Financial Institutions Surveyed in 2012 Debit Issuer Study Expect 15
Percent Growth for PIN Debit, 8 Percent Increase in Signature
Transactions This Year
HOUSTON--(BUSINESS WIRE)--Aug. 20, 2012--
Financial institutions participating in the 2012 Debit Issuer Study,
commissioned by PULSE, experienced strong growth in debit transaction
volume in 2011 amid profound regulatory changes.
“The latest Debit Issuer Study provides more evidence that growth in
debit remains robust even in the face of significant regulatory
headwinds,” said Steve Sievert, Executive Vice President of Marketing
and Communications for PULSE.
The Federal Reserve’s Regulation II capped the maximum interchange fees
that financial institutions with at least $10 billion in worldwide
assets could receive on debit card transactions. These issuers report
fundamental shifts in their debit business. The relative importance of
PIN debit versus signature debit and interest in debit rewards were
impacted by the regulation. Eighty-nine percent of large issuers
indicate that regulatory pressure will be a key challenge in the coming
year.
Impact of New Regulation
Regulation II has two major components: a cap on debit interchange rates
and a prohibition on debit network exclusivity. The interchange cap,
which applies to issuers with at least $10 billion in assets, went into
effect October 1, 2011. These large, “regulated” debit issuers are
limited to a $0.21 plus 0.05% interchange fee per transaction, in
addition to $0.01 to the extent that such issuers qualify for the
fraud-prevention adjustment.
The cap on interchange rates has significantly reduced debit revenue;
the average interchange rate for regulated issuers declined by 55
percent for signature transactions and by 28 percent for PIN
transactions. Issuers’ interest in market growth has shifted from more
costly signature debit transactions toward lower-cost PIN transactions.
Additionally, issuers are seeking to increase small-ticket,
cash-displacement transactions, since revenue is now primarily driven by
the number of transactions rather than the amount spent.
“The impact of Reg. II is being felt most strongly by regulated
entities,” said Inderpreet Batra, an Oliver Wyman partner who helped
lead the Debit Issuer Study. “While interchange fees for regulated
issuers declined by more than half for signature transactions, ‘exempt’
institutions took only a 3 percent hit – at least so far.” Exempt
issuers’ gross margin per debit transaction is now more than double that
of regulated institutions.
The new cap on debit interchange caused an 87 percent decline in the
rate on business debit signature transactions. Business debit
transactions were one of the key growth areas for issuers in prior years
but are now unprofitable on a per-transaction basis for some issuers.
Some issuers surveyed reported network fees that were almost equal to
the effective interchange rate. As with consumer transactions, these
effects are limited to regulated institutions.
Given the decline in revenue, there is much less interest in traditional
issuer-funded debit rewards programs. Half of all regulated issuers with
a rewards program terminated their program in the last year and another
18 percent plan to end or restructure their programs in 2012; another 40
percent do not have a rewards program and do not plan to introduce any
kind of rewards proposition.
On April 1, 2012, all debit cards were required to participate in two
unaffiliated debit networks. This requirement could be met by changing
signature networks, adding an unaffiliated PIN network, or changing PIN
networks. Almost all issuers in the study complied with the regulation
by participating in an additional unaffiliated PIN network rather than
performing an outright switch. The shift toward multiple networks
provides routing choice to merchants and acquirers. Generally, issuers
expressed concern about how the new network dynamics would play out.
Growth in the Debit Market
Seventy-six percent of consumers now have debit cards, up from 73
percent in 2010. The average active consumer debit cardholder spent
$8,326 on their card in 2011, up from $7,781 in the prior year. The
primary source of this increase was greater usage per card, with active
users performing an average of 18.3 purchases per month compared with
16.3 per month in 2010.
The debit market is expanding at the low-end, with small-ticket
transactions continuing to displace cash. While the average ticket on a
debit transaction is $38, the median is just $19, with more than 30
percent of transactions now less than $10.
Consumer volume grew by 11 percent for signature transactions and 9
percent for PIN transactions, exceeding issuers’ expectations of 7
percent growth in both categories. In the year ahead, issuers expect the
market to continue to grow across both consumer and business debit
cards, with 15 percent growth in PIN transactions and 8 percent in
signature transactions. Sixty-nine percent of regulated issuers and 76
percent of exempt FIs agreed that focusing on improving penetration,
activation and usage for debit cardholders is key to growth in 2012.
About the Study
The 2012 Debit Issuer Study is the seventh installment in the
study series. The study provides an objective fact base on debit card
issuer performance and financial institutions’ outlook for the debit
card business. Fifty-seven financial institutions – including large
banks, credit unions and community banks – participated in the study,
conducted by Oliver Wyman, a global leader in management consulting.
Collectively, the participants issue 87 million debit cards and operate
47,000 ATMs. The sample is representative of the U.S. debit market in
terms of institution type, location and debit network participation. For
additional information about the study, visit www.pulsenetwork.com/distudy.
About PULSE
PULSE, a Discover Financial Services (NYSE: DFS) company, is a leading
debit/ATM network, serving more than 6,300 financial institutions across
the United States. This includes 4,300 issuers with which PULSE has
direct relationships and more than 2,000 additional issuers through
agreements PULSE has with other debit networks. PULSE links cardholders
with ATMs and POS terminals at retail locations nationwide. Through its
global ATM network, PULSE provides worldwide cash access for Diners Club
and Discover cardholders through more than 850,000 ATM locations. The
company also is a source of electronic payments research and is
committed to providing its participants with education on emerging
products, services and trends in the payments industry. For more
information, visit www.pulsenetwork.com
or follow PULSE on Twitter @PULSENetwork.
Source: PULSE
PULSE
Patty Sendelbach, 832-214-0395
patty.sendelbach@pulsenetwork.com
or
DPK
Public Relations
Daniel Keeney, 832-467-2904
dkeeney@dpkpr.com