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The Payment Cards Center has followed consumers’ rapid adoption of debit cards and the growth in the debit card market for a number of years. In 2004, the PCC held a conference titled Prepaid Cards: How Do They Function? How Are They Regulated? at which Ronald Congemi, president of Debit Services and Star Systems for First Data Corporation, delivered the keynote address, “Electronic Payments: Back to the Future.” In that speech, Congemi made a number of forecasts about both signature- and PIN-based debit cards. He predicted that the growth of debit card transactions in the near future would be between 25 and 30 percent and that PIN debit growth would outpace signature growth. Moreover, he envisioned a convergence in pricing models from merchants’ increased acceptance of PIN debit. While much of what Congemi predicted in 2004 has come true, the debit card market remains an evolving business, particularly in areas such as fighting fraud and creating comprehensive incentive programs.
To explore these areas and continue its study of the debit card market, the Payment Cards Center hosted a workshop on March 20, 2007, led by Stan Paur, chairman, PULSE EFT Association LP, a Discover Financial Services LLC company, and Tony Hayes, vice president, Dove Consulting.1 During the workshop Paur and Hayes presented the results of their 2007 Debit Issuer Study,2 (conducted with the participation of 55 PULSE brand debit card issuers of varying sizes) and shared insights gained from their research and experience. In her subsequent discussion paper, An Update on Trends in the Debit Card Market,3 Industry Specialist Julia Cheney examines this study and describes trends affecting the debit card market, focusing on four key areas from the study: performance metrics, networks and interchange, debit rewards, and debit card fraud.
Julia Cheney, Industry Specialist, Payment Cards Center, Federal Reserve Bank of Philadelphia
Cheney highlights several performance-based statistics noted by the study. First, debit cards have attained significant market penetration, with 72 percent of respondents’ demand deposit accounts having an associated debit card. Second, cardholders actively use their debit cards, conducting 16.1 point-of-sale transactions per month. Third, the practice of charging consumers a fee for PIN-based transactions is generally trending downward. Last, respondent card issuers commonly identified two broad strategies designed to drive growth: (1) implementation and increased use of rewards programs, and (2) focused marketing initiatives specifically tailored to target populations.
With regard to network fees, Hayes noted that survey responses revealed some apparent confusion about PIN interchange fees and rates. While 66 percent of issuers reported knowing the average interchange rate they received for signature-based debit cards, only 29 percent knew what they received for PIN-based transactions. Based on the information provided by those respondent-issuers that track interchange revenues, the average interchange rate for signature debit card transactions was 1.38 percent, with PIN-based debit transactions averaging 0.52 percent. Both Paur and Hayes emphasized that most respondents expressed general optimism for debit card growth, despite some uncertainty about interchange rates received and the direction those rates were heading.
Examining the relatively recent phenomenon of debit card rewards programs, Cheney observes, and the study confirms, an overall increase in the number of debit cards that offer rewards. According to the Debit Issuer Study, 37 percent of all debit card issuers offer at least one debit rewards program to a portion of their cardholder base, and 20 percent plan to offer rewards for debit card use in the future. The concentration of rewards programs was highest among large banks: 68 percent offer some type of debit rewards programs. Of respondent-issuers’ existing rewards programs, 63 percent applied only to signature-based transactions, while 37 percent applied to both PIN- and signature-based transactions. While debit rewards programs varied — including anything from point-based rewards currency, to airline miles, to cash back — 38 percent of PULSE’s responding issuers cited being members of the “Visa Extras” program.4 Paur and Hayes voiced their expectations that debit card rewards programs would increasingly become a competitive point of differentiation, especially among large banks. Furthermore, they predicted that banks and issuers would increasingly move to relationship-based rewards programs whereby points earned across a broader set of financial service activities would be combined into single reward accounts.
Finally, in her paper, Cheney highlights several key points related to the survey’s findings on debit fraud, especially fraud related to PIN-based debit. Focusing on PIN-based debit card use at both ATMs and the point of sale, the survey found that while PIN-based fraud at ATMs accounted for respondent-issuers’ largest dollar losses (totaling $415 million in 2005), PIN-based fraud losses at the point of sale increased faster than those at ATMs, nearly tripling from 2004 to 2005. Despite this increase, PIN-based point-of-sale losses remained at the very reasonable level of $21 million. Nonetheless, respondent-issuers expressed mild concerns over the growth rate of PIN-based debit fraud at the point of sale and evidence from several recent data breaches, suggesting that encrypted PIN information and other sensitive data had been compromised. Despite these growing concerns, however, levels of PIN-based debit card fraud remain significantly below those of signature-based cards. Losses from fraudulent signature-based debit transactions in the first quarter of 2007 approximately doubled those from fraudulent PIN-based debit incurred at ATMs and were nearly 10 times higher than fraudulent PIN-based point-of-sale transactions. Regardless, Paur and Hayes noted that respondent-issuers reported that they are making new investments and taking steps to mitigate the risk of fraud in PIN-based debit transactions.