2013 Debit Issuer Study Finds Large and Small Issuers Have Seen Drop in Interchange Income (Misc News: July 11, 2013)
Large and small financial institutions that took part in a study of debit card issuers saw growth in their debit business but also saw reductions in debit income revenue.
The 2013 Debit Issuer Study, commissioned by PULSE, shows that small issuers – those with less than $10 billion in assets –saw lower interchange rates, despite being exempt from new standards as outlined by the Durbin amendment to the Dodd-Frank Act. Exempt issuers cited competitive dynamics as the cause of a decrease of 2 cents in their average interchange rates for both signature and PIN debit transactions. One in three exempt issuers said they anticipate further declines in debit interchange.
The study also shows that average interchange rates for regulated issuers – those with more than $10 billion in assets – have declined by 59% for signature debit transactions (from 52 cents to 23 cents, on average) and by 32% for PIN debit transactions (from 32 cents to 23 cents, on average) compared to levels before Durbin amendment rules were put in place.
After Dodd-Frank passed, credit unions fought unsuccessfully alongside other financial institutions to have the Durbin amendment delayed and studied before implementation. Even though only four credit unions are subject to the new rules as large issuers, most in the credit union industry believed a two-tier interchange system would result in a reduction of interchange revenue.
The study found issuers have taken several steps to counter the reduced revenue. The most common are:
- Reducing debit operating costs to better align costs with debit's new revenue proposition
- Reducing fraud to support the cost-containment goal and to qualify for the fraud prevention payment outlined in the regulation
- Adjusting their overall demand deposit account (DDA) product structures to either grow the financial institution's share of wallet with a particular type of account holder or direct account holders to accounts that generate more revenue or have lower service costs
- Restructuring or eliminating traditional issuer-funded debit rewards programs (40% of regulated issuers terminated or restructured their programs in 2012)
"The post-(Durbin amendment) era represents an important time for the debit industry, and the latest Debit Issuer Study provides a comprehensive look at what changes issuers are making in response to this environment," said Steve Sievert, executive vice president of marketing and communications for PULSE. "Even in the face of significant regulatory challenges, issuers managed to grow their debit volumes in 2012 and expect further growth this year."
Despite these changes, issuers experienced continued growth in their debit businesses in 2012. Overall, there was a 14% increase in PIN transactions and a six-percent jump in signature transactions. When asked about their outlook for 2013, issuers were more cautious. Survey respondents project smaller growth levels this year, with PIN volume forecast to increase by 8% and signature transactions by 4%.
"Issuers are more tepid in their outlook for debit. They still expect the industry to grow, just not as rapidly as in the past," said Tony Hayes, a partner at Oliver Wyman who co-led the study. “In fact, this is the lowest growth projection for signature debit we've seen since the study began.”
The eighth-annual 2013 Debit Issuer Study had 64 financial institutions participate. Large banks, credit unions and community banks took part. Twenty-six respondents have at least $10 billion in assets and are therefore subject to the interchange cap. Collectively, the participants issue 140 million debit cards and operate 78,000 ATMs; these cards performed 21 billion annual transactions, representing approximately 45% of total U.S. debit transactions. The sample is representative of the U.S. debit market in terms of institution type, location and debit network participation.
PULSE is a Discover Financial Services company, serving approximately 6,100 financial institutions across the United States.