COLUMN: Shift Customers Back to Credit Cards

By Kahr, Andrew | American Banker, January 4, 2011 | Go to article overview

COLUMN: Shift Customers Back to Credit Cards


Kahr, Andrew, American Banker


Byline: Andrew Kahr

For many years there was continuous double-digit growth in credit card purchase volume and balances. This ended long before the financial crisis of 2007-8 brought about a contraction in demand for and supply of total consumer credit.

One big reason for stagnation of credit card growth is seldom mentioned: Credit card expansion slowed as debit card volume grew from a very low level to a remarkable high that has recently exceeded credit card volume. This has been a stealth stealing of market share within retail banking, from credit cards to debit cards. The debit card was not just replacing check transactions, it was replacing credit card transactions. The customer who previously used his credit card and paid it off from his checking account at the end of the month, without incurring finance charges, began instead to use a debit card - debiting the purchase immediately from his checking balance.

This has had serious consequences for issuers, most obviously because the disparity between the interchange paid to them on debit versus credit cards is huge.

In fact, with all the fuss about the Durbin amendment we lose sight of the fact that the excess of credit card over debit card interchange rates has been enormous for years.

Why then have banks priced and marketed so as to promote the growth in debit cards at the expense of credit cards? One reason is that the debit card is an appendage to retail banking while the credit card typically resides in a different and distant silo. The two strategies are not coordinated. A second reason is that debit cards were cheaper for banks to process than checks. A third is heavy promotion by networks, particularly Visa.

With this issue now in the spotlight because of the proposed Fed regulation reducing debit card interchange still further, banks have much to gain by moving quickly in the right direction. For example, consider a customer who spends just $1,000 per month in debit card purchases. If these were switched to credit card purchases, additional revenue of as much as $260 per year would be generated. This is a target as big as a barn.

Convert debit card volume to credit card volume. Converting just 10% of debit sales to credit sales adds over 10% to annual credit card growth - far more than doubling whatever growth we'd otherwise get. And this shift will multiply the interchange income from these transactions by at least eight!

The move away from shortsightedly promoting and paying incentives for debit cards should have started much sooner, but at least it has begun - for instance at JPMorgan Chase, which announced that it was eliminating incentives for the issuance of debit cards.

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