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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.
August 24
When banks were bracing for damage to revenues from debit card fee caps two years ago, industry observers predicted they'd fight back with a new breed of hybrid products that steered consumers toward more lucrative credit card transactions.
Today, such predictions look overblown at best. Instead, many banks have kept hybrid credit and debit cards in testing mode for lengthy periods, suggesting that single cards offering dual payment options are yet to live up to their initial promise — and may never do so.
Problems the hybrid cards have run into include a lack of appeal among consumers and more technologically sophisticated alternatives that may have caused bankers to balk at investing in them.
The one exception: Fifth Third Bank (FITB), which says its hybrid
Company executives declined to provide many metrics but did say that Duo, which was introduced in 2011, has recently accounted for about 25% of new monthly credit card accounts.
"We'll continue to make this a focus of our business, but it's not the focus of the business," said Julie Joseforsky, Fifth Third's head of debit, credit and prepaid cards.
Fifth Third checking account holders who use Duo are given a choice at the point of sale between conducting a debit or credit transaction. A big benefit to Fifth Third is that the millions of retailers that do not provide PIN keypads process all Duo sales as credit transactions, which are not subject to the two year-old debit fee caps.
"The product resonates with customers who have an affinity for both" credit and debit transactions, said Joseforsky.
Joseforsky downplayed the importance of added swipe fee revenues earned from checking account holders who use a Fifth Third credit card more than they would otherwise, saying that the new pricing rules were not a primary impetus for Duo's creation.
Even so, banks that have $10 billion or more in assets, and are subject to the fee cap, are clearly looking for ways to recoup some of the billions of dollars in revenue lost to the 2011 rules.
TSYS, Total Systems Services Inc. (TSS), a Columbus, Ga.-based payment processor, has launched a product aimed at capitalizing on such demand, but it has received a muted reception among banks.
The product allows bank customers to route transactions to either a credit card or a linked checking account, based on parameters they set in advance. A customer might choose, for example, to send all purchases under $25 to his checking account. Because of the product's structure, all transactions are considered credit card purchases and are not subject to the interchange fee cap that applies to debit card transactions.
TSYS said a couple of U.S. banks that issue credit cards are currently testing its product. That's the same update the company
"We're pleased with where we are at this point," said Sarah Hartman, senior director of payment solutions at TSYS. "I think with the economy being the way it was until the last year or so, there just weren't a lot of people [card issuers] being very aggressive with a lot of different pilots. And I think we're seeing activity picking up."
Citigroup (NYSE:C), one of the nation's largest card issuers, appears to be putting the brakes on a related project. The New York bank is close to shuttering pilot testing of its
One reason hybrid cards may be falling flat is that banks have found other ways to soften the blows from debit card fee caps. They include curtailing debit rewards programs, increasing fees associated with checking accounts and promoting credit cards more aggressively via marketing and rewards programs.
Another problem with hybrid cards is that they simply lack much appeal among many consumers, argues Brian Riley, a payments analyst with CEB TowerGroup. "It's kind of a solution looking for a problem to fix," he said.
Bankers, for their part, are more intent in investing in mobile wallets, a more advanced technology than hybrid cards that will provide the same benefits to consumers, adds Beth Robertson, an industry analyst at Javelin Strategy and Research.
"They're looking to leapfrog from the standard card to [move to] the mobile device where they'll have multiple payment options available through the single device," she said.
Michael Taiano, a senior analyst at Telsey Advisory Group agrees, adding that hybrid cards and mobile wallets both offer consumers a choice of how to pay.
"The future is really going toward mobile payments and mobile wallets," he said.
Other analysts speculated that banks' reluctance to introduce hybrid cards might stem from a fear of angering regulators. There's no indication that the cards have drawn regulatory scrutiny, but consumer advocates have expressed concern that they'll encourage consumers to make purchases they can't afford.
Executives at some large banks are acting as conservatively as the managers of public utilities, says Eric Grover, a payments industry consultant at Intrepid Ventures who predicted that the hybrid card market would boom.
"I've been a little surprised — actually I've been a lot surprised — that the retail banks haven't been more aggressive," he said.
