Debit transactions have become a more important part of banks' payment mix, and that is not likely to change even after the economy recovers.
Fiserv Inc.'s debit transactions have climbed sharply this year as consumers shift away from credit cards, and the payments company says its bank customers are issuing more debit cards.
In addition, younger consumers have grown up using debit and other forms of electronic payments, and will be more important debit customers for banks as they start to account for a larger share of the country's purchases. As a result, the changes occurring now in the payments market are going to have long-term impact.
"We don't think the debit trend is a temporary trend," Jeffery W. Yabuki, Fiserv's president and chief executive, said during a call with analysts Tuesday to discuss the company's third-quarter results.
He said that Generation Y, adults who are in their early 30s or younger, account today for 14% of all U.S. transactions by volume, but that figure will grow to about 40% over the next five years. This group "significantly favors debit," he said, and the banks that manage to attract them as customers will earn significant transaction fees from their purchases.
"Those who have planted the most debit flags will get the benefit of that macro tailwind," he said.
Patricia Hewitt, the director of debit advisory services at Mercator Advisory Group Inc., a payments research firm in Waltham, Mass., said Gen Y's purchasing habits could make them more lucrative to banks than their parents are.
"The younger generation in general prefers electronic payments," Hewitt said. Unlike the baby-boom generation, which came of age writing checks at the checkout counter and have had to change their payment habits, for Generation Y, "debit is something that has been present for them since the start of their financial lives."
The Brookfield, Wis., company signed 58 new debit customers in the third quarter, and won 164 new clients in the first nine months of the year.
Yabuki said debit transaction volume increased sequentially, both from the second quarter to the third, and in each month during the third quarter. Total transaction growth rates in the third quarter were the highest this year, he said, though he would not provide detailed volume statistics.
Fiserv serves mainly small and midsize financial companies, which Yabuki said are "earlier on the debit maturity curve than some of the larger institutions."
That means these banks are still developing rewards programs and other tools to encourage customers to use debit cards, and increase the banks' transaction revenues.
John Kraft, an analyst at D.A. Davidson & Co., said debit and other types of electronic payments are becoming a bigger part of Fiserv's business.
Fiserv's payments operations accounted for $474 million of adjusted revenue, on par with the $475 million that came from its financial institution segment, which includes core processing products and services.
"Payments is going to be the growth vehicle for these guys," Kraft said. "Debit is going to be particularly noteworthy."
Fiserv's net income grew 47% in the third quarter, to $115 million, though revenue fell 5%, to $992 million, compared with a year earlier.
The company is also taking steps to beef up its online bill-payment capabilities. On Wednesday it announced a suite of "feature packs" for its hosted CheckFree RXP service, enabling banks to offer their customers bill-pay widgets, tools for managing fee-based payments, and enhanced electronic bill activation and storage services.
Two weeks ago the company announced new e-mail and mobile capabilities for its Biller Direct HV service.
And while Yabuki noted that online bill-pay adoption is low — estimating that only two of the average of 14 monthly household bills are paid electronically — he said payments made through banks, rather than through biller sites, will eventually become the dominant model.
"There's plenty of room for everyone to survive," he said. "We believe the consolidator model will win over time, and obviously that's where we're investing the majority of our resources."