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Discover's Horizon (Newsletter) - Winter 2012


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Happy New Year and welcome to Horizon. The past year brought some good news for Discover® credit card issuers, ending with positive growth in overall credit card spending, according to estimates by Mercator Advisory Group. Be sure to read more of their predictions for the 2012 credit market in this issue.

More In This Issue:
- Can Co-Brand Cards Fill the Gap Created by the Declining Value of Checking and Debit Card Accounts?
- Washington Viewpoint
- Is the U.S. the Next Destination for Payment Card Fraud?
- Did You Know?
FIS Adds Discover Network to Card Processing Capabilities

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Discover's Horizon (Newsletter) - Winter 2012

  1. 1. Issue 6 – Winter 2012 Brought to you by Discover ® ... your partner in payment servicesWelcome to Horizon SM The Paradox of Spending Growth Happy New Year and By Ken Paterson, Director, Credit Advisory Service, V.P. Research welcome to Horizon. The Operations, Mercator Advisory Group past year brought some 2011 turned out to be a positive year for credit card spending among bank-issued good news for Discover® credit cards, and average spending growth for the year came in at about 8 percent. credit card issuers, ending This spending growth appears to be concentrated among the affluent, low-risk with positive growth in consumers most targeted by issuers over the course of the recession. Perhaps to no overall credit card spending, surprise, these affluent consumers, especially those with good credit histories, are more according to estimates by likely to say their use of credit cards is increasing or holding steady, according to our Mercator Advisory Group. CustomerMonitor consumer survey for 2011. Those with average or damaged credit Be sure to read more of histories are far more likely to say they are trying to make less use of credit cards.their predictions for the 2012 credit market inthis issue. As we project growth scenarios for credit cards going forward, this paradox weighs on our outlook. While we are finally seeing a relatively healthy rebound in credit cardAs we look forward to the increased interest in spending, how long can that trend continue without strong net growth in accounts?both cobrand cards and debit, we visited with At some point, continued volume growth will require a broader-based expansion inMegan Bramlette from Auriemma Consulting accounts.Group. We know you’ll want to check outher analysis and also get an in-depth view Another driver of spending, consumers’ willingness to revolve card purchases, remainsof the Washington legislative and regulatory muted. Again, an important segment of our survey respondents continues to indicateenvironment from our own Ray Messina. that they are favoring debit and cash spending in order to avoid growing their revolving balances, a situation little changed since the depths of the recession in 2009. As theThe cost of fraud is a concern for all of us, so we Federal Reserve’s G19 statistic on Consumer Revolving Credit Outstanding confirms,take a look at the status of payment card fraud in industry outstandings have yet to show a real growth since 2008, and are down anthe U.S. and some of the enhanced technology estimated 3.4 percent (annualized) through August of 2011. We see no upturn inbeing used to combat it. consumers’ willingness to borrow on the horizon, as economic headwinds continueIt promises to be an exciting year and we’re to take a toll on consumer sentiment.looking forward to sharing it with you. Thanks For 2012, spending growth in the range of 7–8 percent appears likely, but is likely toagain for your continued support. plateau without significant net growth in accounts on file. Net account growth inSincerely, 2012 is likely to be an anemic 1–2 percent for banks, a level that could jeopardize future spending growth.Kevin O’Donnell Wishing For a Durbin BounceGroup Executive, Credit Issuance As credit card issuers launched enhanced rewards programs, spending incentives, and attractive balance transfer offers in 2011, concurrent with reductions in debit rewards and announced increases in debit-related fees, speculation has increased that consumersIn This Issue will move their spend from debit to credit. While there may be some marginal shift to credit among affluent debit users who found value in now-discontinued debit rewards,Can Co-Brand Cards Fill the Gap Created a significant shift from debit to credit spending is unlikely. Consumers who find value inby the Declining Value of Checking and the spending control of debit appear unlikely to trust themselves with credit at this time.Debit Card Accounts? ........................... 2 Also, fewer consumers now hold general purpose and private label credit cards than didWashington Viewpoint .......................... 3 before the recession, further constraining their ability to shift spending.Is the U.S. the Next Destination for Will there be a Durbin-driven bounce toward credit? We feel that consumers arePayment Card Fraud? ........................... 3 more likely to bounce to a new DDA provider if they feel the need, in order to continue their debit-based spending discipline. (continued on page 2)Did You Know? .................................. 4
  2. 2. Can Co-Brand Cards Fill the Gap Created by the Declining Value ofChecking and Debit Card Accounts?By Megan Bramlette, Director, Auriemma Consulting GroupOver the past several years, debit cards However, recent announcements from particular, consumers seem unlikely to payhave enjoyed a steadily increasing market major consumer banks regarding checking a substantial annual fee for a debit cardshare, in comparison to credit cards. account fees and the termination of debit when they could pay a smaller (or no!)Notably, debit cards became the primary card rewards programs have decreased the annual fee for a co-brand credit card withpayment tool among the mass-affluent perceived value of these products in the a rich value proposition.population (consumers that had historically eyes of the customer, many of whom have To be sure, some consumers will be waryused credit cards), who relied on their debit indicated that they would cease using of returning to credit cards, citing thecards in an increasing fashion as a way to their debit card if the value of the product spend controls that debit cards offerlimit their temptation to spend. Consumers decreases. In a recent issue of ACG’s Debit them as a primary reason for using thein this population also saw debit cards as Report, 31 percent of consumers with product. However, if lenders offer the an annual household income exceeding spend management tools and reports $50,000 indicated that if their bank that have historically been reserved for instituted a usage fee on their debit card bank-branded products to their co- or removed their rewards program they branded customers, the combination of would revert to using a credit card. Just increased value and the ability to monitor 17 percent of less affluent consumers and control spending may be enough to would move to credit cards if the value of encourage consumers to turn to co-brand their debit cards decreased. credit cards as their primary payment As lenders reduce the value associated product. with debit cards and checking accounts, While it is possible that consumers will rely we anticipate that value-seeking on cash increasingly as a result of reduced consumers may turn to co-brand credit interest in debit products, the convenience cards as their primary form of payment. of plastic could become too enticing for This will especially apply to those consumers to overlook when making their consumers in the mass-affluent population payments choices. As a result, we believe who are averse to paying fees for products that the outlook for credit cards in 2012 isa high-value payments product (due to that deliver nothing in return for usage.their wide acceptance and their low cost), positive, and are particularly intrigued with For this portion of the population, co- the role that co-brand cards could play inparticularly as the interest rates associated brand cards could be especially appealingwith their credit cards increased as a result a market environment marked by rapidly as there is value passed along to the changing consumer preferences. nof the economic crisis. Debit cards allowed customer directly as a result of cardconsumers to avoid over-extending usage. With debit rewards a thing of the Auriemma Consulting Group (ACG) is a full-servicethemselves financially, without worrying past, it is possible that rewards-seeking management consulting firm serving the payments and lending industries since 1984. Megan Bramlette isabout having to pay interest or fees for the former credit users (i.e., the mass-affluent a Director in the Partnerships practice.privilege of doing so. population) return to credit cards. InThe Paradox of SpendingGrowth (continued from page 1) • Competing head-on in the race to As we caution every year, the economy and offer attractive rewards at a reasonable consumers’ economic sentiments trumpOpportunities Are Where program expense. all forecasts in the complex credit cardYou Find Them • Reminding consumers about the core marketplace. And the economic outlookAccount origination opportunities in 2012 values of the product, such as Reg Z- for this year is not in itself bullish. But theexist, but some may challenge the comfort based consumer protections and the recovery in card spending hints at thelevels of some issuers. These include: safety of separating payment accounts possibility of a credit card issuing recovery;• Broadening account solicitations from deposit accounts. the next move is up to issuers. n to include non-prime and thin-file • Stressing transparency of credit terms consumers who are just entering or and education of cardholders on re-entering the credit card market. responsible credit management. 2
  3. 3. Washington ViewpointBy Ray Messina, Asst. General Counsel and Vice President for Government Relations, DiscoverThe ink is barely dry on the initial set of Senator Durbin intends to turn this idearegulations issued by the Federal Reserve into a proposed legislative mandate,to implement the Durbin amendment, but or if he will ask the Consumer FinancialSenator Durbin and other proponents of Protection Bureau to issue a regulationinterchange regulation are keeping up requiring the disclosure. (At the verythe heat. least, a CFPB rule requiring, in effect, thatRetailing trade associations cut short monthly bills double in length would seemtheir victory lap on the enactment of to run counter to the Bureau’s interestthe Durbin amendment to announce an in simplifying and shortening consumer“aggressive” campaign to pass legislation disclosures.)to regulate credit card interchange fees. Another retail trade group effort hasSo far, members of Congress have shown taken the form of a lawsuit against the debit fee regulation on smaller financiallittle interest in pursuing this effort. One Federal Reserve challenging the Board’s institutions, and whether larger bankssenior House Democrat suggested that interchange regulation as inadequate and debit networks have conspired toCongress would be more likely to repeal and inconsistent with the requirements harm smaller institutions. This part of thethe Durbin amendment than to extend it of the Dodd-Frank Act. The obligation study would presumably be conducted byto credit cards. Indeed, a bill repealing of courts to generally defer to regulatory the FTC’s Bureau of Competition. Therethe Durbin amendment and voiding the agency expertise makes this lawsuit an is no comparable House provision (andFederal Reserve’s interchange regulations uphill battle, and the Board is likely to opposition exists to adding one), and it iswas introduced by Reps. Chaffetz (R-UT) ask the court to resolve the case through not clear at this writing if the provision willand Owens (D-NY). procedural motions. But the suit could also become part of the final bill.In mid-November, Senator Durbin drag on for a long time, particularly if the A certain amount of congressional “issuelaunched an effort of his own to address court were to agree with the plaintiffs and fatigue” on interchange, a curtailedinterchange fees on credit transactions. send the rule back to the Federal Reserve, election-year legislative agenda in 2012,In a Senate floor speech, he called on the with judicial guidance, for another look at and Republican control since 2010 of thelargest credit card issuers to disclose, on whether fees permitted under the initial House of Representatives reduce the oddsconsumers’ monthly billing statements, regulations are too generous. of further congressional involvement inthe amount of the interchange fee paid Also in November, Senator Durbin interchange regulation. Still, the anti-bankby merchants on each transaction. He added language to a committee report sentiment in Washington and throughoutdid not explain why he feels consumers on an appropriation bill that directs the the country has not abated, so the politicalwould benefit from learning about a small Federal Trade Commission to study danger of further legislation cannot befee paid by someone else. It is unclear if the impact of the Federal Reserve’s ignored. nIs the U.S. the Next Destination for Payment Card Fraud?By Thomas A. Layman and Vinod Zalpuri, Global Vision GroupIn 2010, total global fraud on payment use of fraud detection, mitigation and environments such as MOTO and internetcards resulted in over $6.25 billion in avoidance policies and technologies. e-commerce, have either increased orlosses to all stakeholders. The good Unfortunately, however, the trend at the remained steady during this same period.1news is that although this “cost of doing aggregate level tends to mask other trends Enhanced use of technology to block and/business” is large, the incidence of fraud that occur at the product, geographic or remove sensitive data from a transactionwhen measured as a percent of total and fraud type level. For example, the continues to evolve and vary by marketpurchase volume has steadily declined graph shows that decreased fraud rates and product. When stronger securityfrom the early 1990s. As the graph on the associated with lost and stolen cards emerges on cards in one area or product,next page indicates, global fraud dropped accounted for most all of the decline in the fraud doesn’t just go away. It around 6.5 cents per US$1000 in 2008, overall fraud during the last decade. By This migration of fraud is most apparentless than half of that reported in the comparison, other types of fraud, including when compared to variations in the themid-1990s. This declining trend is due to counterfeit, fraudulent and unauthorized use of technologies, such as EMV chip.increased investment in and sophisticated use, especially in card-not-present (CNP) (continued on page 4) 3
  4. 4. Is the U.S. the Next Destination for Payment Card Fraud? (continued from page 3)According to the U.K. Cards Association, stored in the “cloud,” data masking Vision Group found that 11 issuers haveface-to-face card fraud at U.K. merchants and dynamic authorization are being adopted EMV chip technology for issuingfell by nearly 70 percent after the implemented across various channels credit cards going forward. But of thosewidespread introduction of EMV at the to better secure data and personal adopters, only 10–20 percent of theirPoint of Sale (POS) in 2004. During this information. respective portfolios will be upgradedsame period, however, the CNP fraud rate by the end of 2012. Moreover, the vastrose by 50 percent and now represents majority will continue to rely only on62 percent of all fraud in the country.2 cardholder signature rather than PINsSimilar experiences have been noted in for authentication at the POS. In theother countries such as France, Australia meantime, it is clear that the U.S. is a primeand more recently in Canada. target for fraudsters, as evidenced by theEMV mitigates fraud on several fronts jump in data breaches occurring withinby verifying whether a POS terminal is the U.S. This and the migration to mobilelegitimate, detecting a counterfeit card, Given that the largest payment market, payments through virtual wallets, NFCand authenticating cardholders via dynamic the United States, is still dependent upon chips and other technologies in both theauthentication and cryptology. This can be mag-stripe technology for conducting the virtual and real world will help accelerateenhanced with “two-factor” authentication vast majority of electronic transactions, the the transition to adopt enhanced securityof the cardholder by using personal PINs question naturally arises as to whether the measures and technology to protect allto verify the cardholder as well. For CNP U.S. is the next target for increased fraud. stakeholders across all electronic paymenttransactions, use of Chip Authentication The main reasons for continued reliance on products and channels of use. n 1 The fraud category noted as “other” includes fraud types suchPrograms using various software and mag-stripe is the high cost to both re-issue as fraud committed through fraudulent applications to obtain ahardware devices that can accept existing cards and to upgrade or replace terminals card, fraud committed on cards that were never received by the authorized cardholder (NRIs), and other miscellaneous fraud types.PINs or generate one-time passwords can that can support enhanced technologies. 2 and_figures/card_fraud_facts_and_figures/-/page/645/further secure Internet-initiated payments.3 Progress is being made however. A recent 3 Diner’s Club International is now piloting such a product calledUse of other techniques and technologies, proprietary survey of a cross section of “Protect Buy.”such as virtual terminals and hosted pay 30 U.S.-based card issuers by Global 4 Scotiabank Commercial Card Conference, 2010.pages (HPPs) where data are encrypted andDid You Know?FIS Adds Discover Network to Card Processing CapabilitiesFIS, the world’s largest provider of banking of credit, debit and prepaid cards including “FIS’s comprehensive solutions will allowand payments technology, recently the Discover Card. At least one in four U.S. us to focus on what is most important toannounced an agreement with Discover households hold a Discover card. Further, us—continuing to find ways to betterFinancial Services to process cards that are Discover’s U.S. card issuing business has serve our customers,” said Kevinaccepted over the Discover® network. A more than $46 billion in receivables. O’Donnell, Vice President of Cardleader in card processing, FIS offers fully FIS provides card processing services Issuance, Discover Network.integrated transaction processing solutions, for every aspect of card production and “Ongoing regulatory changes haveproviding a single point of authorization, processing including activation, fraud made issuing cards increasingly difficulttransaction posting, settlement, reporting management and value-add loyalty for financial institutions and frustratingand access for all services. In addition programs. In addition, FIS’s solutions for consumers,” said Frank D’Angelo,to the newly added Discover cards, FIS provide end-to-end processing support Executive Vice President, FIS Paymentcurrently supports card issuers for Visa,® of consumer, commercial, small business Solutions Group. “By teaming with FIS,MasterCard® and American Express® as and private-label card programs. Currently, Discover Network broadens its networkwell as domestic schemes and proprietary FIS processes 70 million credit cards, of processors, while providing increasedcard brands. 125 million debit cards and in excess of customer satisfaction and loyalty to itsThe Discover network is a comprehensive 180 million prepaid cards on a global basis. issuers and cardholders alike.” nand secure payments network. A business In the U.S. alone, FIS provides credit card About FIS—FIS (NYSE: FIS) is the world’s largestunit of Discover Financial Services, Discover processing for 3,000 financial institutions. global provider dedicated to banking andNetwork markets and supports a full range payments technologies. For more information about FIS, visit views of Mercator Advisory Group, Auriemma Consulting Group and GlobalVision Group as expressed in this Newsletter do not necessarily reflect the viewsof Discover. We appreciate the contributions of these great authors. 4 ©2012 DFS Services LLC