Debit Cards as Profit Drivers - 4th Edition

Debit cards have became popular among issuers primarily as a result of investments that card networks have made in popularizing debit cards among consumers, and as a result of the revenue that banks could realize from debit interchange fees.

The 4th edition of this best-selling report provides new data on the debit card markets in developed regions, including America, Australia, the United Kingdom, Japan and Germany, as well as emerging markets including Thailand, Malaysia and Singapore.

Read this report to:

- Increase profits from your debit card offering
- Access the latest statistics on debit card markets in the most developed countries
- Follow the latest on fraud and the cost to banks so far
- Gain an overview of the latest developments in the debit card market
- Understand the effects of the Durbin Amendment on US banks' debit card profitability
- Understand how interest and inflation rates are associated with the reshaping of debit card systems worldwide

Figures

Executive summary

Keeping an eye on the future

Chapter 1: How debit card markets have developed
Debit cards on the rise
Debit card types have spread differently across the world
How everything started: From credit to debit cards
The path to the current debit card markets
The current situation
Cheques on their way out of the payment market
Debit cards have outnumbered credit cards almost everywhere
Where are the debit card markets heading now?
Credit cards may be making their Way back to the US
Unlike in the US, debit cards will find their place in UK consumers’ pockets for longer
The forthcoming gap between US debit cards and cash will widen
Giant card networks penetrating unexplored markets
Summary

Chapter 2: The profit-making function of debit cards
Banks forced to change their policy – adaptability is the key feature
How do financial institutions make their debit card strategies profitable?
Banks have got it right
Interchange fees create revenue, but to what extent?
Interchange fees are not easy to track
The composition of debit fees
EU debit interchange fees
How have debit card interchange fees been established across the world?
Profitability in the Canadian regime has nothing to do with debit card interchange fees
US debit PIN interchange fees on the rise
An underestimated source of profit: the overdraft fee
Debit cards are much more related to overdraft fees than previously thought
A simple but significant source of profit: ATM fees as a profitability component
ATM fees have been applied differently across the world
Other fee components
Reward checking accounts, prompting higher debit card usage
The more frequently customers use their debit cards, the more they get
Summary

Chapter 3: Regulatory authorities’ decisions and banks’ profitability
The Durbin amendment and card issuers’ reactions
The amendment prompted divergent reactions
The reduction in debit fees will lead US banks to face profitability losses
US banks will pass on losses to consumers
The current US debit cards market might be reshaped
The reduction in debit fees might cause US banks to steer consumers away from debit cards
Summary

Chapter 4: Other authorities’ interventions over interchange fees
Higher debit cards usage triggered by Australian reforms
The controversial pre-reform card regime
The shift from credit to debit cards led to a loss of revenue for card issuers
Australian future may not depend on Visa/MasterCard as much as it has so car
Interchange fees have been a hot topic across Europe too
Visa and MasterCard will lose market share within the future European card market
Noticeable efforts – but SEPA’s complete implementation is far from complete
Summary
Chapter 5: The impact of fraudulent transactions on banks’ profitability
Types of debit card fraud and relieving UK figures
EMV as a firm response to debit card fraud
Positive response to EMV from large part of the world
US still reluctant
US profitability losses estimates from EMV implementation
Technology has been an ally so far, but might become an enemy
Summary

Chapter6: The vicious circle of interest rates and inflation affects debit card usage to a varying extent
Debit cards distribution, projections and central banks’ intervention
The Italian stagnant economy
ECB pursuing Eurozone safeguard by driving interest rates down
Future inflation might lead to more debit card payments
Germany retaining the largest share of the European debit card market
Debit Cards Still Unable to Keep Pace With Cash
German deflation did not affect the debit card market as much as expected
The UK as the second largest European debit card market
Debit cards are more popular than cash
Debit cards expenditure will boost regardless of inflationary pressure
Figure 6.14: UK payment trends – cash loses popularity while debit cards gain it
Chapter 7: Between emerging and developed economies in the Asia-Pacific region
Malaysia as a growing, but still underdeveloped debit card market
Malaysian interest rates and inflation on the rise
Cheques retain the largest share of payments value in Thailand
But numerically, debit cards are far more popular than other instruments
Debit cards could create profits, but
they are not seen as profit drivers
Thailand confirms the rise of debit cards
Singapore as an unusually balanced card market
The clash between debit and credit cards
Consumers have much choice in Singapore
Remarkable interest rates fluctuations
Japan as a highly advanced card system
Japanese residents carry an impressive number of cards per person
Credit cards are associated with much higher spending than debit cards
New steps forward: following examples of excellence
Summary

Chapter 8: Conclusions

List of tables and Figures

Figure 1.1: Change in the US number, value and average value of debit card payments
Figure 1.2: US share of cardholder spending at merchants (% value)
Figure 1.3: Worldwide debit card transactions per person
Figure 1.4: Distribution of the number of US noncash payments, 2006-2009
Figure 1.5: Debit cards across Europe (m)
Figure 1.6: Most recent debit cards number throughout the world
Figure 1.7: UK card expenditure statistics, 2011
Figure 1.8: UK average transaction values
Figure 1.9: UK average monthly expenditure
Figure 1.10: Transactions growth projections
Table 2.1: Composition of Visa interchange debit fees across Europe (Non-Merchant Specific), as of April 2011
Figure 2.2: Composition of Visa interchange debit fees across Europe (merchant specific), as of April 2011
Figure 2.3: Summary of some of the most interesting examples of authority interventions on debit card interchange fees
Figure 2.4: verage fees charged to small retailers by Visa on a $100 transaction
Figure 2.5: Bank revenue from overdraft fees
Figure 2.6: Overdraft fees, US national median
Figure 2.7: Share of US overdraft fees, 2007
Figure 2.8: Overdrawn US account fees
Figure 2.9: ATM numbers across Europe
Figure 2.10: Recent examples of higher usage of debit cards triggered by US’ local banks’ initiatives
Figure 3.1: Visa and MasterCard share price declining
Figure 3.2: Reactions to the Durbin Amendment
Figure 3.3: Post-regulation actions taken by US banks
Figure 3.4: US debit transactions value
Figure 3.5: First potential future US debit card market trend
Figure 3.6: Second potential future US debit card market trend
Figure 4.1: Number of debit and credit cards in Australia
Figure 4.2: Value debit/credit transactions)
Figure 4.3: Fee flows in an EFTPOS transaction
Figure 4.4: Interchange fees on a A$100 payment
Figure 4.5: EFTPOS merchant service fees (cents per transaction)
Figure 5.1: Share of losses suffered by RBS, 2009-2010
Figure 5.2: Fraud figures by payment channels and payment instruments
Figure 5.3: European ATM losses
Figure 5.4: Annual plastic card fraud losses on UK-issued cards 2006-2010
Figure 5.5: European skimming-related losses
Figure 5.6: The predominance of card-not-present fraud in the UK
Figure 5.7: EMV cards share across the world, September 2010
Figure 5.8: US EMV implementation costs
Figure 5.9: Bell ID estimates regarding the US reduction in debit interchange following EMV implementation
Figure 6.1: Number of debit and credit cards in Italy
Figure 6.2: Italian transactions value: debit cards against all types of payment instruments (€m)
Figure 6.3: Euro area interest rate, Jan 2000-Apr 2011
Figure 6.4: Italian inflation rate, Jan 2000-Apr 2011
Figure 6.5: Debit card transactions value in Italy
Figure 6.6: Number of ATMs in Italy
Figure 6.7: Number of debit cards in Germany
Figure 6.8: German transactions value – debit cards against all types of payment instruments
Figure 6.9: Number of ATMs in Germany
Figure 6.10: German inflation rate: Jan 2000-Apr 2011
Figure 6.11: Debit card transactions value in Germany
Figure 6.13: UK transactions value: debit cards against all types of payment instruments
Figure 6.12: Number of debit and credit cards in the UK
Figure 6.15: UK inflation rate, Jan 2000-Apr 2011
Figure 6.16: UK interest rate, Jan 2000-Apr 2011
Figure 6.17: Debit cards transaction value in the UK
Figure 7.1: Number of debit cards and credit cards in Malaysia
Figure 7.2: Malaysian debit against total transactions value
Figure 7.3: Malaysian interest rate, Jan 2006-Apr 2011
Figure 7.4: Malaysian inflation rate, Jan 2008-Apr 2011
Figure 7.5: Distribution of cashless payments in Thailand, 2004-2009
Figure 7.6: Distribution of cashless payments in Thailand (volume)
Figure 7.7: Thai interest rate, Jan 2001-Apr 2011
Figure 7.8: Thai inflation rate, Jan 2001-Apr 2011
Figure 7.8: Number of debit cards in Singapore
Figure 7.9: Singapore transactions value: debit cards against all types of payment instruments
Figure 7.10: Singapore interest rate, Jan 2000-Apr 2011
Figure 7.11: Singapore inflation rate, Jan 2000-Apr 20
Figure 7.12: Number of Japanese debit cards
Figure 7.13: Japanese transactions value: debit cards against all types of payment instruments
Figure 7.14: Japanese interest rate, Jan 2000-Apr 2011
Figure 7.15: Japanese inflation rate, Jan 2000-Apr 2011

Debit cards have started to outnumber credit cards in most countries across the world, in many cases irrespective of the area and related economic development. But when compared to credit cards, the real convenience of issuing debit cards, from the bank’s perspective, may not be straightforward. Credit cards, as a type of loan, have always proved much more interesting because structural features have led issuers to high margin profits. A quick comparison of the internet space devoted to debit cards, and to credit cards, shows how the former has been overwhelmed by its credit counterpart.

Among the most relevant examples from different areas of the globe, Germany, as a cash-based society, stands out of the crowd with an almost total absence of credit cards if compared to the number of debit cards in issue – 4 million credit cards as opposed to 101 million debit cards in circulation. Russia boasts an even more striking gap, with 119 million debit cards as opposed to 10 million credit cards in issue.

Moving towards other continents, a similar picture can be drawn, with recent data showing India with 130 million debit cards against 24 million credit cards, or China whose enormous number of debit cards – 1.8 billion – makes 199 million credit cards pale into insignificance. Even in countries where credit cards still dominate, the card market has experienced an outstanding growth of debit-related payment instruments as in the case of Canada where the number of debit cards almost doubled between 2009 and 2010. The pattern is replicated in countries like Indonesia, Australia, Philippines or Brazil.

But it is not just the relationship with their credit peers that matters; the figures in absolute terms have also become staggering. The relentless rise in debit cards in circulation across the world, in fact, is expected to reach 5.3 billion by the year 2015. In Japan, for example, in 2000, debit cards accounted for only 1% of all card-based transactions. In 2009, despite still very low consumer spending, Japanese debit cards totalled 427 million, overtaking credit cards standing at 346 million. Debit cards can replace cash and cheques, and make the transaction faster and more secure. These represent some of the fundamental reasons behind the favourable attitude of consumers towards this method of payment.

In contrast, banks do not benefit from debit card transactions as much as they do when payments are made through credit cards. In the US, for instance, the bank can earn up to 1.7% of a transaction made through credit cards whereas PIN debit card-based payments generate approximately a 0.7% profit made by the bank on the single operation. So why should a bank continue to release a payment instrument that, all else being equal, makes a very small contribution to its profit-making strategies? The answer lies in a multitude of factors. In recent times, banks have seemingly had little choice but to exercise an ability to adapt to changing surroundings – a shift in consumers’ attitude towards more sustainable expenditure-related regimes – and to always come up with a profitable solution. The perception of debit cards has changed mainly because of the economic turbulence that has led banks to adopt more cautious lending strategies.

The positive correlation between the booming popularity of debit cards and the resulting creation of profits for the financial institutions involved is emphasized throughout this report by highlighting the importance of growing debit card markets in order for banks to benefit from larger shares of profits – mainly, but not exclusively, represented by debit interchange fees.

Keeping an eye on the future

This report has been written with the purpose of giving a complete overview of the debit sources of profit for financial institutions, but it has also identified some key features that are likely to create a sound foundation for future debit card markets.

Chapter 1

Here the evolution of debit cards is examined through a brief overview of the implications that have led debit cards to the most recent trends (by the time this report was completed, official figures for the year 2010 had not been released with regard to European countries, Australia, Japan, Singapore and Thailand). The analysis is carried out within a broader context with the purpose of showing how debit cards are now dramatically spread across the world at the expense of cheques, which are disappearing, and to a lesser degree, credit cards.

These implications are adapted to the markets where these changes are currently taking place, and forecasts are made in accordance with the most up-to-date studies and insights. In the UK for example, the consumer market has accepted with ease both the introduction and use of debit cards, while in the US the situation appears more uncertain due to regulatory interventions whose impact on the US debit card market is not easily predictable.

Chapter 2

This chapter examines in depth the profitability function of debit cards by highlighting general practices that banks take in order to make this method of payment lucrative. It shows how banks have adapted to current consumer attitudes towards debit cards, by associating these payment instruments more strongly with checking accounts.

Debit interchange fees represent one of the main factors that contribute to banks profit growth. Their composition is illustrated, along with all the debit fees applicable within the EU, and an overview of the regulations that have taken place in Canada, Australia, Spain and Mexico over the past decade in order to understand how complex and varied the debit interchange fee system is.

Alternative fee components like ATM-related and, most importantly, overdraft fees are shown to be connected to debit cards much more than initially thought, despite country-by-country variations.

Finally, reward checking accounts are looked at, as a way for small US banks and credit unions to overcome their competitors, for example by offering higher interest rates in return for a specific number of debit card transactions that customers have to make on a monthly basis.

Chapter 3

This examines the consequences of the Federal Reserve’s enactment of the Durbin Amendment. The impact of the related reduction in debit fees is analysed by taking several predictions made in the US market as examples. According to the likely impact that the amendment will exert on profits that US banks make out of debit cards, two different scenarios are illustrated, depending on the possible reaction by US issuers to the new legislation.

Chapter 4

Unlike the current US debit fee-related picture, here the Australian reforms are used as an example showing how regulatory bodies’ interventions on debit interchange fees can affect issuers’ profitability. An overview of debit fee-based implications in the EU is provided, along with a brief description of the role that a Euro-system will play alongside Visa and MasterCard.

Chapter 5

Profitability issues are tackled from a different perspective as the wide range of fraud-related problems encountered by issuers operating in worldwide markets are investigated – specifically the losses generated by fraudulent activities.

Fraud-related losses are following a downward trend in most countries across the world due to the implementation of EMV technology. The US reluctance to move to EMV migration is examined in terms of increase. ing costs suffered by US households and financial institutions due to this technological gap with most of the remaining part of the world. Also the EMV implementation in the US will reduce the amount of debit interchange fees on PIN and signature-based transactions. This potential loss of profitability for US issuers, as estimated by Bell ID, is shown at the end of the chapter.

Lastly, a new set of on-line channels are shown to be posing serious threats to the safety of transactions made through the online world. Although EMV implementation has reduced the number of fraud-related losses to reach one of the lowest levels ever reported – in Europe, domestic issuer losses fell by 63 percent from €62 million during the first six months of 2006, to a low of €23 million during the second six months of 2010 – increasingly frequent attacks still seem to be occurring world-wide irrespective of the counter-measures being taken by issuers.

Chapters 6 and 7

In these concluding sections, different markets are examined. Recent trends are analysed to see if debit card-related expenditure has somehow been affected. Interestingly, in the UK as inflation levels are reported to have affected the total value of transactions made through all types of instruments, debit-related expenditure levels do not appear to have suffered any contraction. This is a clear sign of consumers increasing their usage of debit cards which follows a rising pattern, irrespective of central banks’ interventions in terms of interest rates and inflation. Obviously, these trends vary country by country, but even in emerging economies like Malaysia and Thailand, which show specific cash and paper-based characteristics in their societies, debit cards appear to be gaining acceptance among consumers.

Since debit cards generate profits for issuers, according to the rising number of checking account holders with them, a few examples within the debit card realm are used to illustrate how banks seem to have understood that quantity may matter more than the quality, but that sometimes the two things go together. Over the past three years, specific types of debit cards such as the Maybank Visa Debit Card and Card Finans Nakit Card have stood out of the crowd with very attractive features.

Turkish Finans Nakit Card, for instance, allows customers to make purchases by setting specific installment plans instead of using their available balance. Customers can, therefore, pay for their expenses on a monthly basis, and even earn daily interests calculated on the unbilled part of their balance. The immediate market response to these products was staggering; not only did the number of debit cards issued rose dramatically in a very short time period, but these initiatives also made a huge contribution to the outstanding growth of the sales volume experienced by issuers. These products have sent a clear message about debit cards. Now that the proportion of such cards has risen all over the world, issuers have to find alternative ways to make profits out of them since credit cards, although still popular in some countries, are not expected to keep pace with their debit counterpart for the near future and in most countries. This report shows that now that issuers have adapted to the new trend, there is a positive correlation between the number of debit cards in issue, and profitability implications.

The more cards in circulation, the more banks can get from debit fees, given a certain average value of debit transactions. By following this direction, there will be a higher proportion of available resources that banks can lend at higher rates in the form of mortgages or insurance, for instance. Consequently, banks can use alternative optimisation-based strategies to their advantage as a result of a number of debit cards which has peaked across the world.

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