The State of Swipe

A Federal Reserve survey gauges current issues in the debit card marketplace

By Viveca Y. Ware

To assist in the implementation of the debit card interchange fee standards, Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Federal Reserve Board to collect information from debit card issuers and payment card networks every two years. From this point forward, we will call a spade a spade and refer to the “interchange fee standards” as the “interchange fee cap.”

In early 2012, the Federal Reserve Board surveyed payment card networks and issuers subject to the interchange fee cap. All respondents were asked to report data for calendar year 2011. The board released its survey report in March 2013 and announced that the interchange fee cap and the fraud-prevention adjustment under Regulation II (Debit Card Interchange Fees and Routing) will not change.

The status quo continues the capped debit interchange fee at 21 cents per transaction plus 5 basis points times the value of the transaction for covered issuers with consolidated assets of $10 billion or more. Covered issuers are also eligible to receive up to an additional one cent if they meet certain fraud-prevention standards.

The Federal Reserve Board’s March 2013 survey report, “2011 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions,” provides summary information on debit card volume and value, interchange fee revenue, certain debit card issuer costs and fraud losses. The respondents included 15 networks processing debit card transactions and 131 covered issuers.

Survey says

Comparing the 2011 data to the board’s first survey in 2010—which collected data for the calendar year 2009—yields some interesting factoids for exempt and covered debit card issuers. Although the majority of the data is focused on covered issuers, general trends for exempt issuers can be derived as well.

Here is a list of important takeaways from the survey’s results:

– Payment card networks processed 46.7 billion debit card purchase transactions in 2011, a 24 percent increase from the 37.6 billion purchase transactions processed in 2009.

– The total value of purchase transactions increased 27 percent, from $1.43 trillion to $1.82 trillion, over the same time period.

– Signature debit card transactions, excluding prepaid card transactions, accounted for 63 percent of the volume and 61 percent of the value in 2011.

– Signature debit card transactions, excluding prepaid card transactions, increased 24 percent by volume and 26 percent by value, and PIN debit transactions increased 17 percent by volume and 22 percent by value from 2009 to 2011.

– In 2011, PIN debit transactions averaged $41.80 compared with $37.42 for signature debit transactions.

– Prepaid debit transactions are rapidly growing and represented 5.2 percent of all debit card transactions and 4.6 percent of total transaction value in 2011, with the majority of transactions (65 percent) processed over signature networks.

– Exempt issuers (most community banks and other issuers with consolidated assets of less than $10 billion) processed approximately one-third of the total debit card transactions from Oct. 1 to Dec. 31, 2011.

– Covered issuers with the highest debt-card transaction volume have lower per-transaction costs than covered issuers with smaller transaction volumes (surprise, surprise!).

– The average value of signature transactions for exempt issuers ($35.58) was $2.45 less than for covered issuers ($38.03) for the fourth quarter of 2011. The average value of PIN transactions was roughly the same for exempt and covered issuers.

– Debit card issuers received $20.4 billion in interchange fee revenue in 2011 compared with $16.2 billion in 2009.

– Exempt issuer interchange declined 4 percent, from 45 cents to 43 cents per transaction, after the cap went into effect on Oct. 1, 2011. (The decline is underway.)

– Exempt issuers received 19 cents more per transaction than covered issuers after the cap’s Oct. 1, 2011, effective date.

– The average interchange fee for covered issuers decreased from 59 cents to 24 cents for signature debit transactions, while PIN debit transactions decreased from 34 cents to 24 cents.

– In 2011, 60 percent of fraud losses were borne by issuers, 38 percent by merchants and 2 percent by cardholders for all types of debit card transactions.

– Fraud incidence, as a percentage of purchase truncations declined for both signature and PIN transaction from 2009 to 2011, with signature declining from 0.06 percent to 0.043 percent and PIN declining from 0.01 percent to 0.006 percent.

– Covered issuers bore 96 percent of PIN debit-card fraud losses, with merchants and cardholders absorbing the remaining 2 percent. With regard to signature debit card fraud losses, covered issuers bore 54 percent and merchants bore 45 percent.

Looking Ahead

The next survey will be conducted in 2014 based on 2013 data.

Of course, merchants have been outraged that the Fed is not planning to lower the interchange fee cap or fraud-prevention adjustment. Additionally, the central bank’s implementation of Regulation II is in flux given the merchants’ legal challenge.

Meanwhile, on other payment news, the card industry was quite surprised by the February 2013 announcement that Visa and JPMorgan Chase had formed a strategic partnership that will allow JPMorgan to partner with certain retailers to offer special deals to JPMorgan-issued Visa debit and credit cardholders. Visa rules were quietly modified to permit such an arrangement, and this rule change, in my humble opinion, may place community banks and their customers at a disadvantage at the point of sale. Expect more on this development in the coming months.

Stay tuned for more updates on the evolving and revolving debit card marketplace.  

Viveca Y. Ware is ICBA senior vice president for regulatory policy.