is Formed Step 5 Debit Devoted 1 category 1 category 2-3 categories 2-4 categories 4-6 categories 5-9 categories 7-13 categories 10-22 categories 14-34 categories 23-54 categories 4
At first glance, these findings may not appear to be supported by certain statistics that our research turned up. For instance, the percentage of consumers that populate each of the steps varies significantly between the two latest markets: 50 45 40 35 Emerging Market Advanced Market At first glance, these findings may not appear to be supported by certain statistics that our research turned up. For instance, the percentage of consumers that populate each of the steps varies significantly between the two latest markets. 30 25 20 15 10 5 0 STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 Meanwhile, another distinction between the markets can be seen in the ratios of debit usage to cash at some steps, both in terms of total spending and total transactions, as this comparison demonstrates: Step 5 Emerging Market % Spend Cash POS 50% 50% % Transactions 17% 83% Step 5 Advanced Market % Spend 12% 88% % Transactions 5% 95% 5
However, despite those dissimilarities, we uncovered ample evidence of the five-step framework in the common payment attitudes that exist among consumers in both markets, and that mirror those previously identified in the mature debit market. The following are a representative sampling of comments made by consumers who were designated to be at a specific step based on their level of debit usage: EMERGING MARKET ADVANCED MARKET Step 1 Card Necessity or Confined Use I mostly use it for buying food. About the only time I use my bankcard is if it is over (a certain value). It s a large amount, so you don t want that in your pocket. Step 2 Incidental Use Step 3 Building to Regular Use Step 4 Habit Is Formed Hairdressers, masseurs you have special, personal relations with them. It looks nicer when you give all the amount in cash (and) for tips. Everything is in the card money, information where I spent, from whom received. However, there is a temptation to spend. I keep track of the spending via my online banking and card receipts. When you go grocery shopping, it s the perfect time to use your debit card. You can see what you spend with a card get a receipt. Can always go back and see what you ve paid with a card; it s really convenient. Step 5 Debit Devoted I use (debit card) as cash equivalent everywhere it is possible. This is much more convenient; no rattling things in pockets. I think it s a huge problem if places don t take cards I have to look for an ATM. Furthermore, the five-step framework was reinforced by some common behaviours and categories in which consumers in the two new markets were inclined to use their debit card, just as they did in the mature market. For example, at Step 1, consumers typically opted to make a POS transaction with a debit card only for essential purchases, a planned one-off acquisition, or when no alternative was available, e.g. online. At Steps 2 and 3, they then grew more at ease with card usage for groceries and fuel categories that traditionally represent core debit territory as well as eating, drinking and other social activities. What all of this irrefutably proves is that the five-step framework serves as an invaluable resource for financial institutions in any market around the globe that are seeking guidance for segmenting their portfolios to achieve optimal returns. By examining transactional data and consumer attitudes in the context of the market, issuers can gain an extraordinary appreciation for their customers payment patterns and then use that to develop ways of encouraging them to increase their debit usage. What all of this irrefutably proves is that the five-step framework serves as an invaluable resource for financial institutions in any market around the globe that are seeking guidance for segmenting their portfolios to achieve optimal returns. 6
UNIVERSAL TRUTHS AND NOTABLE DIFFERENCES In addition to these revelations, our recent research in the two latest markets validated many other insights generated by our earlier study about what factors stimulate consumers to adopt a debit card payment habit or inhibit such behaviour. As a result, we now believe there is an array of universal truths that financial institutions in almost any market worldwide should be very mindful of as they try to encourage habitual card activity among their customers. Some of the most significant of these are as follows: Monetary Attitude Insights Control of spend and strong money management are key needs across all steps. At lower levels, cash provides this most readily because of the perception among consumers that it is more secure, easier to use, and offers greater access. Consequently, those who have a debit card will often use it only to withdraw cash at ATMs and then leave the card at home to ensure they don t overspend. However, at the upper steps, debit becomes the dominant means for achieving greater control and enhanced money management as consumers learn to appreciate how it enables them to track their spending. In these situations, consumers will often move into their debit/checking account only the money they need for spending, thereby ensuring the remainder stays in an interest-bearing account. Increased debit usage does not completely eliminate the need for cash since there inevitably are certain places, such as kiosks and parking meters, where consumers find that only cash is accepted. For this reason, ATM transactions in emerging and mature markets actually grow as debit adoption grows, while in advanced markets, they remain essentially flat. Still, at the higher steps in every environment, cash does become less prominent in the payments mix, and consumer frustration at having to carry and use not just coins, but also paper currency rises significantly. Increased debit usage does not completely eliminate the need for cash since there inevitably are certain places, such as kiosks and parking meters, where consumers find that only cash is accepted. For this reason, ATM transactions in emerging and mature markets actually grow as debit adoption grows, while in advanced markets, they remain essentially flat. Fear of fraud and loss restrict debit usage in varying ways at each step. Many consumers are confused about the difference between debit and credit cards, and perceive all forms of plastic as bad because they equate them with debt accumulation. This demonstrates that consumers are largely unaware of existing debit card benefits and security features, as well as the opportunity debit offers to segregate funds by permitting, for example, card usage only for Internet purchases. Likewise, there seems to be little understanding of how fraud exposure can be minimized for overseas travel by using a prepaid card or credit card and leaving a traditional checking account card at home. 7
Merchant Insights Merchant trust is a major driver of consumers confidence to use their debit card, especially in emerging and mature markets. This means different things at different steps, with consumers at the lower steps being most comfortable with card activity only at large, well-established merchants, while those at the higher steps are willing to make debit purchases at smaller merchants if they are personally familiar with them. Small, independent merchants are often unwilling to accept debit and may apply surcharges on low-value payments. At the same time, consumers are quite conscious of the cost of debit to merchants and have empathy for the small guy, so they may refrain from using their card in deference to a merchant s needs particularly those with whom they have a close relationship. However, when merchants post signs and employ other means of expressly encouraging card usage, consumers find it easier to overcome their reluctance to make purchases with debit because they feel as though they ve been given permission to do so. Small, independent merchants are often unwilling to accept debit and may apply surcharges on lowvalue payments. At the same time, consumers are quite conscious of the cost of debit to merchants and have empathy for the small guy, so they may refrain from using their card in deference to a merchant s needs particularly those with whom they have a close relationship. Demographic Insights Older, less affluent consumers tend to prefer cash to debit, although the pivotal point at which they become less inclined to change their purchasing patterns depends to some extent on where they live. In emerging markets, marketing initiatives seem most effective with those below age 45, while in mature and advanced markets, the corresponding cut-offs are ages 55 and 65, respectively. However, in all three types of markets, consumers who exceed those ages do engage in online banking and other Internet activity so they may, indeed, be susceptible to behavior change over time. Therefore, there is definitely potential value in continuing to use low-cost channels, such as email and ATMs, to promote to them to the advantages of increased debit usage. On average, and certainly at the higher steps in each market, women are more prone to be debit users than men. Likewise, family members and close friends of both genders are key influencers of habitual card usage. Consumers who are inhibited about using debit often overcome those barriers with input from others they trust, including personal bankers with whom they have a one-on-one relationship. Consequently, when issuers are considering strategies and tactics for how to change consumer mindsets, they should see their branch personnel as valuable assets in terms of providing support when cards are issued and activated, as well as at other times. 8
Other Key Insights Over a 12-month period, consumers are likely to migrate only one step in either direction, but are more apt to move down or, at best, remain at the same level if no attempt is made to reinforce sustained usage. Even in the most advanced markets, certain categories or events are ones for which consumers appear hesitant to make debit transactions. As an example, many expressed a reticence to use their card for a night on the town for fear of overspending. That this appears true even among those in the upper steps, who regularly use their card during the daytime, reinforces our finding about consumers need for control in certain situations. When it comes to bar/club behaviour, they seem disinclined to trust themselves and feel it is better to use cash so they are limited to just what is in their pocket. Generally speaking, social conformity is a strong influencer of debit usage. The prevailing standards of a particular market often dictate when and where consumers feel they can make debit purchases, even if they don t have the explicit permission of a merchant or their family and friends. Generally speaking, social conformity is a strong influencer of debit usage. The prevailing standards of a particular market often dictate when and where consumers feel they can make debit purchases, even if they don t have the explicit permission of a merchant or their family and friends. Beyond these common themes, our research also exposed a number of notable exceptions where attitudes or behaviours in two types of markets were not necessarily shared by the third. Therefore, banks should be equally aware of these differences as they aim to accelerate debit adoption as a means of achieving enhanced profitability based on their view of their own market s place in debit evolution: In emerging and mature markets, increased debit usage is typically accompanied by consumers being less loyal to ATMs from their own bank s network because they have a declining need to receive mini-statements and balances. Still, the associated costs of that disloyalty to a financial institution are frequently more than offset by the higher revenues that the POS transactions generate. 9
In emerging and advanced markets, core debit territory is established in Step 2, even earlier than in mature markets. However, consumers in these two markets are more inclined to use cash for tipping, and are reluctant to use debit for any restaurant purchases if they must surrender their card for the transaction to be completed away from their table, where the card s security could potentially be compromised. Similarly, these consumers also expressed tentativeness about debit usage involving any kind of card reader or terminal other than what has become the standard model found at most retailers today. In mature and advanced markets, Internet gambling is frequently a popular debit category for consumers, even serving as a basis for first-time-usage in Step 1. KEY ACTION THEMES So what can financial institutions do to fully optimize these findings and drive increased debit card usage? We recommend a series of steps that echo some of the proposals that came out of our earlier report: Disrupt the consumers existing view of their money management system. - At account opening and other key customer touch points, demonstrate different alternatives that help consumers meet their needs for financial control and money management. - In mature and advanced markets, expand debit acceptance into lowervalue payment categories and develop secure person-to-person debit solutions. - Highlight debit s ability to enable spending to be easily tracked through a comparison of receipts and online statements. Use category preference insights to develop customer treatment offers and discounts. For instance, in advanced markets, using debit for spend in socialising begins in Step 3, so providing incentives in these categories will help to drive further usage for customers In emerging and advanced markets, core debit territory is established in Step 2, even earlier than in mature markets. However, consumers in these two markets are more inclined to use cash for tipping, and are reluctant to use debit for any restaurant purchases if they must surrender their card for the transaction to be completed away from their table, where the card s security could potentially be compromised. - Offer tactical incentives and implement spend-and-get campaigns. - Feature new acceptance locations and provide merchants with signage that welcomes customers to use their debit cards. 10
Increase awareness among consumers of the products they have and how they work, emphasizing convenience, as well as security features and benefits, such as spending-control mechanisms. - Evaluate product features and benefits that can address consumers loss and security concerns (e.g., insurances, zero liability for unauthorized transactions, etc.) - Use printed literature and other simple, clear communications to highlight that debit is pay as you go and, therefore, different from credit. - Promote that debit is not just fast and convenient, but offers peace of mind and is safer than cash, with fraud protection, limited liability and easy card replacement. Promote that debit is not just fast and convenient, but offers peace of mind and is safer than cash, with fraud protection, limited liability and easy card replacement. - Tout the ability that debit provides for consumers to get balance alerts via text message on their mobile phones. Create overall stronger banking relationships that will make customers feel valued and motivate them to explore, if not pursue, the behaviours being advocated. - Take advantage of social and new media i.e. Facebook, Twitter along with other low-cost channels, such as cell phone text messaging, email and ATMs, to regularly update consumers with relevant bank news. - Develop an internal education programme so bank staff members become informed debit advocates who can vouch for the reliability of the acceptance network. It is important to note, however, that when it comes to increasing debit card usage, there is no single silver bullet solution that is certain to work in each instance and every market. Rather, the key is understanding consumers comfort zones and focusing on strategies at key touch points that will encourage them to take small steps into unfamiliar territory. This approach will lead to their being more adventurous and eventually embracing new behaviors they might have previously been unwilling to adopt. 11
Authors Martin Bunn Senior Consultant MasterCard Advisors Martin_Bunn@mastercard.com Ben Colvin Senior Vice President Global Payments Knowledge Center Ben_Colvin@mastercard.com Carlos Pittier Principal Global Prepaid Knowledge Center Carlos_Pittier@mastercard.com Anna Zanghi Senior Business Leader Product Delivery Anna_Zanghi@mastercard.com Contributors Andrew Robinson Senior Managing Consultant MasterCard Advisors Andrew_Robinson@mastercard.com John Trencher Senior Managing Consultant MasterCard Advisors John_Trencher@mastercard.com Fabiano Vergari Global Solutions Leader MasterCard Advisors Fabiano_Vergari@mastercard.com For additional insights, please visit www.mastercardadvisors.com and insights.mastercard.com. 2012 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.