Debit cards-How profitable are they for banks?

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Banks earn more money from debit card fees than credit card fees and they often manipulate usage patterns to maximize their profit – and our pain, says a front page story in NY Times.

http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html?_r=2&hp

“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. Debit has essentially changed into a stealth form of credit, according to critics like him

The problem is that banks charge you an overdraft fee when you spend more than what is in your account, instead of denying the purchase. Three-quarters of the largest American banks automatically give consumers overdraft coverage, excepting Citigroup and INGDirect.

By calling this service overdraft “protection,” banks emphasize the benefit to consumers (being able to spend more than you have), while de-emphasizing their gain (charging outrageous fees for lending you what you the moolah).

The Indian situation is still in its early days with regard to Debit card penetration and usage! Though smart banks would be making a neat packet of other income with fees, interchange & off us charges kicking in.

In India we have over 1464 lakh (as of June 2009) debit cards issued by banks (excluding those withdrawn/blocked). By March 2008 end, the number of ATMs deployed in India was 34,789 with the then annual rate of increase in the number of ATMs being 28.4%. Thus considering a figure of 44000 ATMs deployed currently by the banks, on an average each ATM caters to about 3300 debit cards.

The Reserve Bank of India reported that debit card transactions increased by 48% in the financial year of 2009 which is against 12.7% increase recorded for credit cards. Furthermore, debit card volumes also rose 44.6% while credit card volume increased by 13.7%.

Analytics can play a strategic role for banks who are looking to positively impact their P&L with the Debit card & ATM business. Here are some thoughts:

1.    Driving the channel migration advantage: How do you start to identify customers who could be prospects to migrate from the branch to an ATM/Debit card/Internet channel. The cost of a bank transaction on manual mode is estimated to be in the range of Rs. 45 to Rs. 50 while it is around Rs. 15 on ATM and Rs. 4 on e-banking. Creating analytical models that help you identify customers who are great prospects for migration would be a starting step.

2.    Creating an ATM location strategy and driving Off us income. Are there competing bank customers who are great prospects for your ATMs and if not what are the catchments where such customers are more likely to be? 

Here are some interesting thoughts from Ashish Das a Professor at IIT Mumbai : http://www.math.iitb.ac.in/~ashish/workshop/ATMfees.pdf

Let us consider the practical situation wherein a bank X does not have an ATM located where it should have one (assuming a number of their own customers would have used it, had there been one). Bank X customers, in that location, may then look for a location where bank X has an ATM or a bank branch. In other words, bank X induces inconvenience to their customers and also carry a risk of incurring more expenditure (through a customer’s branch visit) because of its inability to have placed an ATM at the location. Thus, keeping in mind the role of technology in enhancing quality of customer service in banks, RBI came up with an innovative idea of making third party ATM same as customer’s own bank ATM thereby considerably reducing the cost (of opening more branches or installing more ATMs) to banks. This way, while increasing efficiency and better utilization of resources, bank X customers can use bank Y ATM while bank Y customers can use bank X ATM with cost saving and convenience to banks and bank customers. The expenditure and income incurred by each of banks X and Y balance out and in fact there is a tremendous gain for banks even after paying Rs. 17-20 by profiting almost Rs. 30 on each ATM cash withdrawal as against carrying out the transaction on manual mode over the branch counters.

RBI had freed unlimited usage of all ATMs by account holder from 1st April 2009. Though the ATM usage was made free for customers, the bank is required to pay a charge of Rs 18-20 per transaction to bank that owns the ATM.

The IBA proposed RBI to cap third party ATM usage at Rs. 10,000 per Day, limiting such transactions to five per month. Now the RBI has approved this proposal, it would be applied after October 2009. It will be optional on banks to levy such charges on customers.

As per RBI, international experience indicates that in countries such as UK, Germany and France, bank customers have access to all ATMs in the country, free of charge except when cash is withdrawn from white label ATMs or from ATMs managed by non-bank entities.