As those in the banking, financial services and merchant communities have seen over the past years, the growth of debit as a preferred consumer method of payment has been remarkable. But along with that growth, many in the industry have begun to ask a few questions. Will the preference for debit as a payment choice continue to grow? How might the debit card itself change? How is debit card fraud affecting usage?
To seek insights into the answers to these questions, PULSE EFT Association commissioned Dove Consulting to conduct a survey of debit card issuers focusing on building an objective fact base on issuer performance and debit card fraud. Four key areas were studied: performance metrics, debit rewards, networks and interchange and debit card fraud. The 2007 Debit Issuer Survey was the second such study commissioned by PULSE.
A number of study findings regarding consumer behavior relative to debit are especially significant for the merchant community and the financial services providers that serve them. New data on debit card performance metrics, the impact of transaction fees on card usage, the role of rewards programs on card usage and how fraud is being addressed are significant factors in the future growth of debit payments. While the findings of this study are based on responses from card issuers, the trends identified could have a bearing on how merchants shape their payment programs.
Debit Industry Strong and Growing
The 55 debit card-issuing financial institutions taking part in the survey – ranging from credit unions to community banks to large banks – reported an increase in debit card usage in 2006 and expect continued growth this year. These issuers, representing 62.3 million debit cards (59.2 million consumer and 3.0 million business), reported average transaction growth of 20.3 percent for signature debit and 15.7 percent for PIN debit last year, with large banks experiencing the highest growth rates. The study also showed that participants achieved an average debit card penetration of 72 percent for consumer checking accounts, meaning that nearly three out of four eligible accounts at the institutions surveyed can be accessed by a debit card.
Of the debit cards in circulation, 85 percent were capable of initiating both PIN and signature-authorized transactions. These signature-capable debit cards have become a standard checking account offering. Overall, for 73 percent of issuers surveyed, if a consumer qualifies for a checking account, he or she also automatically qualifies for a debit card, while 89 percent of best-in-class issuers employ automatic qualification.
While the penetration rate is impressive and might suggest limited potential for continued rapid growth, the number of these cards that are considered “active” by issuers gives reason to believe that debit payments still have considerable room to expand. While definitions of “active” vary, the most common one is based on consumers using their cards for at least one signature transaction in the past 30 days.
Based on this standard, 56 percent of cards are considered “active.”
These cardholders are performing 16.1 point-of-sale transactions per month, of which 10.6 are signature and 5.5 are PIN. When all cards (active and inactive) are factored in, average usage drops to 9.6 transactions per month – 6.3 signature-based and 3.3 PIN.
Currently, signature debit accounts for 62 percent of total debit transactions at the point of sale with PIN accounting for the remainder. However, contactless cards are on the horizon for debit card issuers, with a significant percentage of the financial institutions surveyed planning to either implement the technology this year or study the possibility. Of those issuers, 22 percent have plans to introduce a contactless payment product this year, and an additional 29 percent are considering it long term.
Encouraging Debit Usage
The application of new technology such as contactless cards is only one way card issuers are trying to increase the use of debit. The study revealed that more than half of the issuers surveyed offered their cardholders the option of overdrawing their account using a debit card in 2006, thus facilitating an increased opportunity for consumers to complete their purchases.
More significantly, offering debit rewards programs is becoming a high priority among many issuers due to competition for customers and a desire to increase the number of debit card transactions and related revenue. Most large banks offer and promote debit rewards programs, which feature a variety of accrual rates and redemption methods. These debit reward program options are increasing as issuers are looking to broaden the scope of their available programs using tactics like co-branded miles, cash rewards, points and enterprise- wide programs, which reward account holders for multiple facets of their relationship with an institution.
The current landscape of debit rewards shows that 37 percent of the issuers surveyed offered debit rewards programs to some (28 percent) or all (9 percent) of their consumer cardholders in 2006. Today, these programs are primarily offered by large banks with many small banks still considering rolling out reward programs. Among rewards program issuers, 63 percent offer rewards only for signature debit transactions. However, issuers are increasingly offering incentives for PIN transactions as well (37 percent in 2006 vs. 29 percent in the 2005 survey), as well as for the broader banking relationship.
Overall, rewards program results to date are positive, but not as significant as some issuers had hoped. Enrollment in opt-in programs is relatively low (3 to 15 percent of cards); however, the issuers with established programs reported an average increase in transaction activity of 25 percent for cardholders using traditional points-based programs.
The Impact of Transaction Fees
While rewards programs were shown to increase consumer debit card usage, the transaction fees charged by some issuers can have the opposite effect. Of those issuers surveyed, 28 percent charge a fee for PIN debit transactions to at least a portion of their customer base. Based on data provided, it is estimated that per-transaction PIN debit fees affect only 5 percent of cardholders, however. While this number is small, the impact these fees have on consumer behavior is not. When a fee is levied, the average number of PIN transactions per active card decreases from 5.3 to 3.8 per month.
Debit Card Fraud
Another factor with the potential to impact debit card use is fraud.
Total payment card fraud is increasing worldwide, and credit card fraud is migrating to other payment cards. In particular, the nature of debit fraud is evolving as fraudsters employ increasingly sophisticated technology to capture card data. It is shifting from the cardholder level to the system level; from a local issue to a global one; and from signature debit to signature and PIN debit.
Based on fraud losses reported by issuers in the study, it is projected that an estimated net $662 million was lost in 2005 to debit card fraud nationwide by card issuers. This represents an overall increase of 21 percent over the previous year; a 28 percent increase in signature-based losses and 17 percent increase in PIN- based losses, including transactions conducted at ATMs.
Two levels of fraud were studied – Level 1 fraud that involved only the card number being compromised, and Level 2, in which both the card number and PIN were involved. Level 1 compromises result in fraudulent transactions at physical retail outlets and in card-not- present environments, while Level 2 compromises can also lead to fraudulent ATM transactions.
Of particular interest to merchants and their service providers is the fact that 92 percent of fraudulent debit transactions conducted at the point of sale are signature-based. However, PIN-based losses per gross dollar volume, although relatively small because of the added security provided by the PIN, doubled from 2004 to 2005.
For Level 1 compromises, fraud is most often the result of merchant server breaches (24 percent), stolen cards (23 percent) and friendly fraud (18 percent). Common points of use for the stolen information include point of sale purchases (56 percent) and card-not-present purchases (31 percent).
In Level 2 compromises, when both the card number and PIN are involved, friendly fraud is most often the point of compromise (30 percent), with merchant server breaches comprising 23 percent, Internet-based activity 12 percent, ATM skimming 11 percent and POS skimming 7 percent. In these instances, the point of use of the compromised card and PIN data was at an ATM in 62 percent of cases in 2005. The next most popular method of taking advantage of a stolen card number and PIN is at the point of sale, where 25 percent of the fraudulent events occur.
As fraud has become more technology-centric, with more instances originating on a larger scale, merchant security breaches have received significant notoriety. However, the impact of these instances must be put into perspective. While 90 percent of the issuers surveyed were notified that their cards may have been compromised in a merchant breach in the past few years, on average, only 8 percent of their card base was potentially affected. And less than 5 percent of all cards that were potentially compromised actually saw fraudulent activity, said the issuers. In spite of the small chance of fraud to any particular cardholder, the response by issuers to reports of security breaches has been significant. In 87 percent of the situations where the issuers surveyed were notified of a merchant security breach, they reissued debit cards either selectively or automatically.
In response to the rise in fraudulent activity, issuers are implementing a wide range of more advanced fraud detection tools to combat increasingly advanced fraud schemes. The use of CVV/CVC validation measures are judged by the issuers surveyed to be the most effective, followed closely by blocking of certain international transactions and the use of neural networks. Issuers also reported expanding their use of neural networks to PIN-based transactions. It should be noted that, because the fraud data in the survey were from 2005, the positive effects of the broader implementation of these technologies in 2006 is not yet reflected in the survey data.
Daily transaction limitations, new account screening and separate mailing of account holders’ PINs and cards are among additional security initiatives being taken by the overwhelming majority of issuers. Combined with consumer education regarding safe practices and measures being taken at the merchant level, it is apparent that the issue of fraud is being addressed aggressively to maintain consumer and merchant confidence in debit payments.
Debit Industry Outlook
Based on recent history and the opportunities identified for growth, issuers are optimistic about the future of debit card payments and the value they bring to all parties. Looking forward, the issuers responding to this study said they expected debit transaction volume to increase by almost 16.8 percent this year (17.7 percent for PIN transactions and 16.2 percent for signature). Issuers also are implementing various tactics – including enhancing or introducing rewards programs, using more targeted customer segmentation techniques to refine promotions, and educating consumers about the value of debit – with the intention of spurring further growth in that payment category. These tactics, combined with emerging technologies, more effective fraud detection and prevention measures, and the demonstrated preference of debit among young audiences, are likely to support continued strong growth in this payment method.
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