Though They’ll Remain Popular, Debit Cards Will See Some Growth Clipped by Regulation

Debit cards will remain popular with consumers, but the Durbin Amendment will take as much as three percentage points off its annual growth rate over the next five years, according to a new analysis from First Annapolis Consulting Inc. Some transactions that might have gone to debit cards will switch to credit cards, while re-pricing by banks will force some underbanked consumers to drop traditional bank products such as debit cards.

Using federal-government economic forecasts as well as data from some clients’ card portfolios and internal analysis, Linthicum, Md.-based First Annapolis predicts total debit transaction volume will reach up to 76 billion by 2016 based on compounded annual growth rates of 8.6% to 10%. The analysis includes signature and PIN debit transactions on the Visa and MasterCard networks as well as those on the electronic funds transfer networks, First Annapolis partner Lee Manfred says.

Citing government data, First Annapolis predicts debit cards will get a lift of 2% to 3.4% annually just from economic growth. The main growth driver will continue to come from the secular shift away from cash and checks, lifting transaction volume a predicted 9.6% annually. That puts the predicted gross increase at about 13%, close to recent growth patterns, Manfred says.

From that First Annapolis deducted estimated growth that would have otherwise occurred had not the Durbin Amendment, part of 2010’s Dodd-Frank Act, made debit cards less financially attractive for issuers. Federal Reserve Board regulations implementing the amendment took effect Oct. 1 and cut average interchange revenue for regulated issuers, those with more than $10 billion in assets, by close to 50%.

Many analyses of the regulation’s effects predict issuers will try to shift a small subset of customer spending to higher-interchange credit cards. First Annapolis, citing a review of an undisclosed number of clients’ data, quantifies that shift as a compounded negative growth rate of 1.3%. That figure is the result of “cascading assumptions” about purchase volumes, the number of consumers who will revolve balances, and other factors, according to Manfred.

Higher-income consumers are more likely to use credit cards as substitutes for debit cards, of course. On the other end of the income scale, First Annapolis predicts a shift away from traditional banking products by some underbanked consumers will reduce debit card growth rates by another 1.7% annually. This shift began with the re-pricing of demand-deposit accounts after new regulations first reduced overdraft-fee income on debit card transactions and picked up speed with the Durbin Amendment. Upfront debit card usage fees proved to be politically explosive, but banks are now quietly adding other fees or changing account terms to compensate for the lost revenue.

“We’re in the midst of industry re-pricing with the DDA relationship that started with the fee changes and continues with Durbin,” says Manfred. “Some consumers on the low end are going to be priced out of the market.” He adds that “particularly the marginalization of those lower-end customers” could end up being the worst effect of the post-Durbin industry changes.

Still, Manfred says that consumers’ preference for the debit card as a substitute for cash and checks is entrenched. Thus, First Annapolis predicts debit cards will remain a core bank product despite the somewhat reduced growth prospects. “That’s probably the most important takeaway, that there is still strong, latent demand,” he says.