Debit interchange is one of the key fee income drivers, especially for community banks. But many institutions struggle to find strategies that fuel revenue growth, especially as merchants become more sophisticated in directing debit transactions to lower cost PIN vs. signature.
In today’s environment are debit rewards programs successful in stimulating demand? Can they help you jump-start performance? Is there sufficient payback after expenses are considered?
We believe there are more effective ways to improve debit revenue.
Rewards programs reached their peak in 2009 when they were offered by 58% of financial institutions. This dropped to a low of 32% in 2012, before stabilizing at 38% during the past two years. The decline in rewards programs gives us a test case to measure effectiveness. What happened when rewards programs were discontinued? Are the banks with the highest debit revenue generation offering rewards, or are they improving revenue through other means?
There are 3 drivers of debit revenue: penetration, activation, and usage
- High performing institutions have significantly higher penetration of their customer base – more customers have cards, and are active. At the top quartile of performance, 92% of customers have a debit card. This compares to the average for all financial institutions of 77%, and only 62% for the bottom quartile.
- We often hear that “many customers don’t want a debit card” or that “many of our customers don’t qualify for a card”.? But top performers have demonstrated that high penetration is possible. If customers don’t have a card, they can’t use it.
- Best in class banks encourage their customers to use their cards more. At the top quartile, active cardholders use their card 31 times per month, vs. an average of 22 for all institutions, and a low of only 14 times per month for the bottom quartile of performers.
Data analytics is key to improving usage. Well performing institutions understand who is using their card, and where they are using it. They have programs to target activation (get non-users to make at least one transaction), and to encourage users to transact more (“you used it at the gas station, now try it at the supermarket”).
What about rewards programs? The decline in rewards participation is driven by the recognition that most customers receiving rewards are already predisposed to debit use. When programs were discontinued there was no significant diminishment in activity – certainly not enough to offset the savings from program management.
Instead of the highest users, spend your time and energy to identify non-users, or low users, and incent them to increase activity.
Remember PAU (Penetration, Activation, Usage) and establish metrics to measure, monitor – and improve – performance.
If the podcast does not appear, please click on the word “Podcast” in the title of this article)?
On this episode of the BAI Banking Strategies podcast, Lou Carlozo, Managing Editor, interviews???Jon Voorhees of Peak Performance Group about the closing, opening and evolution of bank branches. Voorhees also reveals how banks can close branches and still experience low customer attrition rates.
Lou Carlozo, BAI. Bank branches. Where the three key words before were always location, location, location – today they might as well be decisions, decisions, decisions. ?Should branches be closed, should they be transformed, should they be re imagined. or should branches turn into something altogether different that uses the best world of customer satisfaction and automation.
To learn more about the current and future state of branches we will be talking with bank branch expert Jon Voorhees.
Welcome to BAI Banking Strategies, where each week we will focus on key issues facing financial services leaders.? We’ll bring you objective opinions and actionable insights that will help you power smart decisions. I’m your host, Lou Carlozo, Managing Editor of BAI. Come on in!
Thanks for tuning in. It is great to have you on the podcast today and we are at the end of Season 2 so we want to thank everyone who has tuned in so far. While we’re off you can check out the archive of podcasts at www.bai.org ?and as always, our podcasts can be heard through Apple iTunes podcast app, Soundcloud and Google Play.
And today with us here we have Jon Voorhees, a Consultant/Adviser for Peak Performance Consulting Group. Most recently focused on the consumer banking industry, Jon has used his expertise in retailing, consumer goods and the automotive industry.? If you’ve read his posts on BAI Banking Strategies you know he is clear spoken and gets right to the heart of things.
Jon, great to have you on the program today.
BY: DAVID KERSTEIN, Peak Performance Consulting Group, and DAN MERCURIO, Cambridge Savings Bank. ?This article was originally published in BAI Banking Strategies.
Compelling digital offerings aren’t just a consumer expectation anymore. They are a necessity to stay competitive.
But many financial institutions, especially smaller ones, are stuck in a holding pattern—with too many confusing options and choices to grasp a clear sense of how to move forward. What’s the best way to harness new digital technology to deliver the desired results? How should you select the right partner? What key strategies lead to successful implementation?
If there remains any question that the FinTech revolution is disrupting the banking ecosystem, just ask Millennials: 73?percent believe innovation will come from outside the industry and 33 percent believe they won’t need a bank at all to serve their financial needs.
With the current technology sprint, it’s often hard to make sense of it all. (The iPhone, after all, is only 10 years old.) Today, FinTech startups don’t compete with banks head-on but focus instead on specific services historically integrated within the bank’s core offerings. It can feel like death by a thousand cuts.
Let’s step back a moment and consider this from the customer’s perspective. Leading FinTechs are competitive because they focus on products and segments banks don’t serve well, such as micro-business lending, unsecured lending and roboadvisory. FinTechs also show particular skill at creating a frictionless, intuitive customer experience.? Many offer faster payment processing. Others provide simplified, instant business loan processing by connecting directly to information sources for verification, instead of relying on customers to gather and provide paperwork.
In our view, partnering with innovative FinTechs instead of trying to develop solutions in-house is a no-brainer.? Jamie Dimon, CEO of JP Morgan Chase, described it well: “(FinTech partnerships) offer the kind of stuff we don’t want to do or can’t do, but there’s someone else who can do it.”
So what should smaller financial institutions do?
For years, community banks have tried, with varying degrees of success, to boost fee income through wealth management. Now, thanks to the robo-advisory trend, smaller banks can compete more effectively, even with larger, more established players according to a new article in ICBA’s Independent Banker Magazine, ?Say Hello to Your New Employee.
The article highlights the experience of Cambridge Savings Bank and quotes David Kerstein, president of Peak Performance Consulting Group.
“A robo-advisor allows banks to have the potential for greater control over their services, and it allows them the opportunity to be able to service more of their customers and to manage it under their brand,” according to Kerstein.
“Conventional wisdom would say that robo-advisors would be more important to younger, more digitally savvy customers, but that’s not necessarily the case. For Cambridge Savings, the Connect Invest platform has gained widespread interest; its average user is 47-48 years old. ‘It’s not just millennials.’ says Kerstein, a consultant to the bank.”
David Kerstein, president of Peak Performance Consulting Group, was interviewed by S&P Global (formerly SNL Financial) about FinTech and the whether they are competitors or partners. He said that digital disruption isn’t new, citing past developments like automated teller machines and automated call centers. The difference, he said, is that today’s developments are much more rapid.
Nonbank competition can be a sore subject among community bankers as the banking landscape — along with customer expectations — is continually changing. “If you think about it, banking and technology have been tied together for all of our lives,” Kerstein said. “These were developed not by the core banking providers, but by what we would now call fintech firms.”
Today, wealth management is one area where small banks and fintech companies are teaming up. He said he sees ample opportunities for robo-advisory companies to team up with community banks to simplify and standardize wealth management platforms, citing SigFig Wealth Management LLC’s partnership with Cambridge Savings Bank.
Fintech companies such as PayPal Inc. and LendingTree Inc. have put pressure on banks to up their digital game, and teaming up with fintech companies rather than competing with them is a sensible solution, Kerstein said.
“There’s a huge number of fintech initiatives that are really building their business propositions around providing services to financial institutions to make quicker loan decisions or provide more efficient investment advice,” he added. “Small-business processing has been complex for financial institutions. It’s been difficult to maintain the skill sets, just given the amount of training that it takes and the skills of loan officers.”
For more, see the full article.
The following article, quoting Peak Performance Consulting Group’s President David Kerstein, appeared in S&P Global Market Intelligence on August 8
By??Kate Garber?and?Kellsy Panno
Some of the largest U.S. banks hope to entice their customers with real-time, P2P payment capabilities like those offered by?PayPal Holdings Inc.?and other fintech companies.
As member banks go live on the clearXchange network, a unified payments?channel, customers will be able to send and receive money in real time. So far,?Bank of America Corp.,?Capital One Financial Corp.,?JPMorgan Chase & Co.,?U.S. Bancorp?and?Wells Fargo & Co.?have the real-time payments capability up and running. Fellow network owners?PNC Financial Services Group Inc.?and?BB&T Corp.?have yet to go live on the network. An Early Warning spokesperson said that while all members are in the process of integrating the capability, go-live dates vary by bank.
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