With Durbin Looming, Are Issuers Pushing Higher-Interchange Cards?

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With Congress last week clearing the way for big debit card interchange cuts to take effect this summer, new data about payment card usage and revolving credit suggest that debit and credit card issuers are trying to milk the interchange cow while there’s still something in the udder. Still, the economy may be the biggest factor driving the payment card mix.

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Processor First Data Corp.’s SpendTrend report for May noted that year-over-year dollar-volume growth at merchant locations on its processing platforms for at least a year was only 6.6%, the lowest monthly growth rate in 2011. Transactions increased just 5.1%, the lowest rate in the past 12 months.

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Credit card charge volume, however, surged, and signature debit’s growth far outpaced that of PIN debit. Year-over-year credit dollar volume increased 8.8% versus 6.6% for signature debit, 2.6% for PIN debit, and a 7.9% decrease for checks. In transactions, credit came in second at 6.5%, not too far behind signature debit at 6.9%, with PIN debit up only 1.4% and checks, off 12.4%. Atlanta-based First Data, the largest merchant processor, doesn’t release actual dollar or transaction figures.

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Summarizing the overall report, First Data said “consumer spending hit a soft patch in May as stubbornly high unemployment raised caution about the recovery. Inflationary pressures are causing lower- to middle-income shoppers to pull back on discretionary spending. Gas prices peaked in early May but remain high. Wage growth has failed to keep pace with inflation. Consumers have resorted to saving less and are increasingly turning to credit to fund everyday purchases.”

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High gasoline prices certainly took their toll. Excluding gas, overall spending would have been up only 5.2%. Across all payment types tracked, average tickets rose 1.4% in May, the highest gain in more than a year, but only 0.5% when gasoline-station purchases are excluded. On credit cards, gas-station dollar volume grew 36.7% while transactions rose only 8.7%, leading to a 25.8% increase in the average credit card gasoline purchase.

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The price of gas was the main reason credit’s overall average ticket rose, according to Susan Fahy, vice president of Global Information and Analytics Solutions at First Data. “It impacted volume more because when prices rise, people fill up less frequently,” which results in fewer transactions for higher amounts, Fahy tells Digital Transactions News by e-mail.

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While the economy certainly has a big effect on how people use payment instruments, it is possible that card issuers are encouraging consumers to use the types of cards that generate the most interchange, credit and signature debit, ahead of Federal Reserve regulations that could impose debit card interchange cuts of 70% or more. The U.S. Senate last week failed to approve a measure that would have delayed those cuts, which means the Fed is likely to have its final regulations in place by July 21 as called for by the so-called Durbin Amendment in 2010’s Dodd-Frank financial reform act.

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In a research report that commented on the May SpendTrend numbers, investment bank Goldman Sachs & Co. acknowledged that First Data cited the weak labor market and high gas prices. But Goldman said the change in the payment mix was “issuer-driven.”

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“We believe a pullback in issuer support for debit programs ahead of Durbin implementation shifted debit share to credit, as shown by still-improving credit/transaction volume growth despite declining U.S. revolving credit balances,” the commentary says. “We believe the credit-mix shift also drove the up-tick in average ticket size, as credit tickets are often larger than debit.”

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The Federal Reserve recently reported that consumer revolving credit declined at an annualized rate of 1.4% in April to $790.1 billion, resuming a decline that has seen outstandings increase in only two months since peaking at $973.6 billion in August 2008. Seasonally adjusted outstandings in April were off 4.9% from $831.1 billion a year earlier. With borrowing on credit cards down but transactions increasing, as noted not only by First Data but also by Visa Inc. and MasterCard Inc. in recent quarters, Americans seem to be using credit cards more for everyday spending as opposed to merely bigger-ticket purchases.

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Richer folks tend to be transactors and poorer ones borrowers. “We have seen an increase in credit usage year-over-year and a slowing of debit,” says Fahy. “This is attributable to high-end consumers using their credit card and paying off balances at the end of the month and low-to-middle income consumers relying more on credit as fuel, food and apparel prices rise. Also, as issuers cancel debit rewards programs, consumers choose credit instead.”

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Some issuers have announced plans to scrap debit card rewards programs if the Durbin interchange cuts go through in order to reduce costs. On the revenue side, apart from possibly trying to encourage more credit card usage, issuers may be trying to shift volume from lower-interchange PIN debit to the more revenue-generating signature debit while they can. “Traditionally, signature debit offers more rewards programs than PIN,” says Fahy. “In addition, issuers make higher interchange on signature debit compared to PIN debit. As a result, issuers maybe steering consumers to signature debit, away from PIN, with targeted programs.”