The world of payments is changing rapidly, but one aspect has remained steady amid the shifting tides: consumers’ love of debit.
The 2018 Debit Issuer Study – commissioned by PULSE and conducted by Oliver Wyman – has revealed continued strong fundamentals for U.S. debit card issuers. This ongoing strength is one of four key trends identified in this year’s survey.
1. Continued Strength in Debit
Issuers reported overall year-over-year debit transaction growth of more than 5% in 2017. And debit card penetration, activation and usage rates all rose compared to 2016, as did average ticket size and annual card spend.
Growing consumer debit card use has driven total issuer interchange revenues to pre-Regulation II levels. Although per-transaction interchange has declined since the regulation was implemented, card usage has risen every year.
Issuers subject to the regulation’s interchange cap earned an average blended rate of $0.24 per transaction in 2017, or $69 per debit card. Issuers exempt from the cap earned $0.39 per transaction, on average, or $118 per card.
2. Convergence of Debit Transaction Types
The traditional lines between PIN and signature debit have blurred as EFT networks have expanded their offerings to include card-present transactions with no cardholder verification method (CVM), card-not-present transactions and, in some cases, signature debit and other dual-message transactions. As a result of this shift, issuer tracking of debit card activity is evolving from a focus on how the transaction is routed to how consumers are using the card.
“The lines between signature and PIN are increasingly getting blurred. All of the old rules and assumptions have changed.”
— Regional Bank
This shift gives merchants routing options on a greater percentage of debit transactions. As a result, EFT network volume grew 7 percent in 2017 versus 2016, while card brand volume grew less than 5 percent. Increased PIN debit use on chip-card transactions also played a role in this shift.
While some issuers are concerned that competition will drive down interchange rates, EFT networks typically offer lower issuer fees than card-brand networks, resulting in a net benefit for issuers.
3. Debit Fraud Losses Declined … Again
Net debit card fraud losses declined for the second year in a row in 2017. Issuers lost 1.4 bps per gross dollar volume (GDV), or 0.6¢ per transaction, on PIN debit transactions last year. This compares to 1.5 bps/GDV, also 0.6¢/transaction, in 2016. Across all other debit transaction types (signature, no-CVM and card-not-present), issuers lost a net 4.2 bps/GDV and 1.6¢/transaction in 2017 compared to 4.8 bps and 1.8¢ in 2016.
About 20 percent of debit transactions are card-not-present, but these transactions account for 66 percent of fraud cases. Not surprisingly, fraud losses per case are highest when fraudsters obtain the cardholder’s PIN and obtain cash.
The 2018 study also looked at authorization rates and fraud false-positive ratios for fraud detection. While 5.2 percent of debit transactions are declined, suspected fraud is the reason for only 0.4 percent of declines. More prevalent reasons include insufficient funds, data mismatches and recurring payments hitting invalid or expired cards.
“CNP makes up almost 80% of our denials, even though it only comprises 20% of our transactions.”
— Regional Bank
False-positive ratios for fraud detection are an important metric to issuers, and one that varies depending on an issuer’s appetite for cardholder impact. On average, issuers decline 4.8 legitimate debit transactions for each confirmed fraud instance. Regional banks had the lowest ratio (3.1 to 1) and national banks the highest (5.0 to 1).
4. Mobile Payments Remain a Future Phenomenon
Cardholder enrollment in mobile wallets has doubled in the past year, but mobile wallet transactions accounted for only 0.6 percent of in-store debit volume in 2017. While this is more than double the percentage reported in 2016, it remains a tiny fraction of overall card use.
Still, 86 percent of issuers surveyed have implemented at least one mobile wallet for competitive reasons. They are ambivalent about the outlook for mobile payments, however, citing low adoption, implementation complexity and disintermediation of the issuer brand.
“We are just offering mobile wallets for convenience and to keep up with our peers, but we are not necessarily encouraging consumers to use these wallets.”
— National Bank
Areas of Focus for 2018
Issuers pointed to enhancing digital capabilities as their top priority in 2018, surpassing even fraud mitigation. These capabilities include:
- Cardholder self-service tools, such as card on/off and temporary limit adjustments
- Provision of virtual cards in mobile wallets when card is newly issued, lost or stolen
- Communication-related enhancements such as interactive feedback on suspected fraud
Want more debit discoveries? See the Top 10 Findings from the 2018 Debit Issuer Study.