Payments Exchange


Secrets to ‘very profitable’ debit card programs

By Don Sadler

In the recent ICBA Community Bank Payments Survey, the majority of respondents said their debit card programs are profitable. However, most rated their programs as just “somewhat profitable”—only 17 percent said their debit card programs are “very profitable.”

So how do these community banks measure the profitability of their debit card programs? And more importantly, what are these banks doing to boost the profitability of their programs? Here’s what several of them say.

All of the community bankers we spoke with stressed the fact that the customer relationship aspect of their bank’s debit card program is critical and is one of the factors they consider in rating their program as very profitable. ICBA Bancard Executive Vice President Joseph T. Shallow echoes this reasoning: “Most community banks look at the debit card as a relationship product. Studies have shown that the more product relationships a customer has with his or her bank, the less likely the customer is to leave the bank. So there’s tremendous customer retention value in a debit card program.”

Measuring performance

Beyond the relationship aspect, each community bank has a process in place to measure its debit card program’s profitability in dollars and percentage of interchange revenue. “We established a methodology to identify all the expenses and revenue associated with our debit card program, including third-party processor expenses,” says Kim Barnes, the president and CEO of The Callaway Bank, a $300 million-asset community bank in Fulton, Mo. “We get good reporting info from our third-party processor, and we have strong ad hoc internal reporting, so it’s easy to get timely information about our debit card program’s profitability each month.”


Barnes says The Callaway Bank’s net percentage of interchange revenue is about 0.5 percent after expenses. “We include fraud losses in our costs, since merchants are off the hook for fraud losses if they process the debit card transaction correctly.” She adds that the bank is very proactive in trying to reduce debit card fraud losses in order to boost profitability.

“We look for commonality in the calls that come into our call center about fraudulent activity to try to spot breeches ourselves and then reissue customers’ cards before fraud occurs,” Barnes says. “As a result, we reissued about 4,000 cards last year. That’s a significant cost, but we’d have had to reissue them eventually anyway, and doing so sooner reduced our fraud losses and improved our debit card program’s profitability.”

Donald Lieto, executive vice president, senior administration manager with Monroe Bank & Trust, a $1.2 billion-asset community bank in Monroe, Mich., says that his bank gauges its debit card program profitability “in terms of how much interchange revenue we are generating in hard dollars and the percent of spend, which is about 1.4 percent. Our expenses are about 0.7 percent for a net interchange revenue percentage of about 0.7 percent. Our interchange revenue was mostly flat last year, but it had doubled over the previous five years.”

Lieto attributes last year’s lack of growth in interchange revenue largely to the Durbin Amendment. Barnes says The Callaway Bank’s debit card profitability has also taken a hit due to the interchange price-control law, which statutorily exempts most community banks from its provisions but doesn’t shield them from market responses. “Our analysis has revealed the impact of legislation on our profitability—if we hadn’t been watching it closely, we’d have thought we were protected from it,” Lieto says.

Tony Cook, senior vice president, chief operations officer with City National Bank, a $437 million-asset community bank in Sulphur Springs, Texas, says his bank’s net percentage of interchange revenue in 2013 was about 0.6 percent, up nearly 9 percent year-over-year. This was based on 4.5 million transactions, which were up about 13 percent, worth about $170 million.

“We base the profitability of our debit card program not just on these numbers, but also on the fact that most debit card swipes replace a paper check,” Cook says. “Processing checks can cost one dollar or more each, so there’s a big savings on the back end when checks are replaced by debit card transactions.”

“Studies have shown that the more product relationships a customer has with his or her bank, the less likely the customer is to leave the bank. So there’s tremendous customer retention value in a debit card program.”
—Joseph T. Shallow, ICBA Payments Expert

Even though City National Bank earns a higher interchange fee on signature (rather than PIN) transactions, Cook says he prefers that customers enter their PINs for debit transactions because of stronger security. “We think PIN transactions are more secure and help keep fraud losses down, which boosts profitability. We started our debit card program in 1997 and have only had to file one fraud claim with our insurance company since then.”

Incentivizing card usage

Barnes, Lieto and Cook all talked about various incentives their community banks have used to encourage customers to use their debit cards more often and thus boost revenue and profitability. Such incentives include creating branded cards with the logos and mascots of local schools and colleges, developing programs that reward customers for shopping with local merchants and requiring a minimum number of debit card transactions per month in order to qualify for high-yield checking.

“We are focusing on trying to change customer behavior to choose our debit card first, which initially meant paying an incentive in the form of a higher deposit rate when a minimum transaction threshold is achieved,” says Lieto. “In addition, we hired a consultant who helped us get a better deal on card processing and also negotiated a deal for us with MasterCard that provides incentives for us to grow our annual spend. Operationally, we have automated the manual card issuance and reissuance process to reduce our staffing costs and boost profitability.”

While City National Bank does some newspaper advertising to promote debit card usage, Cook says it doesn’t have to spend much because larger banks in the region are spending heavily to do the same thing. “This actually helps drive usage of our cards because customers know we have the same debit card products.”

One of Barnes’ responsibilities before becoming The Callaway Bank’s president was managing deposit products, including the bank’s debit card program. “It’s important to make someone in your bank a champion of your debit card program,” she says. “This person should understand the full gamut of the program, including the marketing aspects, operational side and contract negotiations. He or she should be paying careful attention to all aspects of your debit card program, always with an eye toward boosting profitability.”

Don Sadler is a writer in Georgia.