Three years ago, MasterCard Worldwide’s success in stealing a major bank's debit business could have been a game changer.
But in the wake of new regulations dampening the debit industry's profitability, MasterCard's latest victory seems more like a consolation prize.
The second-largest payments network picked up some bragging rights on Oct. 27, when Huntington Bancshares Inc. announced it will be converting all of its debit cards to MasterCard from Visa Inc.
The deal was the latest part of MasterCard's campaign to overcome its longtime underdog status in the U.S. debit market, where it has struggled to gain much more than a 20% share, and to recover from losing some of its biggest bank customers to Visa during the financial crisis.
But it also comes at a time when new regulations and bank fees are cooling the potential of the overall debit market, where network brands earn revenue from switch fees each time consumers spend using their cards.
"At a minimum, debit growth is going to come down appreciably, and quite possibly it will go negative," says Eric Grover, a payments consultant with Intrepid Ventures.
New federal rules that went into effect this month capped the interchange fees issuers collect from merchant acquirers when customers buy something with their debit cards. Issuers are expected to lose more than $5 billion in annual debit interchange revenue next year as a result of the so-called Durbin amendment to last year's Dodd-Frank law.
Now many issuers are taking steps to discourage their customers from using debit cards.
Bank of America Corp. recently said it will start charging customers $5 a month for using their debit cards (
"I think consumers are going to become much more discriminating as to how and when they use" debit cards, says Madeline Aufseeser, a senior analyst with Aite Group.
Some consumers are going to migrate back to credit, says Aufseeser. "On the other end of the spectrum, I think the prepaid market is going to expand immensely," she says.
The new fees at BofA and other large banks could start to reverse debit's recent popularity, which increased during the recession as many consumers cut back on buying all but household necessities. At the same time, MasterCard lost its biggest debit card customer as JPMorgan Chase & Co. bought Washington Mutual Inc.'s operations and converted the debit card portfolio to Visa.
MasterCard has made some progress in winning over more of the debit card market since then. Last year, it picked up the debit card processing contracts with SunTrust Banks Inc. and Banco Santander SA's Sovereign Bank.
And for the time being, debit is still very popular with consumers. Visa recorded 28.4 billion debit transactions in 2010, and MasterCard recorded 8.7 billion, according to data from PaymentsSource.com.
That means that at least until the full impact of the recent regulations is known, the pot of money to be made on debit transactions is still vast. And analysts predict that some consumers, especially younger ones, are likely to continue relying on debit cards instead of credit cards.
"We'll see maybe a little diminution, but we're not going to see debit go away," says Patricia Sahm, a managing director with Auriemma Consulting Group.
Younger consumers are more inclined to switch to banks that are not charging debit fees instead of change over to another form of payment, she says.
"They can move more readily than baby boomers because they don't have all the entanglements" of a complex banking relationship, including mortgage or auto loan debt with a particular bank, Sahm says.
And as with some of its smaller competitors, Huntington is counting on the new fees at other banks to actually help it win some new debit card and checking business. The Columbus, Ohio-based bank says it will keep its new debit MasterCard "fee free" in an attempt to woo disenchanted customers from competitors.
The bank, which is the 34th largest holding company by demand deposits, issues some 1.5 million consumer and business debit cards. Mary Navarro, Huntington senior executive vice president and director of retail and business banking, says the services MasterCard can provide with its new "platinum" debit card will help Huntington differentiate its checking account from those offered by other banks.
She would not discuss the deal's specifics, but analysts say price was likely a deciding factor for Huntington's decision to switch networks.
Huntington is "probably getting a better deal from MasterCard than they got from Visa. MasterCard is hopping right on the opportunity train, and I think it's a smart move to try to win business over at this particular juncture," Aufseeser says.
MasterCard spokesperson Seth Eisen says the company will "continue to look for opportunities to incentivize new deals as we can." Visa did not respond to a request for comment.
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