Reclaiming the Foundation Payment Product to Build Better Long-term Customer Relations
Start small and grow. For generations, that has been the path for building lifelong, loyal relationships between banks and customers. As a customer matures, the relationship does too, with a steady stream of additional products and services added to meet life events. When that stream reached eight products under management, that customer was yours for life, so said an old industry mantra. After that, it was too much hassle for your customer to go elsewhere.
The first step was a checking account.
Debit accounts are undoubtedly the gateway to cross-selling additional products that build mutually fulfilling banking relationships. However, the rates at which customers open new checking and debit accounts have been falling at a dramatic pace in recent years, particularly in the United States. That has many wondering if the foundation of the lifelong banking relationship is disappearing, and whether something can be done to reverse the trend.
The reduction in the creation and usage of debit accounts is a troubling trend for many U.S. banks, and many point toward the millennial generation as the main culprit. A recent Mercator report suggests that only 82 percent of 18–24 year olds and 85 percent of 24–35 year olds own a checking account1, suggesting that much of the loss in account ownership is with young adults and affluent households. Millennials demand instant gratification, real-time accessibility and transparency, which means they take their services from whomever offers the best deal.
While it is true that many Generation X customers have also seen reduced debit utilization, this could be in part due to the fact that, historically, older generations routinely operated multiple checking accounts as part of their monthly money management. This practice has largely been dropped as consumers and small businesses increasingly consolidate their accounts.
However, the downhill trajectory in debit usage is ultimately blamed on the Durbin amendment: a U.S. regulation from 2010 that radically changed the rules for debit provision. In essence, Durbin altered the interchange fees for medium to large banks, making debit facilities unprofitable. Consequently, smaller banks consciously remained small so as not to trigger the interchange fee regulation, or banks were forced to grow as quickly as possible in order to mitigate the impact through economies of scale – it became a numbers game.
Since Durban was enacted, we have seen a huge drop in the auxiliary advantages debit accounts used to offer including bonus points, cashback facilities, loyalty programs, interest earning and overdraft facilities – all of which have been reduced to cover the lost revenue from debit services. Subsequently, consumers found debit less attractive and switched to credit cards as their preferred payment mechanism.
A new strategy to reinvigorate debit is needed, as there is every chance that the credit card being used is from a competitor.
Building DDA Relationships
Checking/debit accounts must become the focus of the continued banking digital transformation if such relationships are to continue. If customers are to be acquired and retained in larger numbers, debit is typically the first service on offer. Debit is a steppingstone to getting closer to the customer, with more product offerings, at advantageous prices that are contingent on relationship depth. Millennials are notoriously not monogamous in their choice of financial service providers, preferring to get the best deal for their immediate needs. Therefore, more than any other group, they need to be attracted, retained and grown with products and services appropriate to their life events – for the long-term viability of the bank.
Fortunately, millennials – or at least the technology they use every day – may actually be the solution. The world of alternative payments is expanding quickly, and it is the younger generations that are championing it. The demand to be able to make payments here and now, intuitively and on the go, is inspiring a new lease on life for debit. Tokenization, Apple Pay, Android Pay and many others – linking directly to a traditional debit account – can dramatically increase utilization while also providing a valuable marketing channel for customer interaction, recommendations and advice. Millennials value transparency and expect smart, data-driven products and services delivered through their channels of choice. Technology is providing banks with a golden opportunity to recast the debit account as the foundation to a wealth of additional services and a lifelong mutually beneficial relationship.
The Long Game
Debit services represent an incremental path: from prepaid to debit cards, debit to credit cards, then onto loans, mortgages, investments, insurance and more. Durbin may well have made debit products more expensive to operate, but there are strong indications that the emerging world of alternative and mobile payments may prove to be a silver bullet that reinstates debit as the default payment mechanism.
The ease and convenience of emerging payment mechanisms, when linked to a debit account, can ensure long-term use as the cornerstone of a customer relationship. Focus on the needs of the customer and make using debit effortless through the most relevant digital engagement channels: web, email, mobile, ATM, eCommerce, IVR, etc. The only need is to embrace the digital transformation.
1 Source: Mercator Research Note, 2016 Outlook: Debit Cards December 2015
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