Robust for Years, Debit Growth Expected to Weaken, Study Says

Perhaps the hottest payment product going for the past several years, debit cards are showing signs of cooling off. “It's almost become a broken record that debit transactions are growing at double-digit rates, but we're seeing a slowing in that rate,” Tony Hayes, a partner at research and consulting firm Oliver Wyman, said during a webinar this week to release the results of a recently completed study on debit. Issuers expect a marked slowdown in growth this year, according to the survey, which was conducted in February and represents the third such study sponsored by the Houston-based Pulse electronic funds transfer network. Respondents forecast overall debit transaction volume will grow 12.1% this year, down from the 16.8% forecasted in last year's survey. Their predicted growth rate for signature debit (12.5%) somewhat exceeds their expectation for PIN debit growth (11.8%). But both forecasts fall well short of sunnier expectations last year, which were 16.2% for signature and 17.7% for PIN. Debit card payments secured by signatures flow through the national bank card networks and carry higher interchange rates than those for PIN-authenticated debit transactions, which are handled by the regional electronic funds transfer networks. Indeed, transaction growth for both signature- and PIN-based debit cards ranked as the No. 1 concern among the 62 banks and credit unions surveyed for the study, with 68% of the respondents citing it. Major issues outranked by growth concerns included fraud losses (66%), PIN prompting by merchants (56%), and pressure on interchange rates (42%). “There's pressure to maintain that momentum [for growth],” Hayes said during the presentation. The study found that the mix of signature and PIN transactions is remaining more or less stable, with signature-based payments representing 65% of debit traffic. Even so, the study also found a significant range in this measurement among individual issuers, with those in the lowest quartile reporting 48% of transactions secured by signature and those in the highest reporting 80%. Not coincidentally, while the overall average interchange revenue per active card came to $78, the range was $34 at the low end up to $103 among issuers in the top quartile. Issuers report they are taking a number of steps to counteract the slowdown in growth, including stronger marketing to attract new users among younger customers (including positioning the linked account as a “debit” account rather than a “checking” account) and more refined segmentation of cardholders to yield better results on target marketing. One other interesting result revealed by the survey was the relatively high ranking among issuer concerns for decoupled debit cards, which were cited by 20% of respondents. Capital One Financial Corp. made decoupled debit a headline item only last June when it announced a new cobranded card product that can debit funds from any checking account at any bank through the automated clearing house network. In thus severing the conventional link between debit cards and checking accounts from the same bank, the decoupled debit card concept has stirred controversy in the electronic-payments industry. The financial institutions included in the survey represented a range of banks and credit unions by size, network used, and location, and accounted for 74.2 million debit cards, according to the study.