Durbin-Inspired Survey Gives a Rare Look into Debit Cards

No matter how you feel about the Federal Reserve Board’s proposed 7-to-12-cent cap on debit card interchange and plans for breaking up exclusive debit-network affiliations, the regulatory process has produced some previously unavailable measurements of the booming debit industry. Ahead of writing the proposed rules that it unveiled last week, the Fed surveyed debit and prepaid card issuers, payment card networks, and merchant acquirers to obtain data about transaction volumes, interchange revenues, and other vital industry statistics. Congress ordered the Fed to regulate debit cards through the Durbin Amendment in the Dodd-Frank financial-reform law enacted in July.

The Fed sent surveys to 131 financial institutions with assets greater than $10 billion, the cohort that will be subject to interchange regulations under Dodd-Frank. Eighty-nine issuers responded and another 13 said they didn’t have debit programs. The responding issuers accounted for 60% of all debit and prepaid transactions in 2009, the survey period. All 14 networks the Fed queried responded, as did the nine largest merchant acquirers, a group that processes about 95% of debit and prepaid card transactions. The Fed published the results within its 177-page document of draft regulations.

The networks reported handling 37.7 billion debit and prepaid card transactions in 2009 worth more than $1.45 trillion. The average ticket was $38.58. The acquirers said 6.7 million U.S. merchant locations accept signature debit cards while 1.5 million were able to accept PIN debit. The responding issuers collectively had 174 million debit cards and 46 million prepaid cards outstanding in 2009.

Other key findings:

Some 87% of debit cards and 25% of prepaid cards accessed both signature and PIN-debit networks. Only 4% of regular debit cards but 74% of prepaid cards were signature only. Just 9% of debit cards and 1% of prepaid cards were PIN-only.

Regarding the heart of the matter, interchange, the networks reported that debit and prepaid interchange fees totaled $16.2 billion in 2009, with $12.5 billion for signature debit, $3.2 billion for PIN-debit, and $500 million for prepaid cards. The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14% of the sale. The average signature rate was 56 cents, or 1.53%. The average PIN-debit fee was 23 cents, or 0.56%. Prepaid card interchange fees were similar to those of signature debit, averaging 50 cents per transaction, or 1.53% of the sale.

In a footnote, the draft says signature rates “were generally around 1.5% of the transaction value” from 1990 to 2009. PIN-debit rates in the late ‘90s, however, were about 7 cents per transaction, less than half of what they were by 2009. Those findings confirm a trend of rising PIN-debit interchange reported by Digital Transaction News in August 2009.

On the expense side, issuers reported a median per-transaction cost of 11.9 cents for authorization, clearing, and settlement for all types of debit and prepaid cards. Broken down by transaction type, the median processing cost was 13.7 cents for signature debit, 7.9 cents for PIN debit, and 63.6 cents for prepaid cards. The median per-transaction variable processing cost was 7.1 cents. Disaggregated, respective variable costs were 6.7 cents for signature debit, 4.5 cents for PIN debit, and 25.8 cents for prepaid, respectively. Also, the median network per-transaction processing fee was 4 cents for all types of debit and prepaid cards in 2009.

Networks, which assess transaction and non-transaction fees, charged issuers a total of $2.3 billion in fees last year and acquirers $1.9 billion. The average network fee attributable to each transaction was 6.5 cents for issuers and 5 cents for acquirers. With signature debit, issuers generally pay more in network fees than acquirers, but the reverse is true in PIN debit.

Offsetting the fees, however, are network discounts and incentives for both issuers and acquirers (including merchants) meant to spur card issuance and also volume at merchant locations. Issuers received a total of $700 million in such incentives and discounts last year, an average of 2 cents per transaction, while acquirers received $300 million, or 0.9 cents per transaction. Adjusting for incentives and discounts, the average per-transaction network fee was 4.5 cents for issuers and 4.1 cents for acquirers.

The Durbin Amendment allows the Fed to set an interchange adjustment for fraud-control expenses. The Fed estimates industry-wide fraud losses to all parties from debit card transactions at $1.36 billion in 2009, about $1.15 billion from signature debit and $200 million from PIN-debit. Signature debit fraud rates were 3.75 times those of PIN debit, averaging 13.1 and 3.5 basis points (0.131% and 0.035%) of dollar volume, respectively.

The Fed’s draft rules suggest criteria regulators should consider in preparing final fraud adjustments but leaves the issue open for comment.