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Fifth Third is offering a payment card that lets users pay from either a credit or debit account.
August 24
The debit card likely will not go the way of the paper check, its role is rapidly transforming, and its days as a single-purpose product are looking increasingly numbered.
Banks are increasingly enticed by projects such as one Fifth Third Bancorp has undergone to marry debit and credit cards. In doing so, they might replace revenue lost because of new limits on what they can collect for debit card transactions.
Fifth Third announced a hybrid debit-credit card on Wednesday that it is marketing mainly to existing customers, and payments experts say other banks are likely to follow its example.
"We're going to see more stuff like this," says Eric Grover, the principal of payments consulting firm Intrepid Ventures in Minden, Nev.
Caps on the amount of fees that issuers generate from debit card purchases are set to take effect in October, reducing revenue for large banks by as much as $6.6 billion annually, according to a report from Javelin Strategy and Research. The fee caps, stemming from the Durbin amendment to the Dodd-Frank Act, are intended to lower the costs merchants pay to accept debit cards.
Fifth Third recently said its quarterly debit interchange revenue would shrink by half, to $30 million, barring mitigation efforts it is planning.
The Cincinnati banking company is looking to generate new revenue but the interchange caps were not the driving factor in introducing its new Duo Card, says Jon Groch, the senior vice president and director of bankcard services at Fifth Third Bank. Rather, the company sees an opportunity to strengthen relationships with customers by making card use simpler.
"Really the Duo Card was designed to meet the needs of our customers and it really is based on our research," Groch says, adding the product is not "a reflection of … the Durbin amendment."
Fifth Third is not the only bank looking at offering multi-purpose cards.
Total System Services Inc., a Columbus, Ga., payments processor to merchants and banks, has been marketing its TSYS Hybrid card to banks that includes a line of credit and the ability for a consumer to attach up to five demand deposit accounts, each from different financial institutions if desired. Two U.S. banks are testing the product, a TSYS spokesman says.
Dynamics Inc., a Pittsburgh card company, has several banks testing its high-tech plastic cards that include buttons a user can press to select which account to make a purchase with. Citigroup is testing a version that lets customers use the card to pay with a line of credit or their rewards points.
"Durbin has increased competition among [banks] for credit products and for differentiated features," Jeff Mullen, Dynamics' chief executive, says.
Such products could help banks offset lost debit interchange revenue by encouraging more frequent use of credit cards, which carry higher interchange fees, thereby generating more income for card issuers.
Fifth Third's card, which carries MasterCard Inc.'s logo, allows a consumer to select at a merchant's point of sale whether to pay by credit or debit. By selecting credit, a purchase would be applied to the consumer's line of credit. Selecting debit would require the consumer to enter her PIN, applying the transaction to her checking account.
However, consumers can select debit only if a merchant has a PIN terminal.
About 1.5 million to 2 million of an estimated 8 million U.S. merchant locations are equipped with PIN terminals, according to analysts. While most big-box retailers and chains have the technology, it is likely that users of Fifth Third's Duo Card would be forced to pay with credit in some instances because of the lack of PIN terminal penetration.
"Fifth Third is providing products to their customers added utility, absolutely," Grover says. However, "Fifth Third's underlying motivation is to try and generate more interchange income on spending [by] their existing retail banking consumers and I think this product will probably do that. To the extent that it's successful, it will mean that merchants are paying higher payment card interchange fees."
Generating new sources of payments revenue is a priority for Fifth Third in general, Groch says.
"We're hoping to generate more credit card revenue, absolutely," Groch says. However, with the Duo Card, "we really feel that most of the increase in credit card revenue will not be [from] migrating debit transactions" to credit.
"Our hope is that it will be more accessible because of its uniqueness," Groch says. "It will be more top of wallet."
Fifth Third in May eliminated its debit rewards program as a way to further save costs in light of the debit fee caps, Groch says. However, it still offers a debit card that comes with a $3.95 monthly fee that can earn customers rewards.
Fifth Third says the primary targets for the products are existing checking account customers, especially those that do not already have a credit card with the bank. The terms of the credit accounts will be similar to any other Fifth Third credit card.
Consumers are not clamoring for hybrid-type card products currently, partly because few are actually commercially available, Beth Robertson, the director of payments research with Javelin, says.
"I wouldn't say there's necessarily a lot of consumer demand but I think if consumers can carry less in their wallet and obtain the functionality that they want, that's always a desirable thing," Robertson says.
Such products are not "game-changers" and can carry technical challenges for payments processors, says Brian Riley, a senior research director of bankcards at TowerGroup in Needham, Mass. However, they could help consumers grow more comfortable with the idea of using their mobile phones as a payment device, given they tap into multiple accounts, a feature included in most mobile payments systems being tested by banks, payments networks and wireless carriers today.
