Friday, March 29, 2019
Debit card payments continue to grow, albeit at a slower pace than in the past, and that growth has been accompanied by rising fraud losses. These are two key takeaways from a new report out of the Federal Reserve Board.
The Fed was required under the Durbin Amendment to the 2010 Dodd-Frank Act to regulate debit card interchange, and to file a report every two years detailing costs incurred and interchange fees associated with covered debit cards. The Fed’s regulation, which applies only to debit cards issued by financial institutions with $10 billion or more in assets, caps debit card interchange at 21 cents plus 5 basis points. Issuers that meet prescribed fraud-prevention standards can adjust interchange upward by a penny.
This is the fifth report the Fed has filed since the Durbin Amendment went into effect; it covers data through 2017.
In 2017, payment card networks processed 68.5 billion debit and general purpose prepaid debit card payments valued at $2.62 trillion, the Fed reported. Dual-message networks, like Mastercard and Visa, which primarily process signature-authorized debit card payments, accounted for the bulk of those transactions, 64.9 billion payments valued at just over $1.7 trillion.
Overall, debit card transaction volumes grew 5.6 percent from 2016 to 2017, down from 7 percent recorded from 2015 to 2016. But single-message networks, which carry PIN-authorized debit card payments, experienced the fastest growth, at 7.2 percent compared with 4.7 percent growth in signature-based debit volume.
Issuers exempt from the interchange fee cap saw slightly slower transaction volume growth than those covered by the regulation, continuing a trend of several years, the Fed reported. Exempt issuers saw transaction growth of 5.1 percent compared to 5.9 percent growth in transactions for covered issuers.
The fraud loss rate across all debit card networks in 2017 was 11.2 basis points, or $11.20 for every $10,000 in transactions, up 10.3 basis points in 2015. Merchants ate better than half the losses – 53 percent of losses – up from 39 percent in 2015.
The average per-transaction cost to all issuers of authorizing, clearing and settling debit card payments, excluding fraud losses, fell to 3.6 cents in 2017. “This is a cumulative decline of 54 percent since data collection began in 2009,” the Fed wrote.
Interchange on all types of debit cards (prepaid and traditional debit cards regardless of whether the issuing bank is covered by the Fed’s regulation) totaled $20.73 billion in 2017, an increase of 5.9 percent from 2016.
“The average interchange fee for covered transactions on both types of networks, in addition to the average interchange fee for exempt transactions on dual-message networks, has not changed materially since [the regulation] took effect in the fourth quarter of 2011. These fees stood at $.023 and $0.52 respectively, in 2017,” the Fed wrote. “By contrast, the average interchange fee for exempt transactions on single-message networks has been falling gradually since [the regulation] took effect, from $0.31 in the fourth quarter of 2011 to $0.25 in 2017.”
Debit card network fees totaled $7.03 billion in 2017, with acquirers paying 63 percent of the fees. “In recent years, the percentage paid by acquirers has increased slightly while the percentage paid by issuers has correspondingly decreased,” the Fed noted. At 10.3 cents, the average network fee per transaction has not changed substantially since 2011.
Card-not-present transactions accounted for a small but growing share of debit card payments in 2017. CNP payments were 18.9 percent of the total, but grew at rate of 22.3 percent, nearly 10 times the 2.3 percent growth rate recorded for card-present debit card payments.
Prepaid debit card payments also grew at a healthy clip – 11.4 percent – from 2016 to 2017, eclipsing the 9.3 percent annual growth rate charted over the previous two years, the Fed said.
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