Banks Targeting Debit Cards for Additional Revenue Stream

With the Credit Card Accountability, Responsibility and Disclosure (CARD) Act to be instituted in February 2010, banks are starting to look at other revenue streams, as over the long term revenue from credit cards will be a smaller part of their overall business than in the past.

It isn’t a stretch to understand there’s a lot of potential revenue to be garnered with debit cards, which are a growing and significant tool used by consumers for their daily transactions. According to The Nilson Report, American consumers will spend approximately $1.64 trillion using their debit cards in 2010, a huge increase of about 66 percent from just 2006. Much of that comes from people cutting back on debt purchases and using cash as the preferred method of doing business.

As far as credit cards as an ongoing revenue stream, limitations from CARD, which will limit how lenders will be able to increase interest rates on the cards, as well as fees, has resulted in companies increasing interest rates on credit cards now in order to get back some of their future losses. While this will work for them over the short term, long term credit card revenue will decline as a percentage of their overall business.

How this will play out for debit cards as a revenue stream will be in relationship to loyalty rewards programs.

How the loyalty programs work when offering rewards is they charge a fee to debit card users for the privilege of using their points to buy goods or services.

While this is good for banks and some consumers, let’s face it, most of the time you have to spend so much it doesn’t really pay to enter into the program. Of course for some people it really works well because they indeed to spend into the thousands of dollars a year using their debit cards, and so can recoup a portion of their fees spent to receive the rewards.

In other words, these programs work for people that make a good living and will spend into the tens of thousands of dollars using their debit card, whether there is a reward program or not. A reward program just nudges them to spend a little more, which can generate more revenue for the banks from the fees connected to administrating the program.

To be useful for consumers, they will have to know their spending habits and how much they will use their debit card. Armed with that, they’ll be able to determine whether a program like this will pay for itself for them or not.

For banks it’s a good idea, as many people like to enter into reward programs, and many times they’ll do that and very seldom tap into the earned rewards, making it less expensive for the bank to provide for them.

Either way, we’ll see a push toward reward programs in 2010 in connection to debit cards as an additional way for banks to generate revenue.