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Debit growth & potential for improved performance among us debit card issuers 4/29 Businesswire Highlighting consumers’ increased use of debit, US financial institutions experienced continued growth in debit card transactions in 2007, according to a new study commissioned by Pulse. The 2008 Debit Issuer Study revealed superior performance by ‘best-in-class’ issuers, suggesting significant untapped potential in debit for many financial institutions. The study, by Oliver Wyman, provides new data & comparisons to the results of the 2007 Debit Issuer Study, released in 2/07. This comprehensive study offers a revealing look at debit issuer performance in key metrics, recent debit card fraud trends & debit issuers’ outlook for the industry in 2008. Overall, the issuers surveyed experienced debit transaction growth of 14.4% in 2007, comprising a 15% increase in signature debit transactions & 14% growth for PIN debit. Although transaction growth remained strong in 2007, it was lower than the 18% 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. ‘These efforts center on rewards programs, targeted cardholder promotions & expansion into new products & new merchant categories.’ A total of 62 financial institutions participated in the study, including large banks, community banks & credit unions that collectively issue more than 74m debit cards, or 28% of the debit cards in the US The institutions represent 46,000 ATMs & are balanced across institution size, type, geography & network participation. Issuer Benchmark Performance The issuers surveyed by Oliver Wyman indicated that 86% of their debit cards are signature-capable, with 14% being ATM/PIN-only cards. This is essentially unchanged from the 2007 study. In addition, approximately 20% of survey respondents said they are planning to convert at least some portion of their ATM/PIN-only cards to dual-capability (PIN & signature) cards during 2008. Of the debit transactions conducted by the issuers’ cardholders in 2007, 65% were signature authorized & 35% 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% for respondents in early 2008, compared to 72% 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% in early 2008 versus 56% in 2006. On average, active cardholders performed 16.6 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 & $38 for signature debit, compared to $42 & $40, respectively, in the previous study. The survey revealed that 9% of PIN debit purchases included cash back. ATM cash withdrawals exceeded PIN debit cash-back withdrawals by a ratio of 9 transactions to 1, & by a ratio of 30 to 1, in terms of dollars withdrawn. Of the issuers surveyed, 25% reported charging a PIN debit transaction fee at the point of sale to at least some cardholders. This is a decline from 28% in 2006, & from 32% in 2005. Per-transaction fees averaged $0.53 but affected only 0.6% of cardholders, compared to 5% in the previous survey. While 2007 marked an easing of debit card transaction growth rates, best-in-class issuers – defined as the top 25% in each performance measurement – were as much as 50% more effective in key metrics, compared to the average for all respondents. Results for best-in-class issuers exceeded averages for all respondents by: 20% in debit card penetration; 30% in transactions per active cardholder per month; & More than 42% in signature transactions per active cardholder per month. Best-in-class issuers achieved more than 55% 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, CUs & community banks tend to lead large banks. This is likely due in part to differences in account holder profiles among the institution types.’ Fraud 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 & 1.09 basis points (0.0109%) through PIN debit transactions. Data breaches, stolen cards & phishing were the mostly commonly reported points of compromise for debit card fraud involving card information only. For incidents in which PINs were obtained, ATM tampering, data breaches & ‘friendly fraud’ (unauthorized transactions conducted by the cardholder’s 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% of survey respondents reported implementing new fraud tools within the past year. ‘Although tools such as CVV/CVC checking & neural networks have proven effective, fraud continues to be a significant challenge for financial institutions, & constant vigilance is required to combat increasingly sophisticated techniques. 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 & merchants.’ Industry Implications Respondents pointed to maintaining debit transaction growth & 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,’ in any given month 41% 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; & Increasing debit card usage in small-ticket environments, & 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 & the average for all respondents. These key distinctions can be vital for counteracting the challenges of slightly slower growth & increased fraud. By sharpening their focus on debit, issuers have the opportunity to raise their game to the level of best-in-class performers.’