Debit, it appears, still has some staying power, though market conditions are causing it to spasm.
Despite a “slight deceleration” caused by new interchange-pricing rules, debit card transaction volume will grow by about 8.6% to 10% annually through 2016, according to a new forecast from First Annapolis Consulting Inc.
New Federal Reserve Board rules that went into effect Oct. 1 essentially halved debit interchange to 21 cents plus possibly a few more pennies to cover fraud and some other issuer costs from a previous average of 44 cents.
The new rates likely will put a damper on issuer profits, but the Linthicum, Md.-based firm nevertheless expects debit-volume growth in the U.S. “to remain strong” for at least the next five years, reaching about 76 billion transactions in 2016, up from an estimated 47 billion this year.
Factors driving debit’s growth include “the long-term secular shift of consumer-payment volumes from paper forms to cards and the continued adoption of debit by younger consumers,” First Annapolis said in a December report.
Absent the Fed’s new rule, First Annapolis would have expected to see annual debit transaction-volume growth of about 12% annually, the firm said.
But the rule likely will depress growth for two reasons, First Annapolis contends.
First, a portion of would-be debit spending will shift to credit cards, as issuers work to make credit products more attractive with rewards and other enticements, the firm says.
“We do not anticipate issuers extending these offers deeply into their debit-customer portfolios,” but the practice may constrain growth by up to 1.3 percentage points over the next five years, the firm said.
Second, First Annapolis expects repricing of debit services to drive “a subset of underbanked households out of traditional banking products and into other channels,” resulting in another 1.7 percentage-point reduction in potential transaction-volume growth.
Taken altogether, these factors may slow debit-transaction growth by as much as 3 percentage points over the next five years, but “this hiccup will not displace debit as a core offering or a preferred payment method,” the firm said.
