Retail debit cards offer a solution that caters to the needs of retailers and their customers. Leveraging consumer bank accounts through store-branded apps and payment cards, these products are especially attractive for everyday transactions like groceries and gas. When combined with loyalty and rewards programs, they play a pivotal role in retaining customers and promoting the adoption of payment methods that benefit merchants.
PaymentsJournal recently sat down with Elisa Tavilla, Director of Debit at Javelin Strategy & Research, to discuss her new report, Retailer Debit Cards: Why Doesn’t Everyone Do It? Tavilla delved into the benefits of retailer debit cards and what retailers should think as they consider dipping their toes into the space.
Your research examines the benefits of retailer debit cards. Can you tell us a bit about the report and what stood out to you in your research?
The report is about retailer debit payment options, and it’s not an entirely new concept. It’s often referred to as decoupled debit or private-label debit cards. Essentially, these are debit cards that are linked to a customer’s bank account. The payment gets debited directly from the customer’s bank account, unlike a credit card, where it’s like a loan. The debit card is issued by the retailer themselves and it can only be used at that retailer.
One of the examples that most people are familiar with is Target’s Red debit card. Target also has two credit cards—a co-branded Mastercard and a private-label one that can only be used at Target. One of the appealing benefits of the Target debit card, and why it’s been so well received by its customers, is the debit card benefits are similar to what Target offers to their credit card holders. There’s a 5% discount on all the products and extended return periods, for example. A benefit for the retailer is that it’s a debit card that doesn’t go through the Mastercard or Visa rails so they can save on the processing or interchange costs.
Target and many fuel merchants offer these retailer debit payment options. They tend to be common for everyday purchases like groceries or household goods that consumers would typically use their debit card to pay for. Because the margins are small on these types of products—any type of savings in payment processing costs would still translate to savings for these merchants. It drives incremental sales for these stores too.
In the report, I mentioned the H-E-B card, which is not a decoupled debit card, but it’s a co-branded debit option that the H-E-B supermarket chain offers with discounts on their store-branded products. Since many consumers are trying to save more money by buying store-branded products as opposed to name-brand products, this helps H-E-B with incremental sales as well.
You mentioned retailer debit cards not being something new, but I will say, they’re new to me. My take is that retailer debit cards can help keep consumers more accountable of their spending, making sure they don’t incur debt. With a retailer credit card, that’s more of a loan and consumers are encouraged, at times, to spend beyond their limits. Do you find that to be the case?
To address your comment about how it was new to you, actually it’s not very common. I was trying to find examples. There’s the Target Red debit card, which we discussed, and the Kroger and Nordstrom debit cards, which have both been discontinued. With Nordstrom, people who have a debit card can still use it, but they stopped issuing new Nordstrom debit cards when they revamped their loyalty program.
People tend to use debit cards for necessities or everyday spend just for the very reason that you noted, so they don’t incur additional debt that they don’t want. For everyday purchases like groceries, household items like consumer-packaged goods, whether it’s laundry detergent or toilet paper—these are necessities where consumers tend to use their debit cards because they can budget better and not incur credit card debt.
You mentioned that Nordstrom is no longer offering a debit card. It has a credit card it offers consumers and a loyalty program it continually puts a spotlight on. I’m curious if, in your research, you noticed why Nordstrom shifted away from a debit card.
There was a trend around the same time Nordstrom restructured its cards and loyalty rewards program. Target also revamped its reward program, along with J. Crew and Macy’s. All these retailers wanted to make their rewards programs less dependent on the payment method, especially their own private-label or co-branded cards.
The Nordstrom program, for example, was rebranded as the Nordy Club, where customers can sign up with their phone number or email address and pay any way they want and still earn rewards points, which they couldn’t do before. It’s at a lower rate than for cardholders, but it makes sense because retailers want to make their cardholders feel special and more valued. This strategy gave retailers the opportunity to capture more of their customer data and preferences, learn more about them, and engage with them. And it appeals to more customers because, as our studies show, loyalty rewards are a valuable incentive for many shoppers.
What’s in-store for retailer debit cards?
Given that mobile payments are more widely adopted, that helps facilitate some of these debit payment options, and certainly loyalty, personalization, and engagement is easier through mobile.
There’s also the potential of real-time payments. I wouldn’t say it’s coming soon or immediately, but it certainly can help improve the customer experience and also reduce risks, in particular with some of the challenges associated with ACH and insufficient funds and account verification. Another point I touched on in the report is one of the reasons that retailers are offering these debit options: They want to save on interchange fees. The Federal Reserve recently proposed lowering the interchange fee cap for large issuers, which is still pending. If the interchange fees were substantially lower, would it be worth a retailer’s investment to offer their own debit solution when they could be saving already from reduced interchange fees? Something to definitely consider