The Green Sheet Online Edition
February 22, 2010 • Issue 10:02:02
Insider's report on payments
Debit rules and other musings
Flashback: It was 1985. I was managing industry newsletters for the burgeoning field of electronic funds transfer, and one of the editors working with me wanted to run a monthly feature listing POS debit deployments.
Since only a handful of banks and merchants in about a half-dozen states offered or supported POS debit card options at the time, it seemed a worthwhile and manageable pursuit. And it took up no more than a two-page spread in the newsletter, until a few years later.
What a difference 25 years can make. Although data detailing consumer usage in 2009 is not yet available, everyone now agrees that growth in debit card usage is a dominant trend, evident at the POS and on the balance sheets of card companies.
The ascendant debit
Blame it on a shaky economy that has made consumers leery of racking up debt and banks even more cautious about lending to consumers.
Point to good debit card marketing on the part of Visa Inc. and MasterCard Worldwide, or give Discover Financial Services a nod for its prowess in acquiring Pulse (the oldest surviving ATM network, and an early innovator in POS debit) and thereby stoking national debit network competition.
Today, unlike in 1985, a merchant who doesn't accept debit cards is an exception, because debit rules.
MasterCard debit card usage was up last year around the globe, including a 10.5 percent gain in the United States, according to the company's year-end earnings statement. MasterCard credit transactions were down 13 percent for the year.
Visa reports even faster growth, with debit card usage in the United States surging 15 percent last year, according to the company's earnings statement, released in February 2010.
The downside of the growing popularity of debit for Visa, MasterCard and others in the card acquiring space is that people are spending less, and merchants, eager to trim processing costs, are steering customers toward cheaper PIN debit whenever possible.
Spending with MasterCard debit cards, for example, totaled just $225 billion last year, or about half the $448 billion spent using MasterCard credit cards, the company reported.
Consumer preference data released in December 2009 by the Federal Reserve Bank of Boston shows more consumers are avoiding credit cards in favor of debit.
A national survey sponsored by the Reserve Bank found 78.3 percent of Americans have credit cards in their wallets while 80.3 percent are debit card holders.
The Boston Fed's data also indicates more than half of all adults (51.6 percent) wrote fewer checks in 2008 than they did in 2005 and that nearly half (49.5 percent) increased their use of debit cards during that same period.
In addition to writing fewer checks, 14 percent of consumers had gotten rid of credit cards during that three-year period, according to the Reserve Bank's research. Just 5.9 percent of American consumers said they had relinquished their debit cards.
Challenges and opportunities
The merchant acquiring business is changing. Once a small portion of the payment pie, debit cards are driving growth and impacting profitability for acquirers, ISOs and their business partners.
"Since acquirers' core business is still heavily credit-dependent, shifts in business models will need to catch up with consumer behavior," said David Fish, Senior Analyst at Mercator Advisory Group, and author of a new report on debit card acquiring.
The report, The Economics of Debit Acquiring, suggests banks and other acquirers rethink flat-fee pricing of PIN debit card transactions, especially as average tickets paid with those cards rise.
The report also points to the upcoming July 1, 2010, deadline for compliance with Payment Card Industry PIN Transaction Security requirements for PIN entry devices as an opportunity to move merchants to new debit card pricing platforms.
"Acquirers should essentially be attacking debit as a potential profit center as the market and regulatory environments surrounding bankcard payments encounter significant and potentially strengthening headwinds," Fish advised.
In November 2009, the Federal Reserve Board adopted new rules that limit the ability of financial institutions to charge cardholders when POS debit transactions create account overdrafts.
Overdraft fees are a huge source of income for banks and other financial institutions.
According to Moebs $ervices Inc, an economic research firm based in Lake Bluff, Ill., 44.5 percent of banks and credit unions reported overdraft income that exceeded net income last year.
The national median overdraft fee rose by $1 to $26 last year, Moebs reported, with the biggest banks charging the highest fees, $35 per overdraft.
And according to a 2008 study by the Federal Deposit Insurance Corp., 41 percent of all insufficient funds situations are triggered by debit cards.
Under the Fed's new rules (included in Regulation E), automatic overdraft programs for debit cards are out; consumers must opt-in (specifically agree) to these overdraft services. The change applies to all existing as well as new accounts with debit cards.
One thing I've always consistently enjoyed about this business is the people I get to meet.
And some of my favorite venues for meeting folks are the regional acquirers association meetings like the Northeast Acquirers Association's annual winter event in Vermont.
Now, I'm not naïve. I realize the main reasons The Green Sheet asks me to attend this event each year are: 1. I live on the East Coast; 2. I grew up in the frozen tundra of Upstate New York; 3. No one cares to leave the relative warmth of California for a cold, snowy week in Vermont.
Nonetheless, it's an event I enjoy, in part because it offers a unique perspective on the acquiring space - the perspective of the feet on the street. And this year's event, held in late January, was no exception.
While just about everyone admitted that business is down, the roughly 400 folks who ventured to Vermont for the meetings and fun in the snow were upbeat.
"Business stinks. But it's been worse, and it's going to get better," one old-timer told me.
I was also struck by the number of new faces I saw among attendees. This is, after all, a people business, and sometimes it takes the perspectives of newcomers to facilitate change.
It's time to rethink card pricing, as the current interchange models keep getting attacked in Washington, D.C., and the press. Maybe newcomers have some fresh ideas.
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