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Study: Debit issuers adjust to 'New Normal'

July 15, 2013

Financial institutions are feeling the pain of debit interchange restrictions imposed by the Durbin Amendment to Dodd-Frank; the question is where they fall on the pain scale. Pulse got a measurement of sorts from the 2013 Debit Issuer Study, a poll of banks with assets both above and below the Reg II dividing line of $10 billion.

For banks with assets of $10 billion or more, the Reg II cap on interchange rates slashed revenue for signature transactions from 52 cents to 23 cents, on average; PIN transaction revenue fell from 32 cents to 23 cents, on average.

Smaller FIs felt a pinch in their debit exchange income, as well. Citing competition as the driving factor, respondents reported a decrease of 2 cents in average interchange rates for all debit transactions. 

"In fact, this is the lowest growth projection for signature debit we've seen since the study began [eight years ago]," said Tony Hayes, a partner at Oliver Wyman who co-led the study.

Despite a major reduction in interchange revenue, financial institutions are still reporting growth in their debit business. FIs reported a 14 percent increase in PIN transactions and a 6 percent rise in signature transactions.

"Even in the face of significant regulatory challenges, issuers managed to grow their debit volumes in 2012 and expect further growth this year," said Steve Sievert, executive vice president of marketing and communications for Pulse.

However, banks expect to see less growth in 2013, with PIN transactions forecast to increase 8 percent (6 percent less than in 2012) and signature transactions forecast to grow 4 percent (a 2 percent decline).

In addition to debit, the Pulse 2013 Debit Issuer Study probed FIs' opinions and plans with respect to prepaid, EMV and mobile payments. Additional findings from the report:

• A record number of FIs (84 percent) offer some type of prepaid card. 
• A growing number of FIs offer general purpose reloadable prepaid cards, between 2011 and 2012 the ratio jumped from 19 percent to 36 percent. 
• Some issuers are positioning GPR cards as supplemental accounts for existing customers; others are targeting consumers outside of the banking mainstream. 
• FIs project 55 percent year-over-year growth for GPR card sales in 2013 .
• In advance of the EMV liability shift, 38 percent of FIs plan to issue chip-based debit cards in 2014; 8 percent are targeting 2015. 
• More than half of issuers plan to hold off on EMV implementation until a common standard is established for routing of Reg II transactions. 
• Thirteen percent of FIs are currently engaged in a mobile payments pilot, up from 9 percent in 2012; among large banks, 26 percent are in test phase, an increase from 15 percent last year. 
• Ninety-three percent of issuers expect more than 5 percent of debit transactions to migrate to mobile in the next five years.

About the survey:

The 2013 Debit Issuer Study is the eighth in a series. The study provides an objective fact base on debit card issuer performance and outlook. Sixty four financial institutions — including a representative sample of large banks, credit unions and community banks — participated in the study; of these, 26 have at least $10 billion in assets. Collectively, the participants issue 140 million debit cards and operate 78,000 ATMs; cardholders performed 21 billion annual transactions, representing approximately 45 percent of the U.S. total.

Read more about trends and statistics.