Nov 22, 2005

Competing for debit card market share

This ad from Mashreqbank is an example of how banks are competing for debit card market share. The ad compares plain, basic cash against Mashreqbank’s Powercash debit card. But the battle is as much against debit cards issued by other banks as it is against cash.

Banks provide debit cards to most of their customers, but often have trouble getting customers to use them. If a customer does not use the bank’s debit card, they may be using another card from another bank, which could be the customer’s primary bank. If the bank can get the customer to use that bank's debit card more frequently, the customer will tend to leave more money on their account and the bank can build a deeper relationship and perhaps sell other products and services, including for example a credit card account, and maybe become the customer’s primary bank.

Debit cards don’t generate interest fees and usually generate lower interchange fees, so there is very little room for traditional card incentives like points, miles or cashback which are paid by the bank. A recent article in The Wall Street Journal, “Winning strategy for debit rewards is elusive”, describes how banks are struggling to offer meaningful incentives that encourage debit card usage.

Other than Mashreqbank’s Powercash card, most debit card incentives are based on the same methods as those used for credit cards, but with lower reward rates that make the programs less lucrative to customers. Mashreqbank is offering a different type of incentive: merchants finance the rewards and gifts through targeted promotions that in most cases are much more valuable than the traditional credit card incentives that other banks offer. Mashreqbank’s Amar Habibulah explains why merchants agree to do this:

“The way the program is marketed to merchants is ’It’s a program just for you and your customers’… ‘The more you give, the better your program will work for you.’ The exciting aspect of the program is that the merchant knows he is rewarding a customer who is truly loyal to him when he considers the number of visits or the purchase accumulated value, and hence, he is more than happy to contribute to the reward.”

When a bank offers credit card rewards, the total value is usually less than 1% of purchases. Sometimes bigger amounts are given, maybe up to 5%, but usually for short periods and with special requirements making it hard for customers to qualify. That’s for credit cards. Banks can’t give this much for debit card purchases. Merchant incentives on the other hand are usually much bigger, since they are promotions such as “buy one get one free”, or free product samples provided as a surprise gift, and these incentives can be given for both credit card and debit card purchases. The value becomes even greater when merchants use the payment infrastructure to offer their best customers special VIP treatment, not only discounts and free gifts.

Mashreqbank has been using the same methods for their credit cards with lots of success. The company recently announced very strong growth in profitability (see their press release, “Mashreqbank 3Q profit soars 101 percent”), with an exceptionally high 157% growth in non-interest income. Mashreqbank’s CEO explains that the rapid increase in the bank’s non-interest income is a sign that customers really appreciate the bank’s value-added services. At the EFMA 2005 Cards and Payments Conference & Expo held in Paris in September, Mashreqbank was awarded first prize in the prestigious Grand Prix 2005 for "having the best credit card Rewards and Loyalty Programme in the world."

Mashreqbank has discovered that when the payment card infrastructure (credit or debit, it doesn’t matter) offers merchants a new and much more powerful way to target their promotions, then Mashreqbank cardholders benefit by receiving valuable offers that the bank would never be able to finance on its own. The value of the promotion is high, because it is designed by the merchant based on the merchant’s own marketing objectives.

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