New numbers and a report regarding the state of the U.S. debit market and in particular, interchange trends was published by the Federal Reserve Board of Governors. One of the requirements of Regulation ii is that that Fed keep track of the debit card market. For anyone interested in the finer details behind the U.S. debit card market, this is a “must read”.
I haven’t had the opportunity to scrutinize all the data yet, but an article in the ABA banking Journal has made some early observations:
Smaller debit card issuers—those covered by the Durbin amendment’s routing provision but not its interchange fee cap—continued to see a decline in debit interchange revenue, according to the Federal Reserve’s biennial survey of debit card issuers’ economics released today.
The average interchange fee paid to these smaller, nominally “exempt” issuers (institutions with less than $10 billion in assets) for PIN debit transactions fell from 31.8 cents just before the Durbin amendment took effect in 2011 to 24.8 cents in 2017. The American Bankers Association noted that this steady decline in revenue to smaller financial institutions reflects trickle-down market distortions caused by the law and continues to call for the Durbin amendment’s repeal.
The study also showed that following the adoption of EMV chip card technology, merchants absorbed a greater share of losses—53 percent—from fraudulent transactions at covered issuers, up from 39 percent in 2015. Meanwhile, issuers absorbed 42 percent, down from 58 percent in 2015. Card issuers are also paying a smaller share of network fees than in the past, while merchants are paying a larger share (total network fees have remained stable since 2011).
About 68.5 billion debit and prepaid card transactions amounting to $2.62 trillion were processed in the U.S. during 2017. Transactions grew 5.1 percent from 2016 to 2017 at banks not subject to the interchange price caps, compared to 5.9 percent for issuers subject to the caps.
There are a few trends taking place here that is creating a decline in the value that financial institutions, particularly exempt institutions receive in the form of debit interchange. Interchange for small institutions is largely based on an applied rate. As the average debit card transaction goes down, so does the revenue opportunity per transaction. Also, the large merchants are not paying the “rack rate” for transactions as published by the debit networks. Large merchants have negotiated rates which are of course much lower. I don’t see either one of these trends changing anytime soon.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group