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STUDY: Debit market continues to boom
February 28, 2007
HOUSTON - U.S. debit card-issuing financial institutions experienced debit-card transaction growth of 18 percent in 2006, growth that is expected to continue in 2007, says Boston-based Dove Consulting.
The PULSE 2007 Debit Issuer Study, conducted by Dove and commissioned by the PULSE EFT Association Inc., is an update to a study PULSE released in December 2005. The newest version includes updated information about debit-card performance and fraud losses, and provides insights into topics such as debit interchange and debit rewards.
According to the study, debit-card usage continued to grow at a healthy pace in 2006. Issuers reported average transaction growth of 20.3 percent for signature debit and 15.7 percent for PIN debit during 2006. Large banks reportedly experience the highest growth rates.
A total of 55 debit-card-issuing FIs participated in the study. Those FIs collectively issued more than 62 million debit cards last year.
Debit-card activation rates averaged 56 percent in 2006 for issuers that define "active" cards as those that have made one signature-based transaction in the last 30 days. On average, active cardholders performed 16.1 transactions per month - 10.6 signature-based and 5.5 PIN-based.
Study participants achieved an average debit-card penetration rate of 72 percent for consumer checking accounts, and 86 percent of the debit cards they issued were signature-capable.
"The financial institutions that participated in our study reported a solid year for debit in 2006 and are optimistic about the future of this payment method," said Cindy Ballard, executive vice president of PULSE.
Other findings
Business debit cards are offered by 64 percent of the issuers surveyed and account for 5 percent of their total card bases. (All of the large banks in the study offer business debit cards.)
More participating institutions offered debit-card rewards in 2006 (37 percent, compared to 33 percent in 2005). Of those offering rewards, 37 percent reward cardholders for both PIN and signature transactions, compared to only 29 percent in 2005.
4 percent of the issuers surveyed issued contactless cards in 2006. An additional 22 percent plan to do so in 2007; 29 percent say they are considering it.
"Contactless cards are a hot topic in the industry, but most issuers are taking a 'wait and see' approach," said Tony Hayes, vice president with Dove Consulting who led the study. "Reasons for their hesitation include lack of widespread merchant acceptance, high levels of uncertainty about the future of the product and fraud-related concerns."
Fees and interchange
28 percent of the issuers surveyed charge a portion of their accountholders a PIN-debit-transaction fee, compared to only 32 percent in 2005. Fees on average are 48 cents and affect 5 percent of cardholders.
Foreign ATM fees levied by survey participants averaged $1.44 per transaction in 2006.
56 percent of participants allow overdrafts on debit transactions.
"Interchange is an important source of revenue for issuers, but deciphering interchange rates can be complex," Hayes said. "What matters for issuers is the 'effective' interchange rate - the blended average rate across all merchants and transaction types, after network switch fees."
Interchange pricing can vary depending on merchant segment, merchant transaction volume and authorization mechanism. Issuers say they have a much better understanding of the interchange they receive on signature debit transactions compared to PIN debit.
Effective net interchange income, for the participants that reported interchange income, averaged 111 basis points for signature debit and 46 bps for PIN debit.
Fraud
In order to capture a full year's worth of fraud data, issuers in the study were asked to report fraud-related information from 2005 (the previous study captured 2004 data).
"Fraud is shifting from the cardholder level to the system level, from a local issue to a global issue, and from predominantly signature debit to both signature and PIN debit," Hayes said.
Dove estimates that issuers nationwide lost a total of $662 million to debit-card fraud in 2005, a 21 percent increase from 2004. Of those losses, 60 percent resulted from ATM transactions, 37 percent from signature-debit transactions and 3 percent from PIN POS transactions. Signature-based losses grew 28 percent in 2005, while PIN-based losses (including ATM and PIN POS losses) rose 17 percent.
Issuers are using more advanced fraud-detection tools to combat evolving fraud tactics.
"Financial institutions ranked CVV/CVC checking, neural networks and international transaction blocks as the most effective fraud prevention tools," Hayes said. "In fact, I expect their widespread use of CVV/CVC checking last year to reduce phishing-related PIN-based losses in 2006."
Outlook
Debit-card issuers continue to predict strong growth in the debit arena. Survey participants expect to grow their debit-card programs by an average 17 percent during 2007, representing a growth rate of18 percent in PIN-debit volume and 16 percent in signature-debit volume.
"This study reveals a debit card industry that is maturing yet still exhibiting strong growth and resilience," PULSE's Ballard said. "Debit-card issuers and networks face the ongoing challenge of fighting fraud, but we have stepped up our focus in this area and are implementing new technologies and processes at a rapid rate to combat fraudulent activity. Overall, debit remains a great product that delivers significant value to financial institutions, merchants and consumers."
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