Financial institutions with at least $10 billion in assets knew they would take a hit to their revenue when the Durbin amendment capped interchange pricing. But smaller issuers, who were exempt from the cap, have seen a drop as well.

Issuers with less than $10 billion in assets earn 2 cents less per payment in interchange revenue for PIN and signature transactions, the 2013 Debit Issuer Study from Discover's Pulse debit network reveals.

Even though their rates are not regulated, small issuers find themselves in a competitive pricing game at the merchant level, says Steve Sievert, executive vice president of marketing and communications for Houston-based Pulse.

"There are a lot of competitive forces at work, and the debit networks find themselves in the middle between the merchant and the issuer," he adds.

The Durbin amendment of the 2010 Dodd-Frank Act became an industry mandate in October of 2011 as a means to provide merchants with relief from debit interchange rates.

The drop of 2 cents, on average, resulted in interchange fees for exempt issuers at 45 cents for signature payments and 31 cents for PIN payments, Sievert says.

Based on issuer speculation, it could have been worse.

"Issuers had a dire outlook last year, saying they expected a 73% decrease in interchange [revenue]," Sievert says. "From that standpoint, it hasn't turned out that bad."

By design, the amendment has affected large issuers the most, with average interchange rates declining 59%, to 23 cents from 52 cents for signature debit transactions. PIN transactions fell 32% for PIN debit transactions to 23 cents from 32 cents, the study says.

For the 2012 results in this year's study, 64 financial institutions participated, some of which are Pulse clients. The study is the eighth Pulse survey of financial institutions to monitor debit business and other services.

Smaller issuers have found themselves caught by a federal regulation "that kind of worked backwards," says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup.

"Durbin basically forced the big guys to undercut the market," Riley says.

Despite the pricing drawbacks, issuers reported a 14% increase in PIN transactions and a 6% increase in signature transactions during 2012.

There were fears that the Durbin amendment "would kill debit" when it was first proposed, but several factors have forced debit volume upward, Riley says.

"You can't just look at Durbin on its own," Riley adds. "The Card Act has taken out risk-based pricing for credit cards, and revolving credit and balance transfers have stagnated."

The average cardholder performed 19.4 debit transactions per month, up from 18.3 in 2011. As a result, the total annual spend per active consumer debit card reached $8,753 in 2012 compared to $8,326 in 2011, the report says.

"Those increases indicate that, for the most part, the consumer has been unaffected by what is going on with debit regulations," Sievert says. "The 19.4 transactions per month are the highest we've ever seen."

Banks have fueled the PIN transaction growth by promoting its use, knowing it lowers their processing and fraud costs, Sievert says.

Issuers of all sizes have reduced operating costs and fraud costs, which could qualify them for fraud prevention payments as outlined by the amendment, the study says.

In addition, 40% of large issuers told Pulse they had restructured or eliminated debit rewards programs. At the same time, the banks are directing account holders to accounts that generate more revenue or have lower service costs.

Issuers had a cautious tone when looking toward the future, with most expecting smaller growth this year in the 8% range for PIN transaction volume and 4% for signature transactions.

But 2012 had some positive signs for debit issuers.

Issuers reported a decline of approximately 30% in their net fraud loss rates for both signature and PIN.

In what Pulse defines as the "new normal" for debit issuers in the post-Durbin era, issuers are developing new products. A record number of financial institutions participating in the study, at 84%, now offer some type of prepaid card.

The most common prepaid card banks offer is a gift card, and some issuers have started offering general-purpose reloadable prepaid products, the report says.

"You could say the GPR is a defensive product, as the issuers have used the term 'self-cannibalize' their account base to make sure they maintain a relationship with those customers," Sievert says.

Debit issuers also expect consumers to increase transactions through mobile devices, as 93% of the issuers expect more than 5% of debit transactions to migrate to mobile in the next five years.

Of the banks involved in the study, 13% say they are currently participating in a mobile payments pilot. Large banks are the most likely to engage in mobile payments, as 26% say they are currently testing a mobile payment system.

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