Endpoint: Catering to the Whipsawed Consumer

It’s no wonder consumers are confused about debit cards these days, what with big banks discouraging use and merchants doing just the opposite. Influencing payments choices now calls for extra finesse, says Beth Robertson.

 

Javelin data shows that 70% of consumers believe that recent debit card regulations will actually benefit banks, while only 30% believe that the regulations will benefit merchants.

 

Beth Robertson, CCM, is director of payments research at Javelin Strategy & Research, Pleasanton, Calif. Reach her at brobertson@javelinstrategy.com.

 

Recent changes in the regulatory and economic environments have transformed market incentives influencing the use of various payments options and have limited the traditional avenues of revenue associated with payments options.

As a result of recent debit card regulations, issuers alone stand to lose a combined total of $12.2 billion in 2012 and, as a result, they are highly motivated to influence consumer payments choice. But consumer expectations surrounding payments—specifically debit cards and credit cards—have also changed as consumers have grown accustomed to active use of their debit cards for daily purchases and to help control spending.

In recent years, financial institutions have greatly encouraged debit card use by touting “free checking” and offering rewards incentives for signature-based debit transactions. Even though new debit card regulations have significantly decreased the revenue offset for maintaining checking-account services, consumers are not fully aware of such implications. They have been confused and have become increasingly hostile in the face of a host of new fees or decreased features.

In fact, Javelin data shows that 70% of consumers believe that recent debit card regulations will actually benefit banks, while only 30% believe that the regulations will benefit merchants. This perception can be reversed with careful messaging and positioning of payments options.

Conflicting Messages

For issuers in the asset group that is affected by the Durbin Amendment (institutions with $10 billion or more in assets), credit cards are now a significantly more profitable product than debit cards, and every attempt is being made to drive usage back to credit. The carrot-and-stick approach may work to a certain extent, as long as the stick is not too big (as the proposed monthly debit fees were perceived to be).

But credit card products are aggressively using the carrot. Rewards are currently the hot draw to that payments option, but financial institutions should consider other means to attract active consumer use back to credit cards or to options such as prepaid cards, as appropriate. Smaller issuers (institutions with less than $10 billion in assets) have used Durbin as an opportunity to advance the use of their debit products and to gain new business. These institutions may be able to generate additional debit business by offering rewards and focusing on debit’s spend-management features.

Notably, almost three-fourths of consumers report that they are satisfied with their debit card, compared to a mere 5% that are dissatisfied. As long as fees are not involved, consumers report that they like and expect to continue using their debit cards.

Merchants will also send conflicting messages about payment choice to consumers. With the average debit transaction at $38.03, most merchants will benefit from Durbin-driven reductions in interchange fees. So, for the most part, merchants will be likely to try to influence more frequent use of debit.

But small-ticket merchants may see cash and check as preferable, since they incur greater interchange costs from Durbin-affected debit cards than they did prior to the implementation of new debit rates. Combined with the influence that financial institutions wield, there will be a number of conflicting pressures influencing the payments mix.

Financially Concerned

The fact that the Durbin Amendment does not apply unilaterally to all debit cards—rather, only to those issued by banks with $10 billion or more in assets—and that it has a variable effect on merchant costs based on the merchant’s average sales transaction has created a confusing environment for debit acceptance and payment. Merchants will need to continue to carefully analyze the cost structure associated with debit acceptance in their specific environment and determine what incentives or disincentives may be appropriate to use.

Consumers, who were aggressively encouraged over the past several years by both banks and merchants to use debit, now see many banks putting on the brakes. They will see and experience mixed incentives from both merchants and financial institutions regarding debit and credit usage. This will result in confusion that may cause consumers to be hesitant about ongoing debit use as they face a bewildering onslaught of mixed messaging and offers.

Further, the recession and its lingering effects have both engendered and maintained a cautious mindset among many consumers who have found debit cards to offer the control they need to avoid financial instability. For many of these consumers, cash is also a payments option of choice, so financial institutions and networks interested in deterring cash and debit card use will need to focus on developing credit and prepaid product attributes that appeal to this financially concerned segment.

The market is still in the early stages of seeing the full implications of the Durbin Amendment come to fruition. Banks, payments networks, and merchants—and ultimately, consumers—will continue to experience more repercussions and conflicting pressures on payments choice than ever before. As a result, stakeholders should monitor payments trends to identify innovative and profitable ways to influence the payments choices they want consumers to make.