… and Why ‘Decoupled Debit’ Could Change All That

I was fascinated to read that Bank of America is now including debit cards in its card payment business line.  Now, for anyone outside of our payments industry, this sounds absolutely reasonable.  But from inside the industry, it’s pretty strange.

The financial services industry, presumably like any service industry,  has always struggled with the question “what is a product”?  This isn’t just an academic argument.  It matters because if something is a product, then you try to build a meaningful P&L around it, and use this to guide investment and decisions about your business.

My simple answer to that question has always been “does the buyer make a discrete buying decision?”. If so, it’s a product – and it makes sense to product-manage it, that is, to understand the P&L of that product.  If not, it is either a feature or a supporting service of some kind, the cost of which needs to be allocated, in some manner, to one or more “real” products.

Let’s look at the auto industry for a minute.  A car is clearly a product.  A steering wheel is not.  It gets a bit trickier with features.  An option such as a fancy radio is clearly a discrete buying decision, even though making that decision is subsidiary to the larger decision of buying the car.  So I would do a P&L for the radio product.  I would add that P&L to the larger P&L of the car.  Of course, you have to be reasonable about this – a really minor option (e.g. a premium paint finish) may be a discrete decision, but probably doesn’t merit full product treatment.

Similarly, a credit card is clearly a discrete buying decision.  A consumer makes one decision to get a certain card, and then ongoing decisions about which cards to use at the time of purchase.  By my definition above, the card issuing business at a bank is obviously  a product.

So why not a debit card?  I would argue that there is no discrete buying decision on a debit card.  You make the buying decision on the checking account (such a dated term!) that you open with a bank.  You just get the debit card as an element of this product – there is no decision to buy the debit card.  Also, with very few exceptions, you don’t pay anything directly for the card.

The bank’s P&L on that checking account includes a variety of “revenue pots”: the value of the balances in the account, debit card interchange (more on that later), and fees – particularly overdraft fees.  Against this the bank has to allocate a wide range of costs:  the systems that run the accounts, the cost of the branches (partial; this would also be allocated to lending products, etc.); the cost of issuing cards and processing card transactions, the cost of ATM’s,  the cost of operating the online banking service, etc. etc.  It’s a tricky P&L – a big pot of revenues, and a big pot of expenses, but very little direct connection between the two.  How do you meaningfully allocate the cost of the new carpet in the branch against ATM fee income?

Ok, back to debit cards.  There are two streams of revenue that are clearly linked to debit cards.  One is the overdraft fee income – increasingly important at many banks.   The other is debit card interchange – the funds that flow from a merchant’s bank (and covered by a discount fee  charged by the merchant’s bank to the merchant) to the debit card issuer.  This is consumer-invisible revenue.  The consumer made a decision to open a checking account with Bank A, who gave the consumer a debit card as a part of that account “bundle”.  Every time the consumer uses the card at the point of sale, the issuing bank is paid – but not by the consumer.

So it is easy enough to create part of a debit card P&L.  But what about the rest of it?  You’d have to allocate a portion of the value of the balances in the checking account to the P&L – but this would be an just a calculation –  there is no meaningful way to do it .  Similarly, although there are some clear debit-card related expenses, there are many more (that branch carpet, again,) that are not.  I’d argue that the real problem goes back to the discrete buying decision – and it is dangerous, from a business point of view, to treat things as products that really aren’t.

What are the dangers?  To start with, there is a drink-the-Kool-Aid problem.  If you go to all the work of allocating those revenue and expenses and building a P&L, you are in danger of taking it seriously – when it is simply something you have fabricated.  You may calculate that you have $x in profit per debit card, and that you like that number.  So your boss (or Wall Street) says “Great!  Sell more!”  But you aren’t selling debit cards, not really.  You are selling checking accounts.  You can’t market or position debit cards in the way that you do a “real” product.  I’d hate to be a product manager, or a marketing manager, tasked with growing “market share” in a non-market.  It is muddled thinking which leads to bad decisions.

Now this isn’t to say that programs to promote debit card activation and use don’t make sense.  Of course they do.  If you have a significant number of your checking account customers who aren’t using their debit cards, it makes all the sense in the world to put programs in place to encourage them to start using them.  Bank of America, in fact, has had notable success with it’s “Keep the Change” program, which is targeted at doing exactly that.  But this is a completely different marketing mindset than that of selling a new product.

Now there is a factor, lurking in the shadows of the payments industry, that could change all of this.  Decoupled debit, today just a blip on the horizon, is a development that unbundles the debit card from the checking account.  It would require consumers to make discrete buying decision on a debit card. Instead of simply having a single debit card which comes with your checking account, a consumer would opt to get one  – or more – additional debit cards from other providers.  Now that, from my definition, is a product!

And it is fun to speculate on whether or not Bank of America’s apparent decision to treat debit cards as a product is an indicator of their interest in offering debit cards to non-checking account customers!