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March 11, 2013 • Issue 13:03:01

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Debit in 2013: Life after Durbin

By Ryan Feeley
First Annapolis Consulting

Editor's Note: This article was first published in the January/February 2013 edition of First Annapolis Consulting's Navigator. Reprinted with permission; all rights reserved; 2012 First Annapolis.

As the first full year with the Durbin Amendment in effect, 2012 was a transformational year for the debit card market. Regulated debit issuers experienced a significant reduction in revenue, experimented with new fees and shifted priorities from transaction growth to cost optimization.

With rapidly evolving market forces, a dynamic regulatory environment and new technologies on the horizon, the outlook for 2013 is expected to be just as volatile. We see five key issues for debit issuers in 2013: growth, value proposition, fraud management, network routing and Europay/MasterCard/Visa (EMV) migration.


First Annapolis is forecasting that total debit transaction growth will range from 6 percent to 9 percent in 2013. PIN debit transaction growth will likely continue to modestly outpace signature growth as cardholders adapt to the elimination of signature-only rewards programs and PIN debit transaction fees. The biggest drivers of debit transaction growth will be small ticket transactions (for example, fast food restaurants) and card-not-present merchant categories such as e-commerce and bill pay.

While issuers are likely to be less aggressive in promoting debit, there are still benefits to encouraging increased activation and usage at new and emerging acceptance locations (for example, small ticket). Further, most issuers can increase profitability through scale economies in debit issuance.

Value proposition

While predictions of the end of debit rewards may have been premature, the Durbin Amendment has dramatically changed the debit rewards landscape. Many exempt issuers continue to offer traditional points-based debit rewards programs; however, most regulated issuers have discontinued these rewards.

A few regulated issuers, including Capital One and Key Bank, have made rewards a feature of premium checking accounts or a value-added service for an additional fee. Many other issuers have launched merchant-funded programs through which cardholders earn cash back by opting in to personalized offers. As these offerings do not rely on interchange revenue for funding, they remain economically viable within the context of post-Durbin card revenues. It is too soon to tell if these rewards programs are perceived as valuable by consumers. Additional cardholder education is required to achieve broader awareness and adoption.

With rewards programs being deemphasized, issuers are promoting other benefits of debit cards in their communications with cardholders. Several financial institutions, including Wells Fargo and Citizens, waive checking account fees based on debit card usage thresholds. Additionally, a number of issuers, including PNC and Wells Fargo, integrate the use of debit cards into personal financial management tools to help cardholders better track and analyze spending.

Fraud management

Given the material reduction in program revenues, many issuers are seeking to reduce overall program costs. Among these actions, fraud prevention regularly tops the list of issuers' most pressing concerns. To guard against an increase in loss rates, issuers must regularly review all practices and policies that relate to fraud. Processes for scoring, queuing, and investigating high risk transactions must be accurate and efficient. Best-in-class issuers also incorporate other types of DDA transactions into scoring models.

Authorization strategies must balance the need to protect against fraud with the importance of minimizing false positives. Issuer policies for plastic issuance, activation and authentication should be designed to minimize risks of compromise. Best-in-class issuers are learning from their experiences with mass data breaches to become more sophisticated and targeted in their reissuance strategies in response to these events.

Finally, electronic communications channels are increasingly being leveraged by issuers in order to accelerate notification cycles with cardholders, improve the customer experience and minimize costs.

Network routing

With the implementation of Durbin routing and exclusivity rules in April 2012, the network routing environment has been completely transformed. To comply with the Durbin Amendment's requirement that cards must support multiple unaffiliated networks, 16 of the top 25 debit issuers added a new PIN debit network last spring.

On April 1, issuers ceded control over network routing decisions to merchants and acquirers. Concurrently, Visa launched PIN Authenticated Visa Debit (PAVD), which enables merchants to route PIN debit transactions on Visa debit cards regardless of whether or not the issuer participates in Interlink.

With these market changes, many issuers observed volatile routing patterns for much of 2012. While routing has by most accounts stabilized, issuers are still observing significant monthly swings in the routing preferences of specific merchants.

In 2013, the network routing environment will remain dynamic and unpredictable. Acquirers and merchants vary widely in the sophistication of their routing capabilities, ranging from a simple ranking of network preferences to more granular transaction-level decisioning.

These capabilities will continue to progress as acquirers and merchants invest in their routing systems. Additionally, networks will continue to refine their approach to merchant incentives as they seek to secure routing volume. A key question for 2013 will be whether other debit networks respond to Visa's PAVD program with their own authentication initiatives.

EMV migration

EMV has arguably superseded the Durbin Amendment as the most talked about topic in the debit industry ("Recap of First Annapolis EMV Forum" in the November 2012 Navigator contains more information on this; subscriptions are free at www.firstannapolis.com/user/register).

With network liability shifts scheduled to take effect in 2015 and many unanswered questions remaining, issuers are struggling to define EMV strategies. While some credit card issuers are moving forward with targeted EMV support, debit card issuers are generally taking a wait-and-see approach.

Issuers need to resolve several key implementation questions, including: (a) whether to support chip and PIN, chip and signature, or both; (b) whether chips should be contact or dual interface; and (c) whether to support offline PIN authentication.

Another concern of issuers is the lack of industry consensus around how multiple debit networks will be supported by EMV chip application identifiers (AIDs). While no issuer wants to be among the last to convert, they are also reluctant to be early adopters given the difficulty in justifying the short term business case for EMV. Nevertheless, issuers need to ensure that they are taking a structured and strategic approach to EMV migration. end of article

For more information, please contact Ryan Feeley, Senior Consultant specializing in Deposit Access and Payment Strategy, at ryan.feeley@firstannapolis.com.

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