Executive Summary2012 Debit Issuer Study               Steve Sievert        Executive Vice President, PULSE              N...
Study Overview    PULSE commissioned Oliver Wyman to conduct the 2012 Debit Issuer     Study, the definitive assessment o...
Summary of Key Findings  While debit growth remains strong, issuers report profound changes to their   business as a resu...
Summary of Key Findings (cont’d)  New technologies and business models are generating considerable   interest among issue...
What Changed with Regulation II’sInterchange Cap Provision                                    5
Regulation II is shifting how regulated issuers manage debit businessExempt issuers report no material change to their bus...
Overall interest in debit businessAs required by Reg II, interchange rates dropped for regulated issuers     Consumer sign...
Overall interest in debit businessDebit interchange revenue per consumer card forregulated issuers is now 45% less than th...
PIN vs. signatureRegulated issuers now prefer PIN debit over signature■   Historically, many issuers preferred         Ma...
PIN vs. signatureRelative share of PIN and signature debit transactionshas remained steady, but might change post-Reg II  ...
Business debitBusiness signature debit was significantly impaired by Reg II  Business signature interchange rates         ...
Business debitBusiness debit interchange revenue per card forregulated issuers is 85% less than that for exempt issuers   ...
Ticket size & performanceThe debit market is expanding at the low-end,            metrics reportingwith small-value transa...
Ticket size & performance                                                                                  metrics reporti...
RewardsInterest in issuer-funded rewards programs is waning  Planned changes in current rewards program  % of issuers     ...
GPR CardsMore issuers now offer GPR prepaid, attracted by higherinterchange rate and ability to meet specific customer nee...
What Changed with Regulation II’sNetwork Exclusivity Provision                                    17
Network exclusivity provisionMany issuers needed to change their debit cardnetwork participation in order to comply with R...
Network exclusivity provisionMany issuers expressed concern with how themarket for network transaction routing is evolving...
Certain Fundamentals are Unchanged                                     20
Market characteristics that did not change post-Reg II   Exempt         Debit economics for exempt issuers have not been ...
Debit growthDebit usage continues to grow  Key debit performance metrics in 2010 and 2011  Consumer  Business             ...
Debit growthConsumer debit growth in 2011 exceeded issuers’ expectations  PIN transaction growth in 2011               Sig...
Debit growthIssuers believe that the positive trend will continue  Transaction growth projections in 2012                 ...
Fraud as a key challengeFraud remains a major challenge, withdata breaches as the primary source of fraud  Signature debit...
Fraud as a key challenge54% of issuers expect signature debit fraud rates toincrease in the future; 37% expect PIN debit f...
Outlook for debitAll issuers report that regulatory pressure andfraud are the biggest challenges to their debit business  ...
Outlook for debitExempt issuers see more opportunities  Key opportunities for 2012  % of issuers                   Regulat...
Beyond Reg II, issuers are most attentive totwo new developments: mobile payments and EMV                Mobile payments ...
Mobile paymentsMany express interest in participating in mobile payments pilots  Mobile payments pilot participation      ...
Most issuers are familiar with networks’ EMV rule                                      EMVchanges and expect the transitio...
EMVIssuers are taking a “wait-and-see” approach to adopting EMV Issuers’ plans to issue EMV cards         “The top merchan...
Summary    Debit growth continues to be strong despite profound changes to debit as     a result of Reg II      – Regulat...
Questions?             34
Thank Yousalesperson@pulsenetwork.compulsenetwork.com                                           35
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2012 Debit Issuer Study Key Findings: Despite New Regulation, Debit Continues to Grow (Webinar Slides)

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The 2012 Debit Issuer Study, commissioned by PULSE, a Discover Financial Services company, presents an impartial assessment of debit card issuer performance and perspectives across electronic payments. This year’s study is based on primary research with 57 credit unions and banks that collectively represent approximately 87 million debit cards and 47,000 ATMs. The data presented examines debit performance metrics and the impact of Regulation II. This webinar goes over the findings. For more info: www.nafcu.org/discover

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2012 Debit Issuer Study Key Findings: Despite New Regulation, Debit Continues to Grow (Webinar Slides)

  1. 1. Executive Summary2012 Debit Issuer Study Steve Sievert Executive Vice President, PULSE November 29, 2012
  2. 2. Study Overview  PULSE commissioned Oliver Wyman to conduct the 2012 Debit Issuer Study, the definitive assessment of the debit card industry – Based on primary research with 57 financial institutions (FIs), drawn from across FI types and sizes, geographies and network affiliation – Conducted in April and May 2012 – Sample includes ~87 million debit cards and is representative of the market Segment Label Participants Segment Participants Large banks (Top 60) LB 26 Regulated 27 (≥ $10 BN in assets) Credit unions CU 15 Exempt (< $10 BN in assets) 30 Community banks CB 16 Total 57 Total 57 2
  3. 3. Summary of Key Findings  While debit growth remains strong, issuers report profound changes to their business as a result of Regulation II – For regulated issuers (≥ $10 billion in assets), how they manage their debit business has fundamentally shifted  Important changes in terms of the overall attractiveness of debit, the relative importance of different transaction types, and interest in debit rewards and GPR prepaid cards – Many issuers were affected by the requirement to participate in at least two unaffiliated networks  Issuers report on how they make their network selection decisions and how the dynamics within the transaction routing market are still playing out – Certain fundamentals of the debit business remain true, post-Reg II  For exempt issuers, economics and the importance of debit has been relatively unaffected, to date  For all issuers, debit growth remains robust and managing fraud is a challenge 3
  4. 4. Summary of Key Findings (cont’d)  New technologies and business models are generating considerable interest among issuers – 47% of issuers indicate that they would like to pilot mobile payments (to enable their debit “cards” in a mobile wallet)  However, of issuers that have tested it, interest has waned – Most issuers are aware of Visa and MasterCard rule changes designed to promote EMV (chip card) adoption; however, very few debit issuers plan to migrate to EMV debit cards  Issuers cite certain costs and uncertain benefits – Will merchants adopt? – Will the dates stick? – How much fraud will be eliminated versus pushed to other venues? 4
  5. 5. What Changed with Regulation II’sInterchange Cap Provision 5
  6. 6. Regulation II is shifting how regulated issuers manage debit businessExempt issuers report no material change to their business, so far Pre-Reg II strategy Post-Reg II strategy Overall interest in  Fast-growing, high-margin fee  Significant reduction in debit revenue and the debit business business contribution  Focus on growth through increasing  Less enthusiasm to grow debit spend Penetration, Activation and Usage PIN vs. signature  Promote signature debit, since  Same interchange rate cap for signature and PIN higher interchange rate more than  Promote PIN debit, since it now has a better offsets the higher costs margin (as a result of lower costs) Business debit  Highest per-txn contribution margin  Revenue declined by 87%  One of the top three growth  Business debit is now unprofitable on a per- opportunities within debit transaction basis for some issuers Ticket size and  Grow large-ticket transactions to  Grow small-ticket transactions, since revenue is performance capture more revenue/transaction now primarily driven by number of transactions metrics reporting  Revenue and margin tracked on a (not spend) bps of dollar volume basis  Revenue and margin tracked on a dollar per transaction basis Rewards  Use rewards as a lever to grow  Significantly lower interest in issuer-funded debit usage and profitability rewards programs, given shrinking top-line GPR cards  Limited interest in GPR prepaid  More issuers offer – and are interested in offering cards; greater opportunities – GPR prepaid cards (exempt from the elsewhere interchange cap under certain conditions) 6
  7. 7. Overall interest in debit businessAs required by Reg II, interchange rates dropped for regulated issuers Consumer signature interchange Consumer PIN interchange Interchange rate ($ per txn) Interchange rate ($ per txn) 144 bps 144 bps 85 bps 85 bps 143 bps 137 bps 72 bps 74 bps 56 bps 51 bps 73 bps 64 bpsTicket Ticket size $36 $34 $36 size $42 $39 $42 Pre-Reg II Post-Reg II Note: Pre-Reg II refers to interchange rates reported by respondents for the period Jan-Sep 2011 (also referred to as pre-Oct 2011), while post-Reg II refers to interchange rates for the period Oct-Dec 2011 (also referred to as post-Oct 2011) 7
  8. 8. Overall interest in debit businessDebit interchange revenue per consumer card forregulated issuers is now 45% less than that for exempt issuers Average gross interchange revenue per active consumer card Regulated vs. exempt issuers Gross interchange revenue per active consumer cardRegulated $51 per $0.23 × 18.3 × 12 = active card per year Gross interchange revenue per active consumer card $0.33Exempt $92 per $0.41 × 18.7 × 12 = active card per year1 $0.46 Transaction mix Interchange rate Blended Monthly Months ($ per transaction) interchange rate transactions per year ($ per transaction) per active card Note: Numbers may not add up as shown in chart due to rounding 1. Up 6% from $87 per active card per year from the 2011 Study 8
  9. 9. PIN vs. signatureRegulated issuers now prefer PIN debit over signature■ Historically, many issuers preferred  Many regulated issuers are signature transactions employing various tactics to increase – Many issuers had marketing or their share of PIN transactions rewards strategies in place to promote signature transactions “We are promoting PIN debit over Post-Reg II, a PIN transaction is more signature as a cost-savings play.” – Regulated FI profitable to a regulated issuer than a signature transaction “We need to move from signature to – Average gross contribution margin is PIN. We may have some sweepstakes for PIN transactions.” $0.11 per signature vs. $0.18 per PIN – Regulated FI transaction – Due to the interchange cap imposed “We have been aggressive with by Reg II, the signature-centric contacting customers with phone and approach has been abandoned by direct mail to promote PIN.” many regulated issuers – Regulated FI 9
  10. 10. PIN vs. signatureRelative share of PIN and signature debit transactionshas remained steady, but might change post-Reg II Trends in PIN/signature 2011 PIN/signature transaction mix transaction mix 10
  11. 11. Business debitBusiness signature debit was significantly impaired by Reg II Business signature interchange rates 231 bps 232 bps 241 bps 215 bps $0.39 40 bps 26 bps Pre-Reg II Post-Reg II Note:, Pre-Reg II refers to interchange rates reported by respondents for the period Jan-Sep 2011 (also referred to as pre-Oct 2011), while post-Reg II refers to interchange rates for the period Oct-Dec 2011 (also referred to as post-Oct 2011) 11
  12. 12. Business debitBusiness debit interchange revenue per card forregulated issuers is 85% less than that for exempt issuers Average gross interchange revenue per active business card Regulated vs. exempt issuers Gross interchange revenue per active business cardRegulated $43 per $0.25 × 14.1 × 12 = active card per year Gross interchange revenue per active business card $0.33 $291 perExempt $1.49 × 16.3 × 12 = active card per year $1.80 Transaction mix Interchange rate Blended Monthly Months ($ per transaction) interchange rate transactions per year ($ per transaction) per active card Note: Numbers may not add up to 100% because of rounding 1. Up 7% from $273 per active card per year from the 2011 Study 12
  13. 13. Ticket size & performanceThe debit market is expanding at the low-end, metrics reportingwith small-value transactions displacing cash Ticket size distribution Median = $19 Mean = $38 13
  14. 14. Ticket size & performance metrics reportingRegulated issuers now prefer low-value debit transactions Interchange rates have shifted from largely ad-valorem based (bps on dollars) to largely per-transaction based (dollars per transaction) – As a result, the realized interchange rate (in bps) on small-value transactions is now higher – Some costs – network fees and fraud losses – are calculated based on ticket size Smaller-ticket purchases now have higher margins “More income is made by growing “Large-ticket signature purchases now transactions, we need to improve our cost more than we receive in small-ticket penetration” interchange revenue” – Regulated FI – Regulated FI 14
  15. 15. RewardsInterest in issuer-funded rewards programs is waning Planned changes in current rewards program % of issuers 65% of all 81% of issuers do regulated not plan to issuers do have a not plan rewards to have a program rewards program 15
  16. 16. GPR CardsMore issuers now offer GPR prepaid, attracted by higherinterchange rate and ability to meet specific customer needs Percent of issuers offering GPR cards1 Prepaid card sales growth projections for 2012 13% 1. For regulated issuers, reloadable cards are exempt from the cap only if the following three conditions are met: a. There is no overdraft facility; b. At least one ATM transaction is free a month; c. The funds can only be accessed through the card (i.e., no ACH-based bill pay) 16
  17. 17. What Changed with Regulation II’sNetwork Exclusivity Provision 17
  18. 18. Network exclusivity provisionMany issuers needed to change their debit cardnetwork participation in order to comply with Reg II Overall card mix Debit card counts as of December 2011 Dual function cards PIN-only cards 84% 11% Cards already participate in (at Cards only participate in one least) two unaffiliated networks PIN network No change required Must change • Add another PIN network • Add an unaffiliated signature network Cards participate in (at least) two PIN networks Cards only participate in No change required affiliated networks Must change Signature-only cards • Add an unaffiliated network 5% Must change • Add an unaffiliated PIN network 18
  19. 19. Network exclusivity provisionMany issuers expressed concern with how themarket for network transaction routing is evolving Issuers concerns with loss of routing control  Will transactions shift from a lower cost network to a higher cost network?  Will networks lower interchange rates to try to attract merchant/acquirer routing? “Within days, half of our volume migrated “We dont have any control over the over to the new PIN network. The shift was merchant’s routing and we dont know how much faster than what we expected.” it will impact our income and expense.” “We used to have a lot more control over how our transactions are routed, but now post- Durbin we don’t have that level of control anymore.” 19
  20. 20. Certain Fundamentals are Unchanged 20
  21. 21. Market characteristics that did not change post-Reg II Exempt  Debit economics for exempt issuers have not been significantly impacted issuers’ by Reg II – at least, not to date – and hence their view of debit is relatively interest in unaffected by it debit – Interchange has declined by 0-3%, as compared to 30-60% for regulated issuers – Exempt issuers are focused on improving debit performance metrics, rewards programs and growing the business Debit  Consumer usage of debit continues to grow strongly; growth in 2011 growth exceeded issuers’ expectations  Issuers expect the positive trend to continue Fraud as a  Fraud continues to be one of the top challenges facing the industry, key impacting both regulated and exempt issuers challenge  Issuers expect fraud rates to remain steady or increase in the future; few predict declines Outlook for  All issuers agree that regulatory pressure and fraud are the biggest debit challenges to their debit business  Exempt issuers see more growth opportunities in the debit business; regulated issuers show greater interest in cost reduction opportunities 21
  22. 22. Debit growthDebit usage continues to grow Key debit performance metrics in 2010 and 2011 Consumer Business 2010 2011 22
  23. 23. Debit growthConsumer debit growth in 2011 exceeded issuers’ expectations PIN transaction growth in 2011 Signature transaction growth in 2011 Projected vs. actual Projected vs. actual Projected Actual 23
  24. 24. Debit growthIssuers believe that the positive trend will continue Transaction growth projections in 2012 Consumer 24
  25. 25. Fraud as a key challengeFraud remains a major challenge, withdata breaches as the primary source of fraud Signature debit and PIN debit loss rates Primary sources of fraud1 In bps per $ 8.06 bps 8.06 bps 7.50 bps 7.50 bps 7.50 bps 7.50 bps 5.24 bps 1.26 bps 0.99 bps 1.26 bps 0.99 bp 0.80 bps Note: “Data breaches/compromises” include counterfeit cards/card compromise, as well as network, processor and merchant breaches. “Other” includes international fraud, breaches by family/friends and false client disputes (“first-party fraud”) 1. Does not sum to 100% because issuers indicated multiple fraud sources 25
  26. 26. Fraud as a key challenge54% of issuers expect signature debit fraud rates toincrease in the future; 37% expect PIN debit fraud rates to increase Fraud loss ratio predictions1 Fraud loss ratio predictions1 Signature debit PIN debit Increase Stay the same Decrease 1. Time horizon for predictions is two years (2012-2013) 26
  27. 27. Outlook for debitAll issuers report that regulatory pressure andfraud are the biggest challenges to their debit business Key challenges for 2012 % of issuers “A decreased profit margin means “Ongoing regulatory pressure a much smaller tolerance for around overdraft is also a big increases in fraud for us.” challenge.” – Regulated FI – Exempt FI 27
  28. 28. Outlook for debitExempt issuers see more opportunities Key opportunities for 2012 % of issuers Regulated issuers will remain less interested in rewards Cost reduction is a bigger priority for regulated issuers after Reg II “We are trying to cut processing “We have implemented a fees, plastic costs, paper merchant-funded debit rewards statements, etc. This is an program in hopes to increase enterprise-wide challenge.” activation.” – Regulated FI – Exempt FI 28
  29. 29. Beyond Reg II, issuers are most attentive totwo new developments: mobile payments and EMV  Mobile payments allow consumers to use their mobile devices for transactions at the POS – Cardholders link card payment information to a mobile device and use the mobile device to initiate a payment Mobile payments  Several solutions to mobile payments, utilizing different technologies, currently exist in the market  Many issuers view mobile payments as the natural next step after mobile banking  EMV (Europay, MasterCard, Visa) is the chip-based payments standard used to store card data as mandated by EMVCo  EMV features improved security, which will reduce card-present transaction fraud EMV  EMV should also enhance card acceptance outside the U.S. (where chip cards are prevalent)  EMV could potentially allow multiple transaction types to be supported on one card (e.g. combining debit and credit) 29
  30. 30. Mobile paymentsMany express interest in participating in mobile payments pilots Mobile payments pilot participation  There is limited participation in mobile payments pilot programs, but strong interest – Large banks are the most active in participating in pilots – Some issuers have initiated employee pilots  Some issuers who have participated in pilots have been unsatisfied, often due to the absence of indicative results 30
  31. 31. Most issuers are familiar with networks’ EMV rule EMVchanges and expect the transition to be challengingIssuers’ familiarity with EMV mandates “We are waiting for developments and% of issuers question whether the deadline will be pushed back.” – Community bank “Much needs to be addressed at a processor level before banks can adequately determine their individual EMV strategy.” – Large bank “We are concerned about merchant participation and the results from the lack thereof when implemented.” – Credit union 31
  32. 32. EMVIssuers are taking a “wait-and-see” approach to adopting EMV Issuers’ plans to issue EMV cards “The top merchants may go % of issuers through a full transformation, but most merchants will move slowly. Merchants are worried about investing too much initially and then experiencing a rule change. Most people will adopt a wait-and- see approach.” – Large bank “We will be issuing our platinum/international cards next year. We will slowly migrate to standard issue as the market adjusts to EMV acceptance.” – Community bank 32
  33. 33. Summary  Debit growth continues to be strong despite profound changes to debit as a result of Reg II – Regulated issuers are investing less in debit and are pursuing different tactics than in the past (e.g. scaling back or discontinuing rewards programs, promoting PIN over signature) – The environment doesn’t seem to have changed for exempt issuers. Debit economics are similar – for now – The requirement to participate in at least two unaffiliated networks resulted in major shifts in PIN network affiliations, routing dynamics are still playing out  New technologies are generating significant interest among issuers. Mobile payments and EMV are generating the usual mix of emotions associated with change – excitement, skepticism and trepidation – Issuers who have tested mobile payments are not particularly enthusiastic, but many issuers are still interested in piloting the technology – Very few issuers plan to migrate to EMV, largely driven by certain costs and uncertain benefits 33
  34. 34. Questions? 34
  35. 35. Thank Yousalesperson@pulsenetwork.compulsenetwork.com 35

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