Change Afoot in Debit Cards

October 6, 2005

In a program rolling out now in New York and several other markets, B of A will reward customers for using their debit card in everyday transactions by rounding up to the nearest dollar and putting the difference into a savings account.

So, in other words, buy a coffee and biscotti at Starbucks for $3.25, pay with your B of A debit card and the bank will deposit $0.75 into your B of A savings account. If you’ve ever put all of your loose change into a jar on a daily basis, you know how quickly it can start to add up to real money.

This B of A program will work for a few reasons: (1) The program will drive debit card usage; (2) B of A will essentially share the transaction revenues they receive in each purchase with their consumers; (3) so, they’ve reduced their margin in exchange for volume. (While they certainly lose money in the $3 coffee sale, that is probably not the case in the $150 grocery store sale.) At the end of the day, it becomes a very clever way to save the consumer money and drive transaction business. For now, this is a three-month promotion – as B of A’s contribution to the saving drops considerably thereafter. And, the program caps at $250 per year.

But if the numbers prove to work beyond their promotional value past the three months, this could revolutionize the debit card movement. It is not inconceivable that this concept becomes the cost of entry for any bank into the debit arena – much like no fee credit cards became standard after the concept was pioneered by the AT&T Universal Card some years back.

Cash and checks are used less and less these days. In the process, fees are involved in every electronic transaction – and those on the receiving end of these fees will continue to have an incentive to trade margin for volume by sharing some of that fee with their customer. Discover Card did it in credit cards and it became a point of difference – albeit one that has affixed them into a role as a low-end card brand. B of A certainly runs that risk as a brand, but if they position it right, this can be just the first of many initiatives built on transactional partnerships with their customers. The rules have just changed in the debit card industry. Let the games begin.

- Jonathan Paisner

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