Why Debit Cards Aren’t a Product

by Carol Coye Benson on April 23, 2009

in Bank of America, Card Issuers, Carol Coye Benson, Debit Cards, Decoupled Debit

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… and Why ‘Decoupled Debit’ Could Change All That

I was fascinated to read that Bank of America is now including debit cards in its card payment business line.  Now, for anyone outside of our payments industry, this sounds absolutely reasonable.  But from inside the industry, it’s pretty strange.

The financial services industry, presumably like any service industry,  has always struggled with the question “what is a product”?  This isn’t just an academic argument.  It matters because if something is a product, then you try to build a meaningful P&L around it, and use this to guide investment and decisions about your business.

My simple answer to that question has always been “does the buyer make a discrete buying decision?”. If so, it’s a product – and it makes sense to product-manage it, that is, to understand the P&L of that product.  If not, it is either a feature or a supporting service of some kind, the cost of which needs to be allocated, in some manner, to one or more “real” products.

Let’s look at the auto industry for a minute.  A car is clearly a product.  A steering wheel is not.  It gets a bit trickier with features.  An option such as a fancy radio is clearly a discrete buying decision, even though making that decision is subsidiary to the larger decision of buying the car.  So I would do a P&L for the radio product.  I would add that P&L to the larger P&L of the car.  Of course, you have to be reasonable about this – a really minor option (e.g. a premium paint finish) may be a discrete decision, but probably doesn’t merit full product treatment.

Similarly, a credit card is clearly a discrete buying decision.  A consumer makes one decision to get a certain card, and then ongoing decisions about which cards to use at the time of purchase.  By my definition above, the card issuing business at a bank is obviously  a product.

So why not a debit card?  I would argue that there is no discrete buying decision on a debit card.  You make the buying decision on the checking account (such a dated term!) that you open with a bank.  You just get the debit card as an element of this product – there is no decision to buy the debit card.  Also, with very few exceptions, you don’t pay anything directly for the card.

The bank’s P&L on that checking account includes a variety of “revenue pots”: the value of the balances in the account, debit card interchange (more on that later), and fees – particularly overdraft fees.  Against this the bank has to allocate a wide range of costs:  the systems that run the accounts, the cost of the branches (partial; this would also be allocated to lending products, etc.); the cost of issuing cards and processing card transactions, the cost of ATM’s,  the cost of operating the online banking service, etc. etc.  It’s a tricky P&L – a big pot of revenues, and a big pot of expenses, but very little direct connection between the two.  How do you meaningfully allocate the cost of the new carpet in the branch against ATM fee income?

Ok, back to debit cards.  There are two streams of revenue that are clearly linked to debit cards.  One is the overdraft fee income – increasingly important at many banks.   The other is debit card interchange – the funds that flow from a merchant’s bank (and covered by a discount fee  charged by the merchant’s bank to the merchant) to the debit card issuer.  This is consumer-invisible revenue.  The consumer made a decision to open a checking account with Bank A, who gave the consumer a debit card as a part of that account “bundle”.  Every time the consumer uses the card at the point of sale, the issuing bank is paid – but not by the consumer.

So it is easy enough to create part of a debit card P&L.  But what about the rest of it?  You’d have to allocate a portion of the value of the balances in the checking account to the P&L – but this would be an just a calculation –  there is no meaningful way to do it .  Similarly, although there are some clear debit-card related expenses, there are many more (that branch carpet, again,) that are not.  I’d argue that the real problem goes back to the discrete buying decision – and it is dangerous, from a business point of view, to treat things as products that really aren’t.

What are the dangers?  To start with, there is a drink-the-Kool-Aid problem.  If you go to all the work of allocating those revenue and expenses and building a P&L, you are in danger of taking it seriously – when it is simply something you have fabricated.  You may calculate that you have $x in profit per debit card, and that you like that number.  So your boss (or Wall Street) says “Great!  Sell more!”  But you aren’t selling debit cards, not really.  You are selling checking accounts.  You can’t market or position debit cards in the way that you do a “real” product.  I’d hate to be a product manager, or a marketing manager, tasked with growing “market share” in a non-market.  It is muddled thinking which leads to bad decisions.

Now this isn’t to say that programs to promote debit card activation and use don’t make sense.  Of course they do.  If you have a significant number of your checking account customers who aren’t using their debit cards, it makes all the sense in the world to put programs in place to encourage them to start using them.  Bank of America, in fact, has had notable success with it’s “Keep the Change” program, which is targeted at doing exactly that.  But this is a completely different marketing mindset than that of selling a new product.

Now there is a factor, lurking in the shadows of the payments industry, that could change all of this.  Decoupled debit, today just a blip on the horizon, is a development that unbundles the debit card from the checking account.  It would require consumers to make discrete buying decision on a debit card. Instead of simply having a single debit card which comes with your checking account, a consumer would opt to get one  – or more – additional debit cards from other providers.  Now that, from my definition, is a product!

And it is fun to speculate on whether or not Bank of America’s apparent decision to treat debit cards as a product is an indicator of their interest in offering debit cards to non-checking account customers!

10 Responses to “Why Debit Cards Aren’t a Product”

  1. pwb says:

    I think I understand. However I think more attention needs to be paid to the discreet decisions that actually drive revenue: card usage. In that respect, I think debit cards kind of do need to be thought of as products.

    Debit card unbundling doesn’t sound very interesting since the economics could never support a thriving market.

  2. Bryan Derman says:

    Broadly speaking I agree, but the product definition may have something to do with the relative importance the consumer puts on various features.

    I think most people would be define a payroll card or general purpose reloadable card as an independent product with a discrete buying decision. Yet, isn’t that really just a checking account product with the checking feature removed (as most such programs include bill payment, ATM access, and the other attributes of a checking account)?

    Given the growing importance card transactions (and the declining volume of checks), an enlightened bank might decide to begin referring to this product as a “debit card account”, or perhaps, following the European vernacular, a “current account”.

  3. Emiliano says:

    Payment Cards are trying to substitute the cash, as much as possible. We cannot immagine that our customers will create “own debts” (with a lot of possible solvency problems) for everyday shopping or as well for mid “relevance” expenses. Moreover, the European experience could teach the US banks that the customer will combine the usage of several kind of cards like prepaid, debts, “charge” credit card or “revolving” credit card according to their neeeds and as well the available budget. It will be fool – ad against the banks’ reputation- not to offer the debit card products, possibly cobranded with charge credit cards. The banks should look at the whole “customer card ratio”. And not only to their revenues.

  4. Joe Young says:

    Conceptually this is a wonderful post. I thought your opinion on what makes something a product and tying it to how it’s sold or marketed is great.

  5. Carol,
    Your argument that there is no discrete buying decision on a debit card is on point… up to a point. It is true that if you make the buying decision on the checking account that you open with a bank you just get the debit card as an element of this product – there is no decision to buy the debit card. But what about the unbanked that get a debit card without an “account”, in the form of a stored value card? No buying decision on the checking account, just the card. I suppose you can argue that a stored value card is not a form of a debit card (which I would disagree with), but then, you would have to agree that a stored value card is a discrete buying decision, and a product.

    I really appreciate the discourse and your insight. Thank you for raising the issue.

  6. Chris Lamela says:

    I have been toting a Bank of America prepaid card among my stack of prepaid cards that I hold up when giving talks to show that they all look so alike – and in fact, pretty much all act alike. Any differentiation between them is discernible, though the importance of those differences is a function of consumer awareness and choice.

    Your point of a prepaid card being a standalone product is clear for the sake of your discussion, and your used of “Decoupled” is a good descriptive term for that purpose. Your use of that term in your discussion about profit centers is well done.

    But please, please, please do not introduce another term into the mix! It’s called prepaid.

    – Chris Lamela

  7. prepaid guy says:

    In banking 1.0, I agree that debit cards are mostly an available feature of the checking account ‘product’.

    Certainly things have evolved to include debit cards offering various rewards and benefits where a consumer earns airline miles, or cash back for purchases. These may differ card by card while the underlying checking account ‘product’ stays consistent. Marketing these different debit cards does take on a product marketing flavor, but in the end I agree the account is the main product.

    If I were a retail checking account product manager at a large institution, I’d probably be a little worried about decoupled debit providers hijacking my interchange revenue, but in the end my accounts and deposits are intact.

    I’d likely be more be worried about Bryan’s point – upstart open network General Purpose Reloadable prepaid issuers marketing low cost of ownership accounts (read: PRODUCTS) with features that were formerly only available in retail checking accounts: FDIC insurance, bill pay, remittances, no overdraft fees and even interest bearing savings purses.

    Sweeten the pot by partnering with consumer brands and retailers offering co-branded reward programs and you have a game changer. If I’m a retail checking account product manager, I see these prepaid issuers able to target highly segmented, brand passionate consumers across geographic regions, stealing my deposits and fee revenue. See ING direct as a prime example of this kind of disintermediation. Low overhead, high value accounts with comprehensive features and relevant branding and rewards.

    In my opinion, the co-brand affinity credit issuers would indeed be foolish not to be readying co-brand prepaid products (read: checking account 2.0) that work side by side with their co-brand affinity credit portfolio.

  8. Carol,
    A very stimulating post. My take on the subject is that the respective roles of the deposit account and the transaction card (be it signature debit, PIN debit, or plain old ATM card) are changing. To your point, the checking account has always been the product with a capital “P” while the card serves as an access channel or service – a product with a lower case “p.” Yet, as Ruben points out above, the unbanked (and more important in my mind, Gen Y) consumers are now viewing the transaction card as the “P”roduct while the depository account merely enables use of the card. Sure, the money is still in “an account” within the banking system somewhere (Iowa or South Dakota in the main) but the brand/product buying decision isn’t about Chase, BofA, or even Visa or MasterCard; it’s about Green Dot, NetSpend, or Rush, thereby breaking the traditional linkage between the deposit relationship and a banking institution. Now, if any my hypothesis is anywhere near correct, your initial fascination with Bank of America’s change in business line reporting becomes even more accurate and well-placed. Or could it be that BofA has plans to over-weight the future role of transaction cards instead of deposits? Time will tell I suppose. Thanks again for the thought-provoking post.

  9. Thanks to everyone for your comments. I think I was remiss in not calling out the open-loop prepaid cards – what are becoming, increasingly, a “bank on a card”. I certainly agree that these, like a de-coupled debit card, are “real products” in that they are subject to a discrete buying decision. I definitely agree with John and Rueben on that – and on the significance of the use of these products by teen and college age kids, as well as the “unbanked”. I think, in fact, that as the economic woes roll out and these products get better and stronger, we will see a growing population of “unbanked” households – or maybe we should start saying “otherwise banked”.

    And Bryan, I certainly agree that agile banks will/should start marketing “debit card accounts”. Come to think of it, when I opened a “teen spending account” at Wells Fargo for my 13 year old (last fall), that’s really what it was – he got a debit card (with no overdraft capabilities!) but no checks.

    Carol Benson

  10. SUP says:

    to determine whether or not it is a product per se, then one must look into the breadth and depth of its functionalities and also the “tangibilities” of it. It is ultimately a marketing decision to position a debit card as a product or an ancillary to a product. To add more relevant points to construct the P&L case of a debit card, other than fees as its mainstream revenues, you must include the “spread” income. How is this recognized for a bank running a debit card program ? simply by calculating the interest rate differential between the % paid to debit card customers as a float to their balance on the card and the bank’s treasury pool fund before base lending rate. So to argue whether or not this is a product should then correlate the significance this may bring to the bottom line of a bank. Customer retention and the size of the portfolio (of a debit card program) in the bank will correspond the deserving attention of the issue…..

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