Finding Opportunities to Optimize Your Program
Having a vibrant and robust debit program can strengthen relationships between financial institutions and cardholders and help to make your institution more resilient. We’ve identified three reasons why debit matters more than ever.
1. Debit is Preferred and Growing
According to a July 2020 study from the Federal Reserve Bank of San Francisco, 42% of consumers prefer debit over other payment types, outpacing credit (29%) and cash (23%). Looking specifically at young adults 18 to 34 years old, debit is used for 37% of transactions, compared to 26% for cash and 21% credit.
Debit also drives cardholder engagement and builds brand affinity and trust. Cardholders make about 26 monthly transactions per active card, which means that the typical debit cardholder uses their card almost every day, according to the 2020 Debit Issuer Study, commissioned by PULSE(R) As consumers visit branches less frequently, the debit card represents the most frequent touchpoint between an institution and account holder.
Estimates from The Nilson Report reveal that debit is and will continue growing, fueled by e-commerce person-to-person and other card-not-present payments. Debit volume is projected to exceed $5.8 trillion annually by the middle of this decade, a compound annual growth rate of nearly 10% from 2019 to 2024.
2. Debit is a Meaningful Source of Non-Interest Income
After two decades of strong growth, debit has become a meaningful contributor of non-interest income for financial institutions. This is especially true for community banks and credit unions that have less than $10 billion in assets and are exempt from the Durbin Amendment’s cap on interchange. The 2020 Debit Issuer Study, found that the average active debit card generates $116/year in gross interchange income for these exempt institutions. Even when costs are netted out, that adds up. The typical community bank derives 24% of its non-interest income from debit. For credit unions, debit plays an even bigger role, accounting for 27% of non-interest income on average.
Debit plays a smaller but still meaningful role for national and regional banks. The study found that the average active debit card generates nearly $75 annually for these institutions. On average, debit is responsible for 8% of non-interest income for regional banks, and 5% for national banks.
3. Debit is Evolving to Meet the Needs of Consumers
We are in the midst of a digital transformation of commerce. While long-term trends have been shifting card-present transactions to card-not-present (CNP) for years, the pace of change significantly accelerated in 2020. For instance, the Ipsos E-Commerce Experience Report found that buy online, pickup in-store (BOPIS) orders and curbside pickup have increased for 78% of shoppers since the COVID-19 pandemic began. Moreover, 69% expect to continue using BOPIS at the same or higher levels after the pandemic subsides.
It’s clear that fear of technology is no longer the barrier it once was.
Debit has been a beneficiary of these changes as networks innovate, evolve and adapt to enable emerging types of CNP transactions, such as account-to-account transfers, which encompass peer-to-peer transfers, business-to-consumer transactions and consumer-to-business payments. Other use cases for emerging forms of payments include click and collect, checkout-free shopping and the connected home and car.
These are the types of transactions that younger generations in particular are looking to make. As a result, issuers should pay close attention to the different capabilities networks have to ensure your debit program is keeping pace to satisfy the demographics you serve.
It’s also important that networks anticipate what might happen next. As part of Discover®, PULSE can tap into the learnings from Discover’s Innovation Office, which evaluates emerging technologies to explore potential payment applications. Work is already under way on developing and testing payments use cases related to enhanced authentication, blockchain and Internet of Things, among others.
If you are interested in learning more about the evolution of debit, watch the replay of the second session of the 2021 PULSE® webinar series, Why Debit Matters More Than Ever, presented by Craig Watson, Senior Vice President, Account Management with PULSE. He walks issuers through ways to drive improvements in penetration and activation metrics, describes how to better understand how your institution stacks up against peers in terms of debit’s contribution to your non-interest income, and describes how to think about your institution’s interchange performance. Click here for a replay.