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Debit Cards as Profit Drivers

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  • 88 Pages
  • Timetric

Abstract

Synopsis

  • This report looks at debit cards as a profit making product for banks, but also contrasts them with cash and credit card usage
  • The report examines the regulatory environment, paying particular attention to the US and the implementation of the Durbin Amendment
  • Debit card fee structures are broken down and examined
  • The impact of a deteriorating economic environment in Europe on debit cards is examined

Summary

Debit cards have started to outnumber credit cards in most countries across the world, in many cases irrespective of the area and related economic development. However, when compared to credit cards, the real convenience of issuing debit cards, from the bank's perspective, may not be straightforward. Credit cards, as a type of loan, have always proved much more attractive because structural features allow issuers to generate high margins. A quick comparison of the internet space devoted to debit cards, and to credit cards, shows how the former has been overwhelmed by its credit counterparts.

Amongst the most relevant examples from different areas of the globe, Germany, as a cash-based society, stands out with an almost total absence of credit cards if compared to the number of debit cards in issue - 3.7 million credit cards vs. 102 million debit cards in circulation in 2010. Russia boasts an even more striking gap, with 127.8 million debit cards vs. 10 million credit cards in issue. A similar picture is apparent elsewhere, with data in 2010 showing India has 227.8 million debit cards against 18 million credit cards, or China where the high number of debit cards - 2.2 billion - makes 229.6 million credit cards pale into insignificance. Even in countries where credit cards still dominate, the card market has experienced an outstanding growth of debit-related payment instruments as in the case of Canada where the number of debit cards witnessed a consistent growth. The pattern is replicated in countries like Indonesia, Australia, Philippines and Brazil.

Scope

  • This report tracks the development of debit cards, paying particular attention to their usage compared to credit cards
  • The report reacts to the enactment of the Durbin Amendment in the US by analysing impact of the cut in the interchange fee
  • Developments in the US are contrasted with those in the sluggish Eurozone and the markets across Asia
  • The impact of interest rates and inflation on debit card usage are also discussed

Reasons To Buy

  • Increase profits from a debit card offering
  • Access the latest statistics on debit card markets in the most developed countries
  • Follow the latest on fraud and the cost to banks so far
  • Gain an overview of the latest developments in the debit card market
  • Understand how interest and inflation rates are associated with the reshaping of debit card systems worldwide

Table of Contents

Executive Summary

List of Figures

List of Tables

1. How the debit card markets have developed

  • 1.1. Debit cards on the rise
  • 1.2. Debit card types have spread differently across the world
  • 1.3. How everything started. from credit to debit cards
  • 1.4. The path to the current debit card market
  • 1.5. The current situation
    • 1.5.1. Cheques on their way out of the payments market
    • 1.5.2. Debit cards have outnumbered credit cards almost everywhere
  • 1.6. Where are debit card markets heading now?
    • 1.6.1. Credit cards may be making their way back to the US
    • 1.6.2. Unlike the US, debit cards will be welcomed in UK consumers pockets
    • 1.6.3 The gap in the US between debit cards and cash will widen
  • 1.7 Giant card networks penetrating underserviced markets
  • 1.8 Summary

2. The profit-making function of debit cards

  • 2.1. Banks forced to change, adaptability is the key feature
  • 2.2. How do financial institutions make their debit card strategies profitable?
  • 2.3. An underestimated source of profit. the overdraft fee
    • 2.3.1. Debit cards are much more related to overdraft fees than previously thought
  • 2.4. A simple but significant source of profit. ATM fees as a profitability component
  • 2.5. Banks have got it right
  • 2.6. Interchange fees create revenue. but to what extent?
    • 2.6.1. Interchange fees are not easy to track
    • 2.6.2. The composition of debit fees
    • 2.6.3. EU debit card interchange fees
    • 2.6.4. How have debit card interchange fees been established across the world?
    • 2.6.5. Profitability in Canada has nothing to do with debit card interchange fees
    • 2.6.6 US debit PIN interchange fees on the rise
  • 2.7 Other fee components
  • 2.8. Reward cheque accounts prompting higher debit cards usage
    • 2.8.1. The more frequently customers use their debit cards, the more they get
  • 2.9. Summary

3. Regulatory authorities and banking profitability

  • 3.1. The Durbin amendment and card issuers reactions
    • 3.1.1. The amendment prompted divergent reactions
    • 3.1.2. The reduction in debit fees will cut US banks earnings
    • 3.1.3. US banks will pass costs onto consumers
    • 3.1.4. Developments following the introduction of the Durbin amendment
    • 3.1.5. Credit unions reap the benefits
  • 3.2. The current US debit card market may be reshaped
    • 3.2.1. The reduction in debit fees might cause US banks to steer consumers away from debit cards
  • 3.3. Summary

4. Interchange fees in other jurisdictions

  • 4.1. Higher debit card usage triggered by Australian reforms
    • 4.1.1. The controversial pre-reform card regime
    • 4.1.2. The shift from credit to debit cards led to a loss of revenue for card issuers
    • 4.1.3. The future in Australia may not depend on Visa/Mastercard as much as it has
  • 4.2. Interchange fees have been a hot topic across Europe too
  • 4.3. Visa and Mastercard will lose market share in the future European card market
  • 4.4. Notable Efforts - but SEPA's complete implementation is far from complete
  • 4.5. SEPA compliant transfers still lack depth
    • 4.5.1. Recent initiatives by banks and corporates to migrate to SEPA
  • 4.6 Summary

5. The impact of fraudulent transactions on bank profitability

  • 5.1. Types of debit card fraud and revealing UK figures
  • 5.2. Summary

6. A vicious circle - how interest rates and inflation affect debit card usage

  • 6.1. Debit card distribution, projections and central bank intervention
  • 6.2. The stagnant Italian economy
    • 6.2.1. ECB pursuing Eurozone safeguards by driving interest rates down
    • 6.2.2. Future inflation might lead to more debit card payments
  • 6.3. Germany retaining the largest share of the European debit card market
    • 6.3.1. Debit cards still unable to keep pace with case
    • 6.3.2. Germany deflation did not affect the debit card market as much as expected
  • 6.4. The UK as the second largest debit card market in Europe
    • 6.4.1. Debit cards are more popular than cash
    • 6.4.2. Debit card expenditure will rise irrespective of inflationary pressure

7. Between emerging and developed economies across the Asia-Pacific

  • 7.1. Malaysia as a growing, but still underdeveloped debit card market
    • 7.1.1. Malaysian interest rates and inflation on the rise
  • 7.2. Cheques retain the largest share of payments value in Thailand
    • 7.2.1. Numerically debit cards are far more popular than other instruments
    • 7.2.2. Debit cards could generate profits but they are not seen as profit drivers
    • 7.2.3. Thailand confirms the rise of debit cards
  • 7.3. Singapore as an unusually balanced card market
    • 7.3.1. The clash between debit and credit cards
    • 7.3.2. Singapore consumers enjoy a wide card choice
    • 7.3.3. Remarkable interest rate fluctuations
  • 7.4. Japan as a highly advanced card system
    • 7.4.1. The Japanese carry an impressive number of cards per person
    • 7.4.2. Credit cards are associated with much higher spending than debit cards
  • 7.5. New steps forward; examples of excellence
  • 7.6. Chapter summary

8. Conclusion

List of Tables

  • Table 1: Change in the US number, value and average value of debit card payments
  • Table 2: Debit cards number across Europe (millions)
  • Table 3: Most recent debit cards number throughout the world
  • Table 4: UK card expenditure statistics for February 2012
  • Table 5: ATM number across Europe
  • Table 6: Composition of Visa interchange debit fees across Europe (Non-Merchant Specific)
  • Table 7: Composition of Visa interchange debit fees across Europe (Merchant Specific)
  • Table 8: Summary of some of the most interesting examples of authority interventions on debit card interchange fees
  • Table 9: A few recent examples of higher usage of debit cards triggered by US local banks' initiatives
  • Table 10: Reactions to the Durbin Amendment
  • Table 11: Some of the actions taken by the US banks in the recent past
  • Table 12: Annual plastic card fraud losses on UK-issued cards (£ millions)
  • Table 13: Growth in number of Debit cards (in millions)
  • Table 14: Italian transactions value: debit cards against all types of payment Instruments
  • Table 15: German transactions value: debit cards against all types of payment instruments
  • Table 16: UK transactions value: debit cards against all types of payment instruments
  • Table 17: Malaysian debit against total transactions value (RM billion)
  • Table 18: Thailand card statistics, 2010 - 2011
  • Table 19: Singapore transactions value: debit cards against all types of payment instruments (SGD billions)
  • Table 20: Japanese transactions value: debit cards against all types of payment instruments (JPY trillions)

List of Figures

  • Figure 1: US share of cardholder spending at merchants (% value)
  • Figure 2: Worldwide debit card transactions per person
  • Figure 3: Distribution of the number of US noncash payments, 2006-2009
  • Figure 4: UK average transaction values
  • Figure 5: UK average monthly expenditure (£ billions)
  • Figure 6: Transactions growth projections
  • Figure 7: Bank revenue from overdraft fees ($ billions)
  • Figure 8: Overdraft fees, US national median ($)
  • Figure 9: Share of US Overdraft Fees, 2007
  • Figure 10: Overdrawn US Account Fees ($ billions)
  • Figure 11: Average fees ($) charged to small retailers by Visa on a $100 transaction
  • Figure 12: US debit transactions value ($ billions)
  • Figure 13: First potential future US debit card market trend
  • Figure 14: Second potential future US debit card market trend
  • Figure 15: Number of debit and credit cards in Australia (millions)
  • Figure 16: Value debit/credit transactions (AUD $ billions)
  • Figure 17: Fee flows in an EFTPOS transaction
  • Figure 18: Interchange fees on a AUD $100 payment
  • Figure 19: EFTPOS merchant service fees (cents per transaction)
  • Figure 20: Share of losses suffered by RBS in 2009-2010
  • Figure 21: Fraud figures by payment channels and payment instruments (million Thai Baht)
  • Figure 22: European ATM Fraud related losses (€ millions)
  • Figure 23: European skimming-related losses (€ millions)
  • Figure 24: The predominance of Card-Not-Present fraud in the UK
  • Figure 25: Number of debit and credit cards in Italy (millions)
  • Figure 26: Euro area interest rate: October 2008 - December2011
  • Figure 27: Italian inflation rate: January 1998 - March 2012
  • Figure 28: Debit card transactions value in Italy (€ billions)
  • Figure 29: Number of ATMs in Italy
  • Figure 30: Number of debit cards in Germany (millions)
  • Figure 31: Number of ATMs in Germany (in thousands)
  • Figure 32: German inflation rate: 1996 - March 2012
  • Figure 33: Debit card transactions value in Germany (€ billions)
  • Figure 34: Number of debit and credit cards in the UK (millions)
  • Figure 35: UK payment trends: cash loses popularity while debit cards gain it
  • Figure 36: UK interest rate: January 2006 - April 2012
  • Figure 37: UK inflation rate: January 2010 - April 2012
  • Figure 38: Debit cards transaction value in the UK (£ millions)
  • Figure 39: Number of debit/credit cards in Malaysia (millions)
  • Figure 40: Malaysian interest rate: January 2002 - April 2012
  • Figure 41: Malaysian inflation rate: January 2008 - April 2012
  • Figure 42: Distribution of cashless payments in Thailand in 2006-2010 (Thai Baht billions)
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