Issuers exempt from the regulatory caps on debit card interchange are exploring the chance to grow their business-debit initiatives, stealing customers from larger rivals that now see such programs as unprofitable.
Exempt issuers are those with assets of less than $10 billion. Companies above that size saw their interchange revenue from the average business debit card transaction plummet to 26 cents from $2.10 after the Federal Reserve Board's rate cap took effect last October.
Smaller issuers, which today earn $1.80 for the average business debit transaction, down relatively slightly from $1.93 previously, are eyeing the chance to take over those relationships. Fourteen percent of exempt issuers said business debit is one of their most significant opportunities for growth this year, while only 8% of nonexempt issuers said so, Steve Sievert, Pulse's executive vice president, said in an interview. Pulse is Discover Financial Services' electronic funds transfer network.
The average cost for business-debit programs offered by nonexempt issuers with legacy cost structures that use dollar value-based assessments is now more than the average revenue earned, Sievert says.
"These issuers are looking to renegotiate their contracts and to focus more on consumers because the business-debit economics have not held up" post-Durbin, he says.
One nonexempt issuer said it would not drop its business-debit program, but it will shift its emphasis to the consumer side, Sievert says, declining to name the issuer.
"Nothing in the study showed they would close the door on them altogether," he says. "But it's still viable for exempt issuers, and they are likely to support business debit payments and to promote them."
The Federal Reserve's Regulation II, mandated under the Durbin amendment to Dodd-Frank, created a fundamental, virtually 180-degree shift in issuers' debit business. Whereas before the rate cap issuers focused their attention on signature debit through rewards and other methods, they now are promoting PIN use instead through customer phone calls and sweepstakes, Sievert says.
However, even as smaller issuers sense an opportunity, none of the issuers said they would completely drop their signature-debit programs, Sievert says.
"It's clear that issuers would be a little bit cautious about taking away a method of payment," he says.
The interchange cap, which applies to issuers with at least $10 billion in assets, went into effect Oct. 1. They can earn no more than 21 cents plus 0.05% of the sale plus an additional cent if they qualify for the fraud-prevention adjustment.
For signature-debit transactions, their average interchange fee fell 54%, to 24 cents from 52 cents, while exempt issuers saw theirs decline by only a cent, to 47 cents from 46 cents, Pulse's debit survey found. Blended, the average fee dropped 56%, to 27 cents from 62 cents.
For PIN debit, regulated issuers saw their average fee drop to 23 cents from 32 cents, while exempt issuers' average fee stayed at 33 cents. The blended average of both issuer types was 24 cents, down 25% from 32 cents previously.
Because the number of transactions primarily drives revenue now instead of the amount spent, issuers are seeking to increase small-ticket transactions, Pulse says. More than 30% of debit transactions now are less than $10.
Given the decline in revenue, there is much less interest in traditional issuer-funded debit rewards programs. Half of all regulated issuers with a rewards program terminated their program in the last year, and another 18% plan to end or restructure their programs this year, Pulse found. Another 40% do not have a rewards program and do not plan to introduce any kind of rewards proposition.
On April 1, also under Durbin, all debit cards were required to participate in two unaffiliated debit networks. Almost all issuers in the study complied with the regulation by participating in an additional unaffiliated PIN network instead of switching signature-debit brands. The shift toward multiple networks provides routing choice to merchants and acquirers.
Seventy-six percent of consumers now have debit cards, up from 73% who did in 2010. The average active consumer debit cardholder spent $8,326 on their card in 2011, up 7% from $7,781 the previous year. The primary source of the increase was greater use per card, with active users performing an average of 18.3 purchases per month compared with 16.3 per month in 2010, Pulse said.
Consumer volume grew by 11% for signature transactions and 9% for PIN transactions, exceeding issuers' expectations of 7% growth in both categories, Pulse said. This year, issuers expect the market to continue to grow across both consumer and business debit cards, with 15% growth in PIN transactions and 8% in signature transactions. Sixty-nine percent of regulated issuers and 76% of exempt institutions agreed that focusing on improving penetration, activation and use for debit cardholders is key to growth in 2012.
Management-consulting firm Oliver Wyman conducted the research for Pulse's seventh annual Debit Issuer Study. Fifty-seven financial institutions, including large banks, credit unions and community banks, participated.