How Market Pressures and Emerging Trends Are Changing The Delivery of Debit Products

Shrinking interchange fees and shifts in consume behavior are going to change the way banks manage and distribute debit and checking products and transform branch networks over the next few years, a new report from Aite Group predicts.

With diminished revenue from interchange, banks are re-evaluating the costs of their debit and checking products, and branch networks, according to the report, entitled "U.S. Checking and Debit Account Trends: Networks, Branches, and Product Management." Fortunately for banks a number of new opportunities will emerge to reduce costs as a result of new technologies and consumer trends that can help banks, the report indicates.

Debit Networks and EMV

The report surveyed 91 financial institutions, and, given the revenue shortfall from the Durbin Amendment, it is not surprising that pricing was the biggest concern for both large and small banks in the study in choosing PIN and signature networks for their Debit products. The anticipated migration to EMV will result in banks reassessing their network affiliations, and give them the opportunity to establish new affiliations at better prices, the report predicts.

"There are a still lot of unknowns around EMV… but it will lead to an opportunity for issuers to think about how they will approach their reissuance," says Madeline Aufseeser, the report's author and a senior analyst at Aite. "Now is the time for banks to evaluate their contracts. How would you do your reissuance? En masse or over time?"

With banks reassessing their networks contracts, the networks will be incentivized to lower prices because of the promise of gaining greater market share, the report notes.

Branches and Self-Service Kiosks

Debit and checking accounts are closely tied to bank's branch networks, where exactly half of all such accounts are sold among bigger banks with over $10 billion in assets, according to the report. For credit unions involved in the study that percentage rises to 61%.

As with debit networks, banks are interested in cost-cutting in their branch networks. The majority (65%) of the large banks in the study rate their interest in closing or consolidating branches as moderate to high. And nearly half (42%) of those larger banks said they expect that interest in closures and consolidation to increase over the next year.

[See Related: Branch Networks on a Downward Slope]

However some of the larger institutions in the study are interested in changing their branches by modernizing them and introducing more advisory services. Among those larger banks, 65% rated their interest in that concept as moderate (45%) or high (20%).

“Banks want to change the branch for finding better customer relationships. If they can provide more resources for the customer in the branch, then they can use it to develop more sticky customer relationships,” Aufseeser explains.

Very few of the banks and credit unions had a high interest in opening self-service kiosks that could potentially replace branch locations at a lesser cost. However, that interest seems set to increase, with 35% of the large banks in the study, and 23% of the credit unions, expecting their interest in kiosks to rise in the next year. Getting customers comfortable with using self-service kiosks for transactions is still a challenge, but as more of them are introduced that challenge should be reduced, Aufseeser notes.

Behind all of the issues around product and branch costs, banks are also trying to implement true multi-channel strategies across their organizations. “They all want to be there, but they’re not there yet,” Aufseeser comments.

As more banks begin to execute on those strategies some of these changes will accelerate. But there are still major barriers for banks in that execution, such as competing interests within organization, Aufseeser warns.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio