Keeping Debit Top-of-Wallet: Competing for Deposits and Spend in a Digital World
| Key Takeaways |
|---|
|
Financial institutions are experiencing more competition for deposits than ever as non-traditional service providers proliferate and third-party wallet use grows. These competitors are succeeding because they provide services and features that consumers value.
To compete – and succeed – in this environment, traditional institutions need to look beyond historic debit benchmarks and take a broader view of factors impacting their debit programs. This information can then inform your institution’s debit strategy and impact your bottom line.
The new reality for issuers
Debit is a critical source of non-interest income for financial institutions. According to the 2024 PULSE® Debit Issuer Study, each active debit card generates an average $162 in revenue per year for exempt issuers and $91 per year for "covered issuers,” as defined by Regulation II. Exempt issuers typically generate more than one-third of their non-interest income from debit.
Given debit’s important role, most banks and credit unions strive to maximize engagement with their debit cardholders. This focus is necessary but insufficient. To further improve performance, financial institutions must take a more holistic view of their debit-card programs.
To do so, institutions must focus relentlessly on improving their key debit performance indicators and debit economics – across their consumer and small business card portfolios and across their network relationships. They must also look upstream to gauge their overall competitiveness. Specifically, issuers should focus on a set of critical questions:
- How strong is our franchise?
- Are we gaining new account holders?
- Does our rate of new customer acquisition exceed our attrition rate?
- Are we gaining share in our target segments?
- Are we gaining deposits?
- Is the growth in core, stable deposits?
- Are we the primary relationship for our account holders?
- Are we sacrificing net interest margin to maintain or expand our deposit base?
Looking at debit within the broader retail banking context highlights some of the challenges many institutions face in competing for account holders and deposits. Gaining a better understanding of your institution’s performance in these areas will position you to begin addressing some of these challenges.
Debit in the retail-banking context
Typical debit programs focus their reporting on debit spend and interchange revenue. Debit managers are tasked with growing both – and ideally faster than overall market growth.
However, a debit program’s results are directly influenced by the performance of the overall retail bank or credit union. If the institution is losing account holders faster than it is acquiring new relationships, its card base will face strong headwinds. Similarly, if demand deposit account (DDA) balances are not increasing, it will be difficult for the institution to grow debit spend.
To win in debit, issuers also need to win in the broader retail banking context.
Competing for account holders
As a financial institution adds more banking relationships, its debit card base grows proportionally. This results in greater spend and more revenue. However, financial institutions are losing ground to digital banks and fintechs. In 2024, these challengers captured 44% of all new consumer checking accounts.
In 2024, 12% of consumers opened a new checking account – and banks and credit unions managed to gain just over half of these switchers. The numbers are directionally similar for each of the last five years.
Financial institutions’ traditional strengths – local branches and branch density, affinity with their local community, and brand trust – are being displaced by different consumer priorities, driven by a growing cohort of digital natives.
As reported in the 2024 Debit Issuer Study, about half of the issuers surveyed are either losing customers on a net basis or are adding accounts more or less in line with U.S. population growth.
Savvy debit managers are aware of this dynamic and make account growth an explicit input in their institution’s planning and budgeting process. For example, an institution initially projecting 5% growth in debit transactions has slower underlying card growth and subsequently reduces its debit-growth forecast.
Competing for deposits
The diffusion of cardholders’ total wallet is a less-appreciated dynamic when it comes to growing debit card spend. While banks and credit unions want to expand debit’s share of total wallet, many other providers are vying for the same dollars.
The days when all deposits were held at financial institutions and all spend was tied to one DDA are long gone. Now consumer deposits are fragmented across numerous intermediaries, with reloadable prepaid accounts and closed-loop payment ecosystems representing the greatest competitors.
Starbucks is the most prominent example of a successful, non-bank reloadable prepaid account. The company reported that, in fiscal year 2024, consumers loaded $15.8 billion into their Starbucks stored-value accounts, providing a convenient way to pay and take advantage of Starbucks’ integrated rewards program.
As consumers divert an ever-greater share of their discretionary income to reloadable prepaid accounts, the impact to issuers is twofold. First, while the vast majority of the money loaded into such wallets is spent, the funds are now outside of the banking system, curtailing financial institutions’ ability to lend them out or otherwise use them to serve their communities.
Second, shifting from a pay-as-you-go model to a prepaid model can significantly reduce covered issuers’ interchange revenue. This is because covered issuers receive a flat interchange rate per transaction that is set by the Federal Reserve. As a result, a cardholder who makes 10 transactions for 10 coffees generates 10 times the interchange of a single card-load for the same aggregate amount.
Similar to closed-loop wallets, the growth of non-bank payment systems used for person-to-person and consumer-to-business payments also presents a challenge for traditional institutions. When a consumer uses one of these services to send money, the receiver of the funds can either withdraw the money and deposit it into their DDA or leave the money in the payment system so that it is available to send to someone else.
There are tens of billions of dollars in consumer deposits in such payment systems. As more banking features such as debit cards and surcharge-free ATM access are added to these platforms, the likelihood that consumers will move the funds to their DDAs declines.
With more non-banks seeking to hold consumers’ funds, the share of the overall deposit pie that remains for issuers – and in turn for debit spend – faces ever-growing pressure. These companies clearly provide services that consumers value and use. To the extent possible, traditional providers should not only encourage consumers to use their debit cards but also seek ways to better serve consumers’ needs.
Actions issuers can take
With debit being the core of retail banking, it is imperative that banks and credit unions safeguard the primacy of these relationships. While there may not be a simple solution, the first step for financial institutions is to develop the necessary fact base to analyze their situation.
Two key questions to answer are:
- Is your organization gaining customers – on a net basis – at a rate that is in line with or faster than population growth?
- Is your organization increasing its DDA balances without resorting to paying bonuses to attract new funds?
If your answers to both are yes, congratulations. If not, consider this analysis the first step toward developing an action plan to strengthen your retail-banking franchise. Here are two avenues to consider to better compete in the digital age:
1. Address outdated legacy systems.
Heitmeyer Consulting says updating core legacy systems can help institutions create sophisticated, flexible systems that support growth and seamless customer experiences across all channels. To remain competitive in the evolving financial landscape, core banking modernization is a necessity, says the firm.
2. Pursue fintech partnerships.
Financial institutions should also consider fintech partnerships, including Banking as a Service (BaaS) relationships. “For existing financial institutions without sophisticated digital-first offerings, BaaS provides a way to monetize existing infrastructure, regulatory licenses, and risk-management expertise by extending those services to customer-facing distribution partners in return for fees,” said Akhilesh Khera, a partner in PwC UK’s digital banking practice.
While there is no simple answer to the challenges that rising competition and digital advances present, gaining a thorough understanding of your institution’s position and options is a great place to start. Please use the form below if you would like to discuss this topic further with your PULSE Account Executive.