Financial institutions generally view fraud and regulatory pressure as their key challenges this year, according to the Pulse electronic funds transfer network’s 2010 Debit Issuer study released this week.
Boston-based management-consulting firm Oliver Wyman Group conducted the research for Pulse in February and March, gathering data from 64 financial institutions, including large banks, credit unions and community banks. Collectively, the participants issue about 78.7 million debit cards.
“Fraud always is a huge issue,” Tony Hayes, an Oliver Wyman partner, tells PaymentsSource.
And 2009 was no exception. “In aggregate, fraud losses to financial intuitions were 7.5 basis points,” Hayes says. This equates to 7.5 cents lost for every $100 spent, meaning “if a bank had $100 million of total debit card spend (most legitimate, some fraudulent), it would lose $75,000 in fraud,” Hayes explains.
In 2008, signature-debit fraud losses totaled 5.2 cents per $100 spent, or 5.2 basis points, Pulse reports,.
Loss rates for PIN-debit purchases increased last year to 1 basis point from 0.8 basis points in 2008. “Using a PIN at the point of sale really safeguards the account,” Hayes says.
The net fraud loss on a typical $35 signature-debit purchase was 2.6 cents, based on 49.6 cents earned in interchange. For a typical $41 PIN-debit purchase, interchange revenue was about 26.5 cents, and the net fraud loss was 0.3 cents, according to Hayes.
Citing other factors of concern, 77% of survey participants felt that regulatory pressure is a big challenge this year because changes to the Electronic Funds Transfer Act will negatively impact debit card profitability. This summer, consumers must give consent before issuers can enroll them in overdraft-protection programs. Some 79% of financial intuitions allow cardholders to overdraw their accounts using debit cards. Of those, 63% allow cardholders to overdraw their accounts at ATMs and at the point of sale, the survey data suggest.
The changes in the EFT Act could hurt financial institutions because overdraft-protection programs traditionally have increased annual revenue per active card by $31, assuming the financial institution imposed a $27 overdraft fee, active cardholders initiated an average of 17.3 transactions per card per month and 39% of transactions authorized overdrew their accounts, Pulse explains in the report.
Financial institutions also face the issue of fewer approved transactions, lower interchange income and less profitable debit card programs. And only 45% of survey participants have a plan for decreased fee income, according to Pulse.
To counteract the impact of the changes in the EFT Act, issuers may raise monthly maintenance fees, increase minimum balances, add conditions or introduce prepaid cards for lower-end consumers, the report suggests.
On a positive note, transaction growth with debit cards increased last year, including on small-business cards, “a typically underpenetrated market,” Judith McGuire, Pulse senior vice president for product management, tells PaymentsSource. Currently, 70% of financial institutions issue business cards, which represents 6% of total cards, Houston-based Pulse notes in the study.
Overall, financial institutions still see opportunities for growth and have higher transaction-growth expectations this year, Pulse notes. Financial institutions predict PIN-debit transaction growth to increase by 9% and signature-debit transaction growth to increase by 8%. Both these estimates are higher then the estimated 7% growth for both sectors in 2008.
For 2010, “Pulse plans to work with issuers to help financial institutions find opportunities, which includes researching the economics behind rewards program to see if it is what the financial institution needs,” McGuire says.
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