H Making the Most of What You Have By Eric Hallman, Vice President — Bank Card Sales & Support, Bankers’ Bank of the West Historically, businesses of all types have been driven to grow by attracting new business from “net new” prospects. While this growth strategy is, and always will be, mission number one on everyone’s list, there is a wealth of potential within a business’s existing customer base. It has been proven in numerous studies that it is far less expensive for a business to keep and expand its existing customer base than to bring on net new customers. Take the case of the bank’s ATM/debit program, a product that has evolved into perhaps the most publicly facing product a bank offers. In 2020, the average U.S. consumer made 68 purchases and payments each month — and more than a third of those transactions were made with a debit card. Cardholders present their cards for payment, either physically or virtually, on average almost 25 times per month. Most community banks see a card-to-DDA penetration rate of 75% with an activation delta of between 15% and 25%. Many in the industry would suggest that a penetration percentage north of 90% with an activation percentage delta of 10% to 15% is realistically attainable. The banking industry has been working with debit cards, primarily Visa and Mastercard, since the mid-1980s and within the community banking industry since the early 1990s. Community banks, in large measure, initiated programs during the 90s with the goal of breaking even. Reluctance to the product was the perception of risk, while the adoption of a program was driven by customer desire and marketplace competition. Interestingly, however, a debit card program epitomizes a bank’s business model — namely, income generation through risk management. An issue of concern associated with a debit card program that many community banks voice is the perceived lack of control. A bank’s ability to manage risk rests on its ability to directly control the risk the bank is accepting. Debit cards put that control in a third party’s hands, which for many community bankers, is an unsettling prospect to accept. It’s no secret that the debit card program is a “house of cards” that is directed and controlled by the two leading card companies: Visa and Mastercard. The rules of engagement are determined by those two companies, and those rules are often perceived as overwhelmingly designed to benefit the merchant world. In short, if there are no merchants accepting cards as a form of payment, the entire product falls flat. Another issue that plagues a debit card program is the notion that the program has an “out of sight, out of mind” element. In other words, transaction authorization and transaction settlement occur automatically. The process happens almost always without worry. In the end, less than 20% of all debit card transactions are fraudulent. Taking into account some 87 billion purchase transactions U.S. consumers perform with debit cards each year, the “worry-free” percentage is quite high, which exacerbates the auto-pilot perception of the programs. Fraud is a genuine concern that constitutes the seedy underbelly of the debit card industry. As mentioned earlier, Visa and Mastercard have written dispute and chargeback rules that clearly benefit the merchants by design. Banks are required to jump through a number of hoops and endure seemingly endless timeframes to find a resolution to a disputed transaction that often works to the bank’s disadvantage. Never forget that the debit card product is based on the idea that a merchant pays a fee to the card-issuing bank in exchange for a guarantee that the transaction amount will be paid. The transaction’s authorization and corresponding settlement justify that merchant fee and provide income to the issuing bank in exchange for that payment guarantee. Visa and Mastercard market a debit card program through which the income a card-issuing bank generates is an offset to the risk the bank accepts. This premise assumes that the expense the bank takes on when issuing debit cards is a cost of doing business. Add now the primary sellers of debit card programs — regional switch networks and processors — that ostensibly sell the debit card program under the guise of the income covering the program expense. The result is a single source of income from the merchant interchange and two expense buckets: a fraud bucket and a program expense bucket. Is there enough coming from the bank’s income spigot to fill each of the expense buckets? The short answer for the overwhelming number of community banks is yes. In some cases, this is difficult to plainly see depending on the method a bank’s processor uses to summarize the monthly income and expense. The norm now is that a bank’s transaction interchange income is credited daily, which is a good thing. However, the bank’s processor invoices the bank on a monthly basis. This creates a visual disparity between seeing the monthly expense as a lump sum and not necessarily seeing the income as a monthly lump sum. Consequently, many banks lose sight of both the positive monthly net revenue a debit card program provides and the increased potential revenue the program could generate by sharpening the program’s management internally. Colorado Banker 6
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