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Debit Issuers Respond To Post-Regulation II “New Normal”

Financial institutions participating in the 2013 Debit Issuer Study, commissioned by PULSE, experienced continued growth in their debit businesses despite downward pressure on interchange revenue as a result of Regulation II. Additionally, the study details financial institutions’ opinions and plans with respect to prepaid, EMV and mobile payments.

“The post-Regulation II era represents an important time for the debit industry, and the latest Debit Issuer Study provides a comprehensive look at what changes issuers are making in response to this environment,” said Steve Sievert, executive vice president of marketing and communications for PULSE. “Even in the face of significant regulatory challenges, issuers managed to grow their debit volumes in 2012 and expect further growth this year.”

Post-Reg II “new normal” for debit continues to take shape

Reg II’s cap on interchange rates has reduced debit interchange revenue for issuers with at least $10 billion in assets (“regulated issuers”). Average interchange rates for regulated issuers have declined by 59 percent for signature debit transactions (from $0.52 to $0.23, on average) and by 32 percent for PIN debit transactions (from $0.32 to $0.23, on average) compared with pre-Reg II levels.

The study also found downward pressure on interchange rates for issuers with less than $10 billion in assets (“exempt issuers”). While not subject to the regulatory interchange cap, exempt issuers cited competitive dynamics as the cause of a decrease of $0.02 in their average interchange rates for both signature and PIN debit transactions. One in three exempt issuers anticipates further declines in debit interchange.

In response to this reduction in interchange revenue, both regulated and exempt issuers are making fundamental changes to their debit businesses. The most common actions are:
  • Reducing debit operating costs to better align costs with debit’s new revenue proposition;
  • Reducing fraud to support the cost-containment goal and to qualify for the fraud prevention payment outlined in Reg II;
  • Adjusting their overall demand deposit account (DDA) product structures to either grow the financial institution’s share of wallet with a particular type of account holder or direct account holders to accounts that generate more revenue or have lower service costs; and
  • Restructuring or eliminating traditional issuer-funded debit rewards programs (40 percent of regulated issuers terminated or restructured their programs in 2012).

This changing environment defines the “new normal” for the industry. Despite these changes, issuers experienced continued growth in their debit businesses in 2012. Overall, there was a 14 percent increase in PIN transactions and a 6 percent jump in signature transactions. When asked about their outlook for 2013, issuers were more cautious. Survey respondents project smaller growth levels this year, with PIN volume forecast to increase by 8 percent and signature transactions by 4 percent.

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