Small Issuers See Durbin Impact on Interchange, Pulse Debit Study Indicates

The Durbin Amendment’s pricing caps are having an impact on small issuers as well as large, and issuers overall are far from bullish about debit-transaction growth, according to a wide-ranging report released on Wednesday.

Issuers exempt from the law’s interchange cap report an average income of 45 cents per transaction on signature-debit in 2012, down from 47 cents before the cap took effect in October 2011. Similarly, they say their PIN-debit interchange has dropped from 33 cents to 31 cents. This is according to the 2013 Debit Issuer Study sponsored by the Houston-based Pulse electronic funds transfer network. Financial institutions with less than $10 billion in assets were exempted by Durbin from a stringent ceiling the law imposed on larger issuers.

To be sure, regulated issuers have seen a much deeper impact. Average interchange per signature transaction for this group fell to 23 cents last year, down from the pre-Durbin rate of 52 cents. PIN-debit interchange plunged from 32 cents to 23 cents. Most regulated issuers, indeed, report interchange income at the upper boundaries of the cap.

Debit interchange is paid by merchants to their acquirers, which pass the income on to card issuers. Merchants lobbied hard for Durbin, which became an amendment to the 2010 Dodd-Frank Act, and various merchant groups have argued the law has benefited small issuers overall.

Financial institutions that responded to the Pulse study, which is the eighth annual issuer survey the network has sponsored, indicated network competition lay behind the slight drop in interchange income to exempt issuers, Steve Sievert, executive vice president of marketing and communications at the network, tells Digital Transactions News. “It’s competition among networks to offer a value proposition to issuers but they’re also having to keep in mind the total cost to merchants,” he notes.

Though the drop for exempt issuers may seem muted, it’s unusual for unregulated interchange to decline at all, Sievert says. “What we have seen typically [over the eight years of the study] is interchange increasing,” he says.

Indeed, a healthy percentage of smaller issuers now look for continued declines in debit interchange. Nearly one-third indicate they expect signature-debit interchange to drop further, while 29% say the same for interchange on PIN debit.

Nor are issuers sanguine in their outlook for overall debit growth. They predict just 4% growth in signature-debit transactions this year, a record low for the survey, despite reporting 6% growth for 2012. They are only slightly more bullish about PIN debit, forecasting 8% growth, down from actual growth of 14% in 2012 and considerably less optimistic than the 15% projection for 2012 they gave a year ago.

Some 64 financial institutions responded to the Pulse study, which, as in past years, was conducted by the Boston-based research firm Oliver Wyman. They account for 140 million debit cards and processed 21 billion transactions in 2012, or 45% of the nation’s total.

Sievert cautions the pessimism appears to be largely confined to larger banks. These institutions are looking to shift volume from signature debit to less costly PIN transactions, he says. Also, “community banks are expecting much more significant growth than banks overall,” he adds. And credit unions, he says, forecast 8% growth in signature debit for 2013, double the overall average.

The report includes plenty of cause for optimism about debit. It shows increases in three key performance metrics—account penetration, activation, and usage—for 2012. Usage, for example, grew to 19.4 transactions per card per month last year, a record high in the history of the study, Sievert says. “This speaks to consumers’ continued interest using debit,” he says. “It’s clearly a positive trend for issuers.”

At the same time, debit fraud fell significantly last year. Signature fraud was reported to be 2 cents per transaction, down from 3 cents in 2011. PIN fraud came in at three-tenths of a penny, down from four-tenths. These declines, both around 30%, are “slightly higher than we have seen in the past,” Sievert says.