Optimizing Debit Card Programs for Big Rewards

Most credit union leaders are familiar with methods to optimize their credit card programs, yet a vast majority of them do not translate the same techniques to their debit card portfolios. This represents a significant missed opportunity, as debit interchange is likely the primary or secondary contributor of their noninterest income. Here, even nominal improvements can drive big benefits. While credit card purchases do generate more interchange on a per item basis, there is much more competition to have these programs earn top-of-wallet position – especially at smaller credit unions. Meanwhile, they often have the tools to effectively and more directly influence debit usage.

Credit unions should look to the metrics familiar to credit card program managers and apply them to debit. These metrics are defined as penetration, activation and utilization (or PAU). After all, this golden trifecta is the ultimate measure of any successful card portfolio.

Penetration

A common way of thinking is that a ratio approaching 1.0 of debit cards in circulation to credit union transaction accounts is adequate penetration, when 1.5 is actually a more appropriate target. With appropriate safeguards in place, joint accountholders (even children, in some cases) represent a pool of potential new cardholders who can boost penetration ratios well above 1.

There may also be an opportunity to convert ATM cards in circulation over to debit. In many cases, these cards are already enabled for PIN-based point of sale usage. It’s true that more seasoned accountholders will value the ability to disable their cards for all but ATM withdrawals, and that’s their prerogative. Yet with a little education on existing available safeguards, credit unions stand to convert at least some limited-use cards to much broader applications. Of course, ATM cards linked to savings accounts face additional constraints with permitted transactions per month. For this reason, exclude “pure” ATM cards from these metrics to establish an accurate reading on performance and potential.

Activation

The mere presence of a “live” card in an accountholder’s wallet should not be mistaken for the proper measure of activation. Instead, look to the percentage of cards that have been used for at least one debit transaction in the past 30, 60 or 90 days. A general rule of thumb is having two-thirds be the indicator for a well-functioning program, even though top performers can reach levels of more than 80%.

It is important for credit unions to regularly assess daily spending limits, as a single declined transaction can have significant long-term impact. The slightest inconvenience or embarrassment will easily move future behavior away from the card. Ironically, these declines across debit cards are often triggered by a single large purchase (for instance, a television or tablet at Target) – spending events of precisely the type credit unions are looking to encourage. Cardholders are generally unaware of their daily limit, meaning a decline can also occur downstream (at a low-dollar convenience store purchase later in the day, for example) and they cannot grasp the true cause-effect.

Credit unions should also consider reviewing any cards that have fallen into inactive status. Look for root cause patterns and launch reactivation programs based on the findings.

Utilization

Penetration and activation essentially serve as table setters for the main event; ultimately it’s utilization that drives the dollar amount of debit interchange. Ballpark targets of 12 transactions per card each month and $3,600 to $4,200 of annual spend are good benchmarks, but can vary widely based on a credit union’s footprint and member profile. The fact is that many debit programs fall well below these levels, but credit unions need not be discouraged. Any institution can start with reasonable targets, organize a plan to reach those goals and then celebrate after success by setting the bar higher.

One effective tactic is to run promotions that offer a gift card or bonus direct deposit dollar amounts for a cardholder who meets prescribed usage levels. Experience has proven that such programs can drive long-term behavioral changes after three months of repetition (so, following a design that incents using the debit card X times per month for three consecutive months). Another incentive might be to offer additional services such as cell phone protection coverage for linking the monthly bill to autopay. This can be sourced through nearly any of the card networks and will pay for itself based on the recurring payment activity.

A newer challenge for credit union members’ debit usage is establishing or maintaining the first position in the field for in-app payments and digital wallets, as the space continues to grow crowded. Being top-of-wallet is perhaps more valuable in the e-commerce sphere than it is in the physical world. Consider how often someone swaps out their card payment credentials for Uber, Netflix or Amazon once they’ve been entered – maybe never. At the same time, even though wallets like Apple Pay will support the storage of multiple cards, many users stick with entering only one card. There’s a reason the major card companies have offered rebates for entering card credentials into services including Apple Music and Spotify.

Having a healthy debit card program starts with querying the transaction data credit unions already have. There, credit unions can identify missing merchants: If there are transactions for Netflix but not Amazon, or airfare charges but no Uber rides, then it is likely those transactions have gone to a different card. Other insights also abound: Is there a member who maintains a steady balance but has an apparent pattern with late fees? Perhaps they will see the value in an alert to set up autopay. As for digital wallet adoption, these transactions are tagged. While gauging a card’s top-of-wallet status is undiscernible, signs of any type of activity should prompt a new promotion.

An underperforming debit portfolio doesn’t indicate the opportunity isn’t there, but perhaps that the program needs a little TLC … or rather, PAU. Don’t underappreciate debit.

Bob Koehler is EVP for Strategic Resource Management. He can be reached at 731-300-7052 or bkoehler@srmcorp.com.