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


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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.


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

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