Study Finds Surprising Stability Amid Rapidly Changing Debit Landscape
The 10th annual Debit Issuer Study, commissioned by PULSE and conducted by Oliver Wyman, is worth spending some time digesting. We have been sifting through the data for many weeks. Every time we revisit the report, we find something new that’s interesting and sometimes surprising. Below are the top 10 things we’ve learned about debit economics and performance from the 2015 study:
1. Consumer preference for debit is strong and likely to continue on its current trajectory. Per-card use grew 5 percent year-over-year, as consumers continued to migrate payments to debit from cash and checks.
2. Debit card performance is generally positive. This is typically dominated by three metrics: penetration, activation and usage (PAU). The study found penetration and active rates are holding steady, while usage continues to grow. The average active cardholder performs 21.2 debit transactions per month. This metric has increased at a compound annual rate of 2.8 percent since the study began.
3. Best-in-class issuers had significantly more transaction volume than their peers. Issuers in the top quartile averaged 29.3 transactions per active card per month, compared to an average of 21.2 for all issuers and 15.8 for the bottom quartile.
4. The vast majority of issuers – both regulated and exempt – maintain profitable debit programs. Nearly 80 percent of regulated issuers and 89 percent of exempt issuers reported positive debit card profit and loss statements.
5. The beauty of an authentication method is in the eye of the beholder. Regulated and exempt issuers have a difference of opinion when it comes to PIN versus signature. Regulated issuers see higher profits on PIN transactions than on signature transactions ($0.21 vs. $0.15), due to the lower cost structure and comparable interchange revenue. Exempt issuers achieve higher profits on signature transactions, where the higher interchange rate ($0.48) offsets the increased third-party processing and fraud costs.
6. Many issuers expect an increase in fraud loss rates for signature. Citing migration to card-not-present transactions following EMV adoption and a ramp-up in fraud prior to the EMV roll-out, a plurality of issuers – 47 percent – expect signature fraud to increase in the next two years, while most expect PIN fraud loss rates to stay the same.
7. Growing the base of debit cardholders is a constant challenge. The average financial institution experiences churn of about one in five debit cards annually. One interesting observation is that issuers that have a high acquisition rate typically also have a high attrition rate. Issuers that have a relatively lower acquisition rate also have a relatively lower attrition rate. The study suggests that in the face of the constant churn of cardholders this core component of growth is essential.
8. When asked for their average ticket size, financial institutions revealed that not all debit programs are equal. While overall the average ticket size was $37 for a second straight year, the highest reported average ticket size exceeded $60, which was over twice the lowest reported average ticket size at about $26. Fifty-four percent of debit transactions were under $20.
9. Declining consumer preference for paying with cash is showing up at the ATM. On average, each active debit card was used two times per month to withdraw cash from ATMs, which is down significantly from a decade ago. The average ATM withdrawal amount was $118.
10. Exempt and regulated issuers differ somewhat on the key challenges ahead. Fraud and regulation are seen by both groups as the top challenges in the year ahead. However, while regulated institutions also are concerned about maintaining margins, their exempt peers worry more about competition from mobile wallet providers and non-FIs.
To learn more about the state of the debit industry, PULSE participants can view an executive summary of the Debit Issuer Study on the Debit Resource Center page of our website.