Debit cards were supposed to be toast. The industry started writing their obituary when financial reform targeted overdraft fees and interchange or “swipe” fees, which had made debit cards extremely lucrative for banks. So why is it that banks are now pushing debit cards like never before?
A couple years ago, the banking industry warned federal regulators that reform efforts could lead to both an increase in fees and a decrease in debit card usage. “Banks and credit unions could charge for various debit card‐related products and services that are now offered free of charge, such as free debit cards and free debit card transactions,” a consortium of financial industry executives wrote in a 2011 letter to the Federal Reserve arguing against reform. “Issuers could also be forced to discourage the use of debit cards for certain transactions … there could also be a reduction or termination of various products and services associated with debit card programs.”
As it turned out, none of that really happened. After an initial retrenchment, banks now are marketing debit cards as aggressively as ever. They’re even adding back debit card rewards programs, which many had discontinued in anticipation of the hit the regulations would deliver to their bottom lines.
New Federal Reserve data shows that the caps on interchange or swipe fees are working as intended. The average fee — the amount card issuers (banks) charged to merchants for each card swipe — dropped to 24 cents from 50 cents before the legislation took effect in 2011. CardHub.com crunched the numbers and estimated that big banks are losing about $8 billion a year as a result.
Because banks are earning less from debit cards, you might think that they’d want to steer customers away from using them. In fact, just the opposite is true. Banks are trying to make up for the decrease in the amount collected per fee with increased volume. “You need economies of scale” to make today’s debit-based business model work, says Brian Riley, senior research director at CEB TowerGroup.
Last year, banks sent out 42 million direct-mail offers for new debit cards, up 6% from 2011, according to Mintel Comperemedia. “It does appear that banks have regained their footing to some degree and are beginning to focus on debit card marketing,” says Susan Wolfe, vice president of research at Mintel Comperemedia.
In reality, the actual increase in debit card marketing is probably a lot higher, since the direct-mail stats don’t take into account the exponential rise in online marketing that’s taking place. A decade ago, direct mail used to account for more than 60% of openings, but it’s now fallen to less than a third of that, Riley says. Comparatively, only 4% of new applications for card-linked accounts used to come via the Internet, but now that figure has climbed to almost 40%.
Internet marketing is cheaper, and it also targets plugged-in Gen Y consumers on their own turf. Young adults — a highly coveted group because banks see them as potential customers for other products like a mortgage or life insurance policy down the line — have displayed a strong preference for debit over credit cards.
Wolfe says banks are targeting millennials in their marketing by appealing to their love of technology. “Interestingly, banks are promoting online banking, mobile banking and text banking as ways to stay on top of debit card spending,” Wolfe says. “Debit is also positioned as a better way to manage finances,” since users can keep track your bank account balance in real time via text or email alerts on their cell phones.
A recent study found that the number of 18-24 year-old college undergraduate students who own a credit card fell by 10 percentage points in only two years. “I don’t want to be paying for my money,” a 20-year-old woman told the Chicago Tribune.
“A lot of the millennials have been influenced by painful recession issues with their parents,” Riley says. Plus, many already have a heavy debt load because of student loans and don’t want to add to that by running up credit card balances.
Besides looking for new customers, banks are trying to get current customers to use their debit cards more frequently. “Some banks are encouraging customers to use the card for small purchases,” Wolfe says. After the swipe-fee rule kicked in, certain banks adopted the 24-cent cap as an effective floor as well as a ceiling. Since they earn the same amount if you buy a cup of coffee or a TV, they make out better if their customers use debit cards for lots of transactions, no matter how small.
“We’ve seen a resurgence of these types of offers encouraging customers to use their card throughout the day for a cup of coffee, lunch, an afternoon snack,” Wolfe says. “For the most part banks are promoting debit as a fast way to pay, as well as secure and convenient.”
The biggest shift in debit card marketing is the reintroduction of rewards programs, which were eliminated in “knee-jerk” fashion a few years ago, says Riley. Today’s programs are different from the ones they’re replacing, though. The older programs allowed users to swipe cards and accumulate a pool of points that could be cashed in. The typical debit card reward program nowadays gives customers rewards in the form of a percentage or dollar amount off at a local business or national retailer they’ve shopped at before. Customers pay the full amount up front at the cash register with their debit cards, and later get a credit for the discount on their statements.
“It kind of changes the whole mindset,” Riley says. “To me, a reward is aspirational.”
Aspirational doesn’t always lend itself to smart spending, though, since some people are tempted to overspend in order to get a “free” perk. This more restrained, coupon-esque approach to rewards is probably a better fit for today’s consumers, who are always looking for a deal.