Tuesday, April 29, 2008

Pulse EFT 2008 Debit Issuer Study: Continued Debit Growth and Potential

Initial Findings of Comprehensive Survey...


  • Survey Sample Represents 28 Percent of Debit Cards Issued in U.S.
  • Issuers Experienced Transaction Growth of More Than 14 Percent in 2007
  • Best-in-Class Issuers Outperform Market, Demonstrate Tremendous Potential in Debit
  • Fraud Remains Top Concern

    HOUSTON--(BUSINESS WIRE)-- Highlighting consumers increased use of debit, U.S. financial institutions experienced continued growth in debit card transactions in 2007, according to a new study commissioned by PULSE. The 2008 Debit Issuer Study also revealed superior performance by best-in-class issuers, suggesting significant untapped potential in debit for many financial institutions.

    The study, conducted by Oliver Wyman, provides new data and comparisons to the results of the 2007 Debit Issuer Study, released in February 2007. This comprehensive study offers a revealing look at debit issuer performance in key metrics, recent debit card fraud trends and debit issuers outlook for the industry in 2008.

    Overall, the issuers surveyed experienced debit transaction growth of 14.4 percent in 2007, comprising a 15 percent increase in signature debit transactions and 14 percent growth for PIN debit. Although transaction growth remained strong in 2007, it was lower than the 18 percent growth rate experienced in 2006 by participants in the previous PULSE study.

    Despite having a strong year in 2007, issuers are implementing a number of programs aimed at improving the performance of their debit card programs in 2008, said Cindy Ballard, PULSE executive vice president. These efforts center on rewards programs, targeted cardholder promotions and expansion into new products and new merchant categories.

    A total of 62 financial institutions participated in the study, including large banks, community banks and credit unions that collectively issue more than 74 million debit cards, or 28 percent of the debit cards in the U.S. The institutions also represent 46,000 ATMs and are balanced across institution size, type, geography and network participation.

    Issuer Benchmark Performance

    The issuers surveyed by Oliver Wyman indicated that 86 percent of their debit cards are signature-capable, with 14 percent being ATM/PIN-only cards. This is essentially unchanged from the 2007 study. In addition, approximately 20 percent of survey respondents said they are planning to convert at least some portion of their ATM/PIN-only cards to dual-capability (PIN and signature) cards during 2008.

    Of the debit transactions conducted by the issuers cardholders in 2007, 65 percent were signature authorized and 35 percent were PIN authorized. This ratio has fluctuated within a fairly narrow band since the original study was conducted in 2005.

    The study revealed an average debit card penetration rate of 73 percent for respondents in early 2008, compared to 72 percent in 2006, when the previous study was conducted. Respondents card activation (defined as the card being used for one signature debit transaction within the last 30 days) averaged 59 percent in early 2008 versus 56 percent in 2006.

    On average, active cardholders performed 16.6 point-of-sale (POS) transactions per month in 2007, an increase over the 16.1 transactions per active card seen in 2006. Respondents reported an average ticket size of $43 for PIN debit and $38 for signature debit, compared to $42 and $40, respectively, in the previous study.

    The survey also revealed that 9 percent of PIN debit purchases included cash back. ATM cash withdrawals exceeded PIN debit cash-back withdrawals by a ratio of 9 transactions to 1, and by a ratio of 30 to 1, in terms of dollars withdrawn.

    Of the issuers surveyed, 25 percent reported charging a PIN debit transaction fee at the point of sale to at least some cardholders. This is a decline from 28 percent in 2006, and from 32 percent in 2005. Per-transaction fees averaged $0.53 but affected only 0.6 percent of cardholders, compared to 5 percent in the previous survey.

    Best-in-Class Issuers

    While 2007 marked an easing of debit card transaction growth rates, best-in-class issuers defined as the top 25 percent in each performance measurement were as much as 50 percent more effective in key metrics, compared to the average for all respondents.

    Results for best-in-class issuers exceeded averages for all respondents by:

  • More than 20 percent in debit card penetration;
  • More than 30 percent in transactions per active cardholder per month; and
  • More than 42 percent in signature transactions per active cardholder per month.

    Best-in-class issuers also achieved more than 55 percent lower fraud losses per gross dollar value.

    Best-in-class issuers are not always large financial institutions, noted Tony Hayes, an Oliver Wyman partner, who served as project lead on the study. In the area of fraud, for example, credit unions and community banks tend to lead large banks, he said. This is likely due in part to differences in account holder profiles among the institution types.


    Debit card issuers fraud loss rates were higher for 2007 than for 2005, the period studied in the previous PULSE survey. Issuers surveyed lost 5.40 basis points (0.054%) per dollar spent through signature debit transactions in 2007 and 1.09 basis points (0.0109%) through PIN debit transactions.

    Data breaches, stolen cards and phishing were the mostly commonly reported points of compromise for debit card fraud involving card information only. For incidents in which PINs were also obtained, ATM tampering, data breaches and friendly fraud (unauthorized transactions conducted by the cardholders family or friends) were the most common points of compromise.

    All of the 62 financial institutions surveyed had debit cards potentially compromised in data breaches in 2007. At the same time, more than 80 percent of survey respondents reported implementing new fraud tools within the past year.

    Although tools such as CVV/CVC checking and neural networks have proven effective, fraud continues to be a significant challenge for financial institutions, and constant vigilance is required to combat increasingly sophisticated techniques, said Hayes. Most of the issuers surveyed believe the next step in the continued evolution of fraud management is to improve collaboration among key constituencies in the industry: issuers, networks, processors and merchants.

    Industry Implications

    Respondents pointed to maintaining debit transaction growth and managing fraud losses as significant challenges for 2008. Despite these concerns, Hayes believes there is still plenty of upside potential for debit card issuers. Based on the most commonly used definition of active cards, for example, in any given month 41 percent of cards are not being used by cardholders to make debit purchases.

    The survey indicated that issuers are planning to take a variety of steps to improve the results of their debit card programs. These include:

  • Re-tooling debit card rewards programs;
  • Using customer segmentation to target promotions to selected cardholder groups;
  • Focusing on business debit; and
  • Increasing debit card usage in small-ticket environments, as well as for bill payments.

    The study results demonstrate significant reason for continued optimism among debit issuers.

    The 2008 Debit Issuer Study revealed compelling differences between best-in-class issuers and the average for all respondents, said Ballard. These key distinctions can be vital for counteracting the challenges of slightly slower growth and increased fraud. By sharpening their focus on debit, issuers have the opportunity to raise their game to the level of best-in-class performers.

    About PULSE

    PULSE is one of the nations leading ATM/debit networks, currently serving more than 4,500 banks, credit unions and savings institutions across the country. PULSE is owned by Discover Financial Services (NYSE: DFS). The network links cardholders with more than 265,000 ATMs, as well as POS terminals at retail locations nationwide. The company is also a valued resource for industry research related to electronic payments and is committed to providing its participants with education on evolving products, services and trends in the payments industry. For more information, visit www.pulse-eft.com.

Online with their Target

HomeATM's "target" market is the Internet Debit space, specifically the PIN (online) Debit Internet Space.

It is good they are "online" with their target because from everything that I've both been told and (gathered independently) since I was a youth was that... When aiming to hit your target it's "not good to be "off-line".

Thus, it is pragmatic to conclude that HomeATM is, in fact, "on target" with both their desire and technology that will finally bring "online debit" well...online. I know it sounds kind of stupid,... the concept of actually making "Online Debit available "online"...imagine that!

Furthering my risk of sounding "moronic", I guess the "Less-On" here is to be, well...uh..."more-on". I guess it all works somehow as "PIN-Heads" are also sometimes known as "Morons." Speaking of which, here's some "Moron" Online Internet PIN Debit...

According to a Celent Analysis, the Relative Value Proposition of Online Alternative Payments (see illustration on the right) PIN-Debit for the Web looks like a pretty good target market to be online with.

Even moron the background of PIN vs. Signature Debit...

Q: The terms "PIN-based" and "Signature-based" often come up in discussions about debit card acceptance. What do these expressions mean? And how do the payment options differ?

A: The terms refer to the two distinct ways in which debit payments are processed: Online and Offline. Online debit transactions call for customers to endorse payments by submitting their Personal Identification Numbers (PINs) at the point of sale, while Offline transactions require shoppers to sign sales receipts

Back in the 1980s, we had a simple, bifurcated world: there were credit cards (PIN-less and tied to a credit line); and there were ATM cards (always requiring a PIN and tied to a bank account).

Muddying the waters was the advent of the so-called 'check card,' which can be thought of as a 'dual mode' card - it can be used without a PIN as sort of a 'secured' credit card ('secured' in the sense that the cardholder is dipping into real money in a bank account) or with a PIN as a debit card.

Now, we get into some rather misleading definitions that this muddying has caused...
  • When you use that check card with a PIN, it's called Online Debit. For those of you familiar with ISO8583, that PIN-ed request is going to result in you (as the acquirer) formatting an 0200 (the typical MTI used for a Purchase/Sale) request to the Debit/EBT gateway.

  • The card issuer (or its authorizer) authorizes that request and treats it as the 'letter of record' to debit the account in its nightly posting cycle.

  • The Debit/EBT gateway may or may not require the inclusion of that Debit transaction in a nightly extract/settlement file (prepped and sent by the acquirer). As a case in point: the FDR North implementation requires that you put Debit/EBT transactions into a combined settlement file; the FDR Nashville (formerly 'Envoy' before parent Concord/EFS was scooped up by FDR) implementation has no associated extract requirement for Debit/EBT. [Same company...go figure.] Even for FDR North, those Debit/EBT transactions in the settlement file aren't there for issuer posting purposes; instead, they provide the basis for gateway-to-acquirer settlement, and they also feed into a 'suspense' process.

  • The Debit/EBT gateway may or may not require the inclusion of that Debit transaction in a nightly extract/settlement file (prepped and sent by the acquirer).

  • When you use the same card without a PIN, it's called Signature Debit, i.e., because you sign for the transaction like a credit card - of course, new regulations muddy the waters further: at some merchant categories, a signature is no longer required for purchases of less than $25, a regular experience at fast food outlets like McDonald's.

    Now, the ultimate in misleading definitions: Signature Debit is often called Offline Debit, this despite the fact that 99 times out of 100 (you're not obligated to authorize these, but you open yourself up to chargebacks), the acquirer sends an online transaction request to get an approval decision (for ISO8583-savvy folks, you send an 0100 - the auth MTI - in these situations). Where the 'offline' designation comes from is that this online auth is not the letter of record. In these situations, you (as the acquirer) are obligated - assuming the transaction isn't subsequently reversed - to put these 'offline debit' transactions into the settlement/extract file. And it is these items that the Issuer uses to debit the related bank account. In other words, the 'offline' appellation here refers to the manner in which the bank account ultimately gets debited, not whether you sent an online request at the time of purchase.

  • Okay, to further complicate matters: this Offline Debit transaction is often referred to as a Credit . What? Well, you AUTH it via a 0100, like credit. And, when you stick the related entry into the nightly extract file, you format it as a Credit record. For example, in the FDR North extract file, these transactions get formatted as the Credit 'D' record, not the Debit/EBT 'Q' record. Indeed, from the perspective of a host-based payment system, you can't tell the difference between a purchase conducted with a 'true' credit card and one conducted with check card in PIN-less mode.

    Are we clear ? ... or is this something only a PIN-Head would understand?

Strong Growth in Debit Card Use for Bill Payment

Study finds many debit card users keeping higher checking account balances, and displaying stronger loyalty than they show to credit cards.

SALISBURY, Md.--(BUSINESS WIRE)--Phoenix Payments, a Phoenix Marketing International practice, today announced the results of its 2007 Consumer Payments Preferences and Usage Study: Debit Card Opportunities and Challenges. The study findings include a detailed report on debit card issues, covering consumer preferences, attitudes, and usage of debit cards as well as debits relationship to other payment methods.

Roughly three-fourths of U.S. consumers have one card association-branded debit card that is tied to their primary bank account. The debit card is therefore at top of wallet for these consumers, making them unlikely to switch debit cards for a better offer as they more readily do with credit cards. Debit activity gives the primary bank opportunities to increase loyalty and wallet share.

To some extent, debit card usage has replaced check writing, states Leon Majors, President of Phoenix Payments. But debit is also replacing cash and credit cards. Increased debit card transactional activity is requiring cardholders to maintain larger bank account balances to draw upon for their payments.The preference for debit cards over credit cards to pay bills is strongest among middle-aged and lower-income consumers. Older consumers and those with incomes above $100,000 are evenly divided in their preferences for the two card types.

As the customers debit card use increases, transactional activity with the primary bank increases as well, continues Majors. Debit card usage at point-of-sale will continue to grow. PIN debit has particularly strong growth potential at walkup centers and for recurring bill payments.

Phoenixs annual Consumer Payments Preferences Study was conducted online in late 2007, surveying slightly more than 2000 consumers with a national representation of the online U.S. population. Phoenix Payments will present its detailed findings at the NACHA Conference in Las Vegas May 18-21. For an executive summary of the research, please visit http://www.phoenixmi.com/pdf/PhoenixConsumerStudy-ExecSummary.pdf.

About Phoenix Payments Practice

Phoenix Payments Practice is one of the most comprehensive financial consulting and research firms in the US; having the only integrated payments program that tracks the entire 200 billion plus financial transaction market through large-scale quantitative research, specializing in issues that are of strategic importance to retail and corporate financial services and technology vendors.

About Phoenix Marketing International (www.phoenixmi.com)

Founded in 1999, Phoenix Marketing International is one of the fastest growing marketing services firms in the United States and partner to many of the largest companies in the financial services, consumer package goods, automotive, healthcare, and travel and leisure industries worldwide. With national offices, Phoenix offers advanced advertising, brand measurement, and direct marketing expertise.

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