Debit Card Wars

5 Jan 2014

Happy New Year everyone. Short blog today on debit card and a new battle taking shape on debit card.payment trends 2013

Debit 101

From last month’s Federal Reserve Payments Study we see that the number of debit card payments increased more than any other payment type from 2009 through 2012. Given that the average transaction value is $39 for Debit and $94 for credit, debit has 64% share by number of transactions, but only 44% by volume.

For Non US readers, the Debit network is split between PIN debit and Signature debit (see US PIN Debit Consolidation). General-purpose PIN debit card purchase transactions at the POS, have roughly one third the fraud rate (0.45 basis points) of Credit (Note this is not shown in graph, this data point is from FED based upon exclusion of ATM fraud). This PIN fraud rate is as low as checks, a rate lower than for ACH (0.72 basis points), and a rate far lower than any other category of general-purpose card payment. In other words, PIN Debit is our “best” most secure card product which consumers PREFER to use for many small transactions.

Debit at Visa

Today Debit processing accounts for around 19% of Visa revenue. Visa famously won very big here over MA in the US starting in 2002, and as recently as 2009 Visa’s processed well over 50% of PIN and Signature Debit (Visa does not break out the categories). Post Durbin, Visa’s debit processing volume fell over 50% but has now recovered half of that loss as they acquire non Interlink PIN transactions and have established large merchant incentives (see Article, and Visa Policies). However I see this trend reversing again, the top 5 retail banks handles over 60% of debit transactions, and sources tell me that all of them are working with processors directly to route all debit transactions as PIN transactions (PINless PIN Debit) to avoid network fee AND DATA LEAKAGE. This is a MAJOR point.payment trends bar 2013

The Volume share picture on the right is from 2009 (not accurate). Durbin has shaken this industry up substantially, with Mastercard near parity to Visa in debit processing. Remember Durbin has set PIN and Signature rates the same.  Today, the most significant difference between PIN and Signature is routing, with merchant able to route PIN transactions directly to a Bank Issuer (avoiding network fee, a complex area still reworked Judge Leon’s ruling ). Visa’s advantage here is that DPS hosts many banks debit authorization services (they are the IT system provider for the Issuer’s Debit Product).

Push to Credit and Resistance on Real Time

With debit pricing dropping from 120bps to $0.21 (Durbin) and now likely to move toward $0.07 (Judge Leon), Banks have little incentive to push Debit cards. Particularly when the bottom 40% of mass consumer retail accounts are not profitable. Banks had a plan to institute fees on Debit, but Bank of America’s Moynihan jumped the gun in Oct 2011 and bore the consequences. Thus there is risk in moving aggressively toward Fees… so what are banks doing to encourage credit card usage?PIN Volume2

  • Throw Dirt on Debit (See ABA’s Target PR and the NRF Response)
  • Promote consumer protections on Credit
  • Enhance consumer rewards
  • Make ATM card the default card with your account, with a longer process to request Debit Card
  • Enhance Fraud prevention on Credit (EMV)
  • Focus all mobile initiatives on Credit only
  • Keep ACH slow moving (see WSJ Article)
  • Institute new “token” network that provides another form of Bank control
  • …etc

Retailers need to start being aggressive in supporting Debit.

Honor all Barcodes?

As I outlined previously, MCX is pursuing a Starbucks like Barcode approach. Most of you know that the MCX merchants have universally refused to accept contactless at Payment Terminal (with a few legacy exceptions in CVS/Walgreens). The reason? Bank led initiatives in contactless are 100% credit cards (200+ bps). Why would any retailer want to encourage their customers to use this product when they just won the Debit war.

The new news this month is that Visa (and perhaps MA) are working on a Barcode scheme as well. Why? The logic goes something like this,

  • Get consumer bar code version of card in mobile wallet (given NFC Failure and Starbucks success)
  • If MCX merchants support barcode payment, work to make Visa option, for example by allowing consumers to provision a Visa Debit bar code without issuer consent (or for DPS banks)
  • Create confusion at the POS, why won’t the merchant accept the Visa Barcode
  • Try to leverage the honor all cards rule
  • Steal market “ownership” of barcodes from MCX

I can’t believe I’m writing this… going from NFC, to Tokens, to HCE to Barcodes.. seems to be walking backwards technically.. but Visa can’t afford to miss a payments party. It is also consistent with what I wrote 3 yrs ago on their “Portfolio Manager” strategy.

Investor notes (January)

I see Visa’s debit revenue falling off much faster than anticipated.

I’m very negative on Paypal’s volume. Amazon, Apple, Google, Visa, and the MNOs will all be entering both the eCommerce and mCommerce space in a very aggressive way. As payments move to the OS, Paypal doesn’t have one.

Stay away from specialized hardware players (Verifone, Ingenico, Gemalto, NCR…) as dedicated hardware moves to commodity hardware and software.

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Accept all Barcodes?