Article

Study: Debit is growing despite new regs

FIs focus on "cash displacement" transactions to make up fee losses.

August 20, 2012

Despite sweeping regulatory changes, U.S. financial institutions saw strong growth in debit transaction volume in 2011. This according to 57 FIs of various types and sizes that participated in the 2012 Debit Issuer Studycommissioned by Pulse, a Discover Financial Services company.

The Federal Reserve's Regulation II, which became effective in October 2011, capped the maximum interchange fees that financial institutions with $10 billion or more in worldwide assets could receive on debit card transactions. The cap limits interchange fees to 21 cents per transaction, plus a 0.05 percent interchange fee, plus an additional penny if the issuer qualifies for a fraud-prevention adjustment. An additional rule prohibiting debit network exclusivity became effective on April 1, 2012.

"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 Pulse study included a number of findings in regard to debit card growth and the effects of the new regulations on card-issuer behavior. For ATM operators, the most concerning of these would be the push by FIs toward debit card use for smaller purchase that have typically been made with cash.

Following are some of the most significant findings from the study.

Impact of Regulation II on large FIs

• As a result of the new regulations, the average interchange rate for regulated issuers declined by 55 percent for signature transactions and by 28 percent for PIN transactions. As a result issuers are now focusing on PIN transactions.
• Interchange fees for signature transactions fell by only 3 percent for "exempt" issuers. Their gross margin per debit transaction is now more than double that of regulated institutions.
• Half of all regulated issuers with a rewards program terminated their program in the last year; another 18 percent plan to end or restructure their programs in 2012.
• Almost all issuers in the study complied with the regulation that required issuers to offer two unaffiliated networks by adding an unaffiliated PIN network rather than performing an outright switch.

Growth in debit card issuance and use

• The percentage of consumers with debit cards increased from 73 percent in 2010 to 76 percent. The average active consumer debit cardholder spent $8,326 on their card in 2011, up from $7,781 in 2010; users are now performing an average of 18.3 purchases per month compared with 16.3 per month in 2010.
• Consumer volume grew by 11 percent for signature transactions and 9 percent for PIN transactions, exceeding issuers' expectations.
• Both regulated issuers (69 percent) and exempt FIs (76 percent) said focusing on penetration, activation and usage for debit cardholders is key to growth in 2012.

Effort to displace cash on small transactions

• 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 debit market is, indeed, expanding at the low-end. The average ticket on a debit transaction is $38, but the median is just $19. More than 30 percent of transactions are now less than $10.

Fifty-seven financial institutions, including large banks, credit unions and community banks, participated in the independent study. Collectively, participants have issued 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 more on this topic, visit the regulatory issues research center.

photo: Flicker/the consumerist