Lower margins associated with debit card interchange and overdraft-protection fees is driving the U.S. banking industry to encourage more consumers to use prepaid and credit cards to pursue revenue. However, despite such moves, debit card payment volume will rise at a double-digit rate this year, a new report suggests.
According to market intelligence firm Packaged Facts, which on May 30 released its report “Debit Cards in the U.S.,” debit card sales volume will rise 10.6% this year, to $1.99 trillion from $1.8 trillion in 2011. Cardholders also will initiate 51.8 billion debit card transactions, up 10.9% from 46.7 billion.
Still, the increases will still not compensate for the reduced revenue that resulted from the Federal Reserve Board’s Oct. 1 cap on debit interchange fees (see story) and the legislative ban on automatic overdraft protection, the report contends.
“These changes are reshaping the debit card competitive landscape and driving sweeping changes in consumer-banking relations, checking account and fee structures, and debit payment network economics,” the report notes. “While we expect debit to remain a checking account lynchpin, the bottom line is that the fee structures banks implement will determine not only the strength of debit-transaction growth going forward, but also related growth in credit cards and prepaid cards—and could even spur a renaissance in cash and check.”
However, Scott Strumello, senior analyst at Auriemma Consulting Group, tells PaymentsSource, such suggestions might not pan out. “This presumes that banks are the only entity in control of debit transactions,” he says. “The reality is that some consumers knowingly choose debit over credit to manage their own expenses and avoid debt.”
Moreover, prepaid cards as an alternative to debit is “alluring,” but their fees are not standardized, and inconsistent disclosures makes comparison shopping difficult, Strumello says, noting the Consumer Financial Protection Bureau has looked into this and wants to apply Federal Reserve Board electronic funds transfer regulations to prepaid cards (see story).
Auriemma Consulting Group does not see a shift to credit card use because of increased debit card regulation as a black-and-white issue, Strumello says.
“We see little solid evidence that credit will necessarily be where debit volume once stood, particularly if consumers have any say on the situation, and they do,” says Strumello. “Credit underwriting is tighter today than it was several years ago, meaning some consumers are effectively ineligible for credit, whereas they may have been able to attain credit cards a few years ago.”
Indeed, credit and debit card transaction activity has see-sawed over the past year, with debit cards again overtaking credit card use in January this year, according to First Data Corp. (see story). However, the reasons for the shift are unclear, Rikard Bandebo, the organization's vice president and an economist, told an audience earlier this month in Orlando during the 24th annual Card Forum and Expo.
Packaged Facts representatives could not be reached for comment on the report.
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