3 trends to watch in 2014: Debit decelerates, prepaid unhinges & low energy explodes
by. Lee Wetherington
2014 will be defined by tipping points in payments and mobile technology. Payments drive a third of revenue industry wide for financial institutions, and mobile technology continues to redefine and revolutionize the ways in which consumers shop, spend, save and buy. But the real story to watch in 2014 is the convergence of tipping points in both mobile and payments.
Debit Deceleration and Interchange Compression Challenge DDA Economics
Already, regulatory compression of payment fee income (via the Card Act, revisions to Reg E, Durbin, 1073 remittance provisions of Dodd-Frank, etc.) has forced financial institutions of all sizes to reconsider and/or re-price their payments franchises.
Revenue per debit card is down for all financial institutions, even those exempt from Reg II/Durbin. The routing provision of Reg II unleashed fierce competition for transaction volume among EFT networks, and this competition is driving down base market rates for debit interchange. Accordingly, many exempt financial institutions are experiencing 6-7% declines in their debit interchange rates—not to mention higher network fees (9% higher for signature debit and 25% higher for PIN debit in 2012, according to PULSE’s 2013 Debit Issuer Study).
Over the past two years, double-digit growth in debit transaction volume has more than compensated for marginal compression of exempt issuers’ interchange rates. But growth in debit card transaction volume will slow considerably in 2014 and no longer make up for interchange compression. In other words, debit cards may soon no longer be able to subsidize the free checking that differentiates most smaller issuers from regulated issuers. Once this happens, smaller issuers will be forced to either charge for basic checking and/or stiffen the conditions consumers must meet to qualify for free checking. This in turn will accelerate ongoing declines both in demand deposit account (DDA) ownership and debit card ownership in the U.S. (Mercator Advisory Group).
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