Debit Cards in the U.S., 4th Edition

Chapter 1: Executive Summary

Scope and Methodology

Scope of Report

Report Methodology

Market size and forecast

Consumer survey methodology

Report Summary

Debit card payment and transaction volume: market size & forecast

Despite market upheaval, debit growth assured

Many arguments in favor of continued growth

$14 billion in interchange revenue is not small change

But alternative payments beckon

Credit cards for the affluent and well qualified

Prepaid cards for unbanked and underbanked

Signature v. PIN

MasterCard PIN volume growth

Short-term profit advantage among smaller banks

Exempt banks generate almost 50% of debit interchange

Outcome to be shaped by debit card usage and adoption cost changes

Regulatory Analysis and Impact

Debit interchange final rule in effect

Network exclusivity prohibition and routing provisions reshape competition

Consumer Overdraft Protection: Challenges & Strategies

Revenue estimate

Revenue drivers

90% of NSF fees accrued from customers with 5+ NSF transactions per year

It ain’t over yet! New overdraft inquiry foretells continued scrutiny

Debit-Driven Innovations & Strategies

A lesson learned: don’t add direct debit fee

Banking distrust among Gen Y, lower-income adults and Hispanics grows

Lesson still being learned: High-to-low balancing on the ropes

Negative perception about overdraft penalties remain pervasive

Creative overdraft solutions: Rewarding profitable behavior

Creative overdraft solutions: grace period

Creative banking solution: simplify fee structures; increase transparency

Checking Account Policy and Fee Analysis: Three Leading Banks

Bank of America checking account analysis

eBanking intended to drive down costs

Not much change in one year

Tiered account structure rewards customers with deeper banking relationship

Flexible account thresholds

Senior checking option

No debit rewards, but customers can still Keep the Change

Incremental charges for anything out of the ordinary

SunTrust checking account analysis

Fee limits based on transaction volume and size

ATM fee refunds—if you’ve got the money

Extended overdraft packs wallop, but the grace period creates wider safety net

Debit rewards alive and well

But fine print mitigates consumer awareness

JPMorgan Chase checking account analysis

Low opening requirements; tiered platform rewards the affluent

Student checking positioned to build relationship over time

Fee differentiator: creative overdraft policy

Debit Cards in Context: The Consumer Payments Universe

Payment card adoption rates

Card and electronic payment adoption declines; cash use rises

Consumer payment products: debit uptake continues

Checking account holders exhibit higher usage of card products

Debit card usage volume influences use of other card types

Debit Usage Trends

Rise in debit penetration begins to taper

Consumer banking backlash?

Visa/MasterCard debit card use trends: cash, purchase & combination

Age reveals peak usage

HH income

Differences between Visa and MasterCard uptake emerge

Payment preference, by debit brand/type

Consumers who prefer to pay with cash see value in using their debit card

Non-engaged credit card users exhibit dip in debit use

Debit Card Usage Rationales & Influences

Convenience and cash wariness fuel debit card use

Exerting spending control

Credit qualification issues less relevant

Rewards on the way out—fast

High-frequency debit user preferences

Debit-only users more apt to cite creditworthiness

Debit card-credit card users least apt to use debit to control spending

Generation Y v. Swing Generation

HH Income differentiators

Card Association Debit Trends & Strategies

MasterCard

MasterCard client wins help set the stage

Exclusivity death knell helps MasterCard pass 50% threshold

And exposure on Visa-branded cards

PIN share jumps

Going forward: acquirer licensing fee in the works

Quarterly comparisons: Q1 2011 v. Q1 2012

Visa

Visa U.S. debit strategy

Visa’s Fixed Acquirer Network Fee

Exclusivity rule takes its toll

Volume share drop: get used to it

“We are never going to regain all of the market share . . .”

Silver lining

Department of Justice inquiry

Visa by the numbers: trending debit metrics & ratios

Q1 2012 tells quite a story

Debit Card Issuer Case Studies

Bank of America

Reg E strategy and impact

Overdraft strategy and fallout

eBanking intended to drive down costs

Quantifying customer base profitability

Debit purchase volume leader

Durbin Amendment impact

$1.7 billion annual debit interchange hit

But debit volume continues to grow, surpassing credit card volume by 30%

JP Morgan Chase

CARD Act takes a bite

But the card segment is humming

Merchant acquiring business is booming

Debit-driven trends, consequences & strategies

Debit does not exist in a vacuum

If you’re not going to generate revenue for us, don’t expect a free ride

We believe this sets the stage for Chase Liquid prepaid

Changing banking economics necessitate a shift in strategy

Checking accounts and debit transactions climb; revenue does not

Threshold for profitability: $100,000 in deposits & investments?

Chapter 2: Introduction and Overview

Introduction

A simple transaction triggers a Byzantine process

Industry Structure: Participants and Processes

Card association

Demand deposit account (DDA)

Card issuer

Electronic Funds Transfer (EFT)

Merchant acquirer

Fees

Signature-based (offline) transactions

Figure 2-1: Path of a Typical Signature-Based Debit Card Transaction

PIN-based (online) transactions

Figure 2-2: Path of a Typical PIN-Based Debit Card Transaction

Automated Clearing House (ACH)

Chapter 3: Market Size and Forecast

Debit card payment and transaction volume: market size & forecast

Table 3-1: U.S. Debit Card Market Size and Forecast: 2006-2014

Payment volume growth

Graph 3-1: U.S. Debit Card Payment Volume: Market Size and Forecast: 2006-2014

Transaction volume growth

Graph 3-2: U.S. Debit Card Transaction Volume: Market Size and Forecast: 2006-2014

Despite market upheaval, debit growth assured

Many arguments in favor of continued growth

$14 billion in interchange revenue still not small change

But alternative payments beckon

Credit cards for the affluent and well qualified

Table 3-2: Card Issuer Quarterly Credit Card & Debit Card Purchase & Acquiring Volume Growth Trends: 2010-2012

Prepaid cards for unbanked and underbanked

Signature v. PIN

Table 3-3: U.S. Debit Card Payment and Transaction Volume: PIN v. Signature, 2011

Difference between PIN and signature debit interchange evaporates

Table 3-4: U.S. Debit Card Payment and Transaction Volume: PIN v. Signature, 2011

PIN gaining quickly on signature

Table 3-5: Monthly Dollar Volume Growth: Check, PIN Debit and Signature Debit: January 2011 - March 2012

MasterCard PIN volume growth

Short-term profit advantage among smaller banks

Exempt banks generate almost 50% of debit interchange

Table 3-6: U.S. Debit Card Interchange Revenue: Exempt v. Non-Exempt Debit Issuers, 2011

Outcome to be shaped by debit card usage and adoption cost changes

Consumers may migrate to alternative payments if cost of debit card use rises

Usage cost v. adoption cost

Assessment of cost helps understand Durbin effect

Lower-income users more adversely affected

Debit usage cost increases to drive cash and check resurgence

Credit cards a more important long-run substitute

Debit adoption cost increases also tilt more heavily to paper payments

Chapter 4: Regulatory Analysis and Impact

Introduction

The Durbin Amendment: Challenges and Strategies

The Durbin Amendment & Debit Interchange

Final rule in effect

Network exclusivity prohibition and routing provisions reshape competition

Woe to debit interchange!

Debit interchange loss analysis

Bureau of Consumer Financial Protection

What is it and what is it supposed to do?

What is the scope of its authority?

Broad rule-making authority

Broad enforcement authority

Consumer Overdraft Protection: Challenges & Strategies

The Key Provision: Regulation E

What is it?

Amendments and their effect

Revenue estimate

Earnings estimates

Revenue drivers

90% of NSF fees accrued from customers with 5+ NSF transactions per year

Regulatory onus

Steering high-frequency overdraft users

It ain’t over yet! New overdraft inquiry foretells continued scrutiny

Fees too high?

Billions at risk

Chapter 5: Debit-Driven Innovations & Strategies

Introduction and summary analysis

A lesson learned: don’t add direct debit fee

Bank Transfer Day

Banking distrust among Gen Y, lower-income adults and Hispanics grows

Table 5-1: Consumer Trust in Giving Money to Banks among Younger Adults, Low-Income Adults and Hispanics, 2008-2011

Lesson learned: High-to-low balancing on the ropes

Flashback: Wells Fargo litigation sets precedent for additional litigation

For how much could the industry be on the hook?

The details: High-to-low posting under legal fire

Commingling and deployment of the shadow line

Legal conclusion: gouging & profiteering drove overdraft program changes

Fast forward: Citizens Bank

Negative perception about overdraft penalties remain pervasive

Most overdrafts not covered by transfers; overdrafts spur account closings

Decline my transaction, please!

Table 5-2: Consumer Attitudes Toward Overdraft Protection, 2012

Age and income correlate to incurring overdraft fees

Creative solutions

Peoples Bank rolls out checking products that boost service charge income

Assessing unprofitable accounts

Rewarding profitable behavior

Assessing by financial behavior and demographic

Customer analysis followed by conversion notice

Huntington Bancshares rolls out creative overdraft solutions

Free stuff and grace periods

Bottom line grows

Simplify fee structures; increase transparency

TD Bank introduces simpler fee disclosures

Other solutions

Wells Fargo fee increases

Citizens Bank boosts checking fees

Checking Account Policy and Fee Analysis: Three Leading Banks

Bank of America checking account analysis: Q1 2011 v. Q1 2012

eBanking intended to drive down costs

Not much change in one year

Tiered account structure rewards customers with deeper banking relationship

Flexible account thresholds

Senior checking option

Names change; structure stays the same

But service charge and daily balance changes noted

No debit rewards, but customers can still Keep the Change

Incremental charges for anything out of the ordinary

Table 5-3: Bank of America Checking Account Features and Fees, by Account, May 2012

SunTrust checking account analysis

Debit rewards holdout balances perks with fees

Fee limits based on transaction volume and size

ATM fee refunds—if you’ve got the money

Extended overdraft packs wallop, but the grace period creates wider safety net

Debit rewards alive and well

PIN and signature debit transactions welcome

But fine print mitigates consumer awareness

Table 5-4: SunTrust Checking Account Features and Fees, by Account, May 2012

JPMorgan Chase checking account analysis

Low opening requirements; tiered platform rewards the affluent

Student checking positioned to build relationship over time

Fee differentiator: creative overdraft policy

Table 5-5: JPMorgan Chase Checking Account Features and Fees, by Account, May 2012

Chapter 6: Debit Cards in Context: The Consumer Payments Universe

Introduction and summary analysis

Payment card adoption rates

Card and electronic payment adoption declines; cash use rises

Consumer payment products: debit uptake continues

Checking account holders exhibit higher usage of card products

Debit card usage volume influences use of other card types

Perspective on the consumer payments universe

Payment cards still rule

Penetration gap between debit and credit widens

For credit cards, rewards still a force

Contactless payments

Table 6-1: Current Adoption of Payment Instruments, by Instrument Features, 2008-2009

Other trends

Small business debit use reaches majority status

Small ticket purchases now more expensive

Credit card share of wallet three times that of debit

Debit wallet footprint underscores importance as relationship touch point

Table 6-2: Number of Adopted Bank Accounts and Payment Cards, 2008-2009

Usage of paper instruments remains universal

And gain traction while card and electronic payment penetration falls

Table 6-3: Incidence Use of Payment Instruments in a Typical Month, by Type of Instrument, 2008-2009

Card payment share falls below 50%

But cash and check gain share!

Uptick in use of cash continues past the financial crisis

Electronic payment share remains low

Table 6-4: Usage Frequency and Share of Payment Instruments in a Typical Month, by Type of Instrument, 2008-2009

Consumer payment products: debit uptake continues

After dropping during recession, credit card use stabilizes

More than 1 in 10 adults use a prepaid card

Table 6-5: Consumer Payment Products Usage, by Type, 2007-2011

Checking account holders exhibit higher usage of card products

Credit card penetration remains higher than debit

Table 6-6: Consumer Payment Products Usage, by Type: Checking Account Holders, 2007-2011

Consumer banking product usage trends a mixed bag

Table 6-7: Consumer Banking Products Usage, by Type, 2007-2011

Consumer loans in decline

Table 6-8: Consumer Loan Products, by Type, 2007-2011

Consumer investment ownership also falls

Table 6-9: Consumer Investments, by Type, 2007-2011

Checking account holders w/ debit cards also less apt to have investments

Table 6-10: Consumer Investments, by Type, Checking Account Holders with Debit/ATM Card, 2007-2011

Credit card usage and engagement

Table 6-11: Credit Card Engagement, 2007-2011

Card and online payments increase bill payment share

Table 6-12: Bill Payment Methods, 2008-2011

Debit card usage volume influences use of other card types

Table 6-13: Card Engagement, by Card Type: All Adults, Engaged Debit Card Users & High-Frequency Debit Card Users, 2012

Card usage among high-frequency debit users

Table 6-14: High-Frequency Card Use, by Card Type: All Adults, Engaged Debit Card Users & High-Frequency Debit Card Users, 2012

Chapter 7: Debit Usage Trends

Introduction and summary analysis

Rise in debit penetration begins to taper

Visa/MasterCard debit card use trends: cash, purchase & combination

Age reveals peak usage

HH income

Differences between Visa and MasterCard uptake emerge

Payment preference, by debit brand/type

Consumers who prefer to pay with cash see value in using their debit card

Non-engaged credit card users exhibit dip in debit use

Rise in debit penetration begins to taper

Consumer banking backlash?

Table 7-1: Debit Card Usage, by Brand, 2007-2011

Visa/MasterCard debit card use trends: cash, purchase & combination

Table 7-2: Debit Card Engagement, Visa/MasterCard Branded Cards, 2010-2011

Visa debit card use trends: cash, purchase & combination

Table 7-3: Debit Card Engagement, Visa Branded Cards, 2010-2011

MasterCard debit card use trends: cash, purchase & combination

Table 7-4: Debit Card Engagement, MasterCard Branded Cards, 2010-2011

Non-Branded Debit/ATM

Table 7-5: Debit Card Engagement, Non-Visa/MasterCard Debit/ATM Cards, 2010-2011

Demographic analysis: Visa/MasterCard debit card use trends

Age reveals peak usage

But don’t let low penetration among Debit Generation fool you

Table 7-6: Debit Card Engagement, by Brand/Type: Age Analysis, 2011

HH income

Differences between Visa and MasterCard uptake emerge

Table 7-7: Debit Card Engagement, by Brand/Type: HH Income Analysis, 2011

Race/ethnicity

Table 7-8: Debit Card Engagement, by Brand/Type: Race/Ethnicity Analysis, 2011

Payment preference, by debit brand/type

Consumers who prefer to pay with cash see value using their debit card

Table 7-9: Debit Card Engagement, by Brand/Type: Cash/Check Payment Preference Analysis, 2011

Non-engaged credit card users exhibit dip in debit use

Financial security and fiscal responsibility self-perceptions

Table 7-10: Debit Card Engagement, by Brand/Type: Financially Secure & Non-Engaged Credit Card Users, 2011

Chapter 8: Debit Card Usage Rationales & Influences

Introduction and summary analysis

Convenience and cash wariness fuel debit card use

Exerting spending control

Credit qualification issues less relevant

Rewards on the way out—fast

High-frequency debit user preferences

Debit-only users more apt to cite creditworthiness

Debit card-credit card users least apt to use debit to

control spending

HH Income differentiators

Debit card usage rationales, account changes and credit worthiness

Convenience and cash wariness fuel debit card use

Exerting spending control

Credit qualification issues less relevant

Rewards on the way out—fast

Table 8-1 Engaged Debit Card Users: Debit Usage Rationales, Account/Fee Changes & Credit Worthiness, 2012

High-frequency debit users more apt to value cashless convenience and spending control

Debit-only users more apt to cite creditworthiness

Debit card-credit card users least apt to use debit to control spending

Table 8-2 Debit Usage Rationales, Account/Fee Changes & Credit Worthiness, by Debit Card & Credit Card Usage, 2012

Demographic analysis: debit card usage rationales

Generation Y

Swing

Table 8-3 Debit Usage Rationales, Account/Fee Changes & Credit Worthiness, by Generation, 2012

HH Income influences creditworthiness-driven debit use

Service fee increases noted among lower-income debit card users

Priming the pump for prepaid cards

Table 8-4 Debit Usage Rationales, Account/Fee Changes & Credit Worthiness, by HH Income, 2012

Race/ethnicity

Table 8-5 Debit Usage Rationales, Account/Fee Changes & Credit Worthiness, by Race/Ethnicity, 2012

Chapter 9: Card Association Debit Trends & Strategies

Introduction

MasterCard

Overview

MasterCard moves

MasterCard client wins help set the stage

But Q1 2012 marks a new era at MasterCard

Exclusivity death knell helps MasterCard pass 50% threshold

And exposure on Visa-branded cards

PIN share jumps

Process transactions jump

Going forward: acquirer licensing fee in the works

MasterCard by the numbers: trending debit metrics & ratios

Quarterly comparisons

Table 9-1: MasterCard U.S. Q1 2010, Q1 2011 and Q1 2012 Debit Card Metrics

Annual trends

Table 9-2: MasterCard U.S. Debit Card Metrics: 2010 v. 2011

Visa

Business summary

Transaction processing services

Core debit processing services

Consumer debit platforms

U.S. debit strategy

Recent Visa moves

Visa’s Fixed Acquirer Network Fee

Raising “no signature” limit

Streamlining dispute resolution process

Exclusivity rule takes its toll

Volume share drop: get used to it

“We are never going to regain all of the market share . . .”

Silver lining

Department of Justice inquiry

Visa by the numbers: trending debit metrics & ratios

Q1 2012 tells quite a story

Two-year quarterly trend analysis

Table 9-3: Visa U.S. Q1 2010, Q1 2011 and Q1 2012 Debit Card Metrics

Discover Financial Services

Chapter 10: Debit Card Issuer Case Studies

Bank of America

Company Overview

Segment overview

Deposits segment

Reg E strategy and impact

Overdraft strategy and fallout

eBanking intended to drive down costs

New fee for monthly statement

Looking ahead

Deposits segment strategy & performance analysis

Banking center reductions and consolidations

Quantifying customer base profitability

Building relationships with preferred and small business customers

Account closings

Table 10-1: Bank of America, Deposits Segment Business Metrics: Q4 2010-Q4 2011

Card Services segment

Credit cards up

Card Services segment strategy & performance analysis

2011 and Q1 2012

Debit purchase volume leader

Durbin Amendment impact

$1.7 billion annual debit interchange hit

But debit volume continues to grow, surpassing credit card volume by 30%

Table 10-2: Bank of America, Card Services Segment Business Metrics: Q4 2010-Q1 2012

JPMorgan Chase & Co.

Introduction

Business segments

Retail Financial Services

Consumer & Business Banking

Growing branches, online, mobile and next-generation ATMs

Enhancing service and increasing sales opportunities

New technologies

Card Services & Auto

Instantly issued cards on the way

Credit card program hums along

CARD Act takes a bite

But the card segment is humming

New cards; new partners

Merchant acquiring business is booming

Debit-Driven Trends, Consequences & Strategies

Debit does not exist in a vacuum

If you’re not going to generate revenue for us, don’t expect a free ride

We believe this sets the stage for Chase Liquid prepaid

Table 10-3: JPMorgan Chase: Banking Services That Do Not Carry an “Explicit” Charge, 2012

Changing banking economics necessitate a shift in strategy

Checking accounts and debit transactions climb; revenue does not

Table 10-4: JPMorgan Chase Consumer & Business Banking Revenue Growth Trends, 2005-2011

Proportionally less revenue generated by those with less at the bank

Table 10-5: Percent reduction in per HH variable contribution by segment, 2011

Threshold for profitability: $100,000 in deposits & investments?

Table 10-6: JPMorgan Chase Post-Regulation Revenue Composition by Wealth Segment

More wealth, more revenue

Table 10-7: JPMorgan Chase Distribution of households by wealth segment

Because the relationship is deeper

Table 10-8: JPMorgan Chase Products per household by wealth segment (industry)

Chase by the numbers: Q1 2012 post-Durbin analysis

Table 10-9: JPMorgan Chase Consumer & Business Banking, Card Services & Merchant Services: Quarterly Metrics, 2011-2012

Chase by the numbers: consumers and business banking

Deposits and accounts on the upswing

More human capital for relationship banking and sales opportunities

Table 10-10: JPMorgan Chase Consumer & Business Banking: Deposit and Retail Branch Metrics, 2009-2011

Chase by the numbers: Card Services and Merchant Services

Strong sales volume; aggressive account management

Healthy bank card volume

Table 10-11: JPMorgan Chase Card Services and Merchant Services Metrics, 2009-2011

The twin pillars of retail banking revenue—debit interchange and overdraft fees—are under assault. As an integral part of consumer checking accounts, debit card transactions drive interchange revenue and are linked to overdraft fee revenue. On the heels of new check overdraft protection rules, debit interchange has been capped, and electronic debit transactions must now be processed over at least two unaffiliated payment networks. 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.

Packaged Facts’ Debit Cards in the U.S. guides market participants through these changes and their significance to the marketplace: the evolving trends shaping the debit card landscape, marketplace winners and losers (debit card issuers, merchant acquirers, payment networks and card associations), and the impact these trends have on consumers and merchants.

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. This report assesses the strategies financial institutions are employing to recoup debit and overdraft losses, including changes in fee structures, creative overdraft solutions, the fate of debit rewards and merchant-funded reward trends.

Through consumer survey analysis, this report also evaluates the role debit cards play in the use of other payment types, as well as how fee and account changes affect debit card use. This assessment includes trend analysis on lower-income consumers and Generation Y, two groups significantly impacted by the growth of debit and the consequences of regulation.

Additionally, the report’s market size and forecast, estimates of current debit interchange revenue, and analysis of "then and now" debit interchange revenue, are all based on data released by the Federal Reserve just prior to June 2012. This same Federal Reserve data were used to create not only tables, but revenue estimates for small and large banks, as well as PIN/signature.

But the debit card is not merely a payment method but a lynchpin of a wider array of cross-sold banking services. As such, the analysis in this report frames debit card patterns within the wider universe of consumer payment, banking service use, consumer loan product use, and consumer investment.