Fed Survey Reveals New State of Affairs for Debit Issuers

PIN debit interchange fees are falling and fraud losses are rising, according to new data from the Federal Reserve.

The agency’s latest survey of interchange revenue, out this month, found that for many credit unions and other financial institutions not subject to the Electronic Fund Transfer Act’s interchange cap, the average interchange fee for debit transactions on single-message networks (typically PIN transactions) has continued to fall since the cap took effect in 2011. In 2017, it was $0.25, compared to $0.31 in the fourth quarter of 2011. However, fraud losses for all debit and prepaid card transactions rose to $11.20 for every $10,000 in transaction value in 2017, up from $10.30 in 2015.

Card use has nonetheless been booming, according to the report.

“For the past eight years, the volume of total card usage has grown steadily from 37.6 billion transactions in 2009 to 68.5 billion transactions in 2017, with an average growth of 3.86 billion transactions per year,” it said. “The total value of purchase transactions also exhibited growth, increasing from $1.43 trillion in 2009 to $2.62 trillion in 2017, with average growth of $0.15 trillion per year.”

The average annual growth rate in the volume of transactions processed over dual-message networks, which generally process signature transactions, fell from 8.8% per year from 2009 to 2016 to 4.7% from 2016 to 2017. However, the average annual growth rate in the volume of transactions processed over single-message networks increased from 6.8% per year from 2009 to 2016 to 7.2% from 2016 to 2017, the report said.

The growth rate for card-not-present transactions, which often occur online, hit 22.6% between 2016 and 2017. They were 18.9% of transaction volume in 2017, according to the data.

Although fraud losses on debit and prepaid card transactions rose in 2017, card issuers absorbed less of those losses. According to the data, they shouldered just 42% that year, compared to 58% in 2015. Merchants absorbed 53% in 2017, up from 39% in 2015.

Fraud incidence as a percentage of debit and prepaid transactions rose from 5.6 basis points in 2015 to 7.2 basis points in 2017, the Federal Reserve also reported. In addition, although the overall average loss per fraudulent transaction fell between 2015 and 2017, the average loss per fraudulent transaction for single-message debit card transactions ticked up slightly in 2017.

“Fraud losses as a share of transaction value continue to be lowest for single-message debit, with losses in the dual-message debit category more than twice as high – 6.7 and 13.8 basis points, respectively,” the Federal Reserve added.

“In absolute terms, the level of fraud losses due to counterfeit fraud was lowest for prepaid transactions (2.5 basis points) and highest for single-message transactions (4.2 basis points), with fraud levels for dual-message debit transactions in between (3.6 basis points),” it said.

Some of the other findings in the study included the following:

• In 2017, the average cost of processing a prepaid card transaction was $0.079. The average cost of processing a dual-message debit transaction was $0.040, and the average cost of processing a single-message debit transaction was $0.021.
• Prepaid card transaction volume grew faster between 2016 and 2017 than it did over the two previous years (11.4% versus 9.3%).
• The average card-not-present transaction in 2017 was about double the size of the average card-present transaction ($62.98 versus $32.47).
• The average network fee per transaction was $0.103, which is virtually unchanged since 2011.
• In 2017, chargebacks were 0.03% of all transactions. Returns were 0.80% of all transactions.
• In 2017, dual-message networks processed 64.9% of debit card transaction volume. Single-message networks accounted for the remaining 35.1%.
• The share of transactions processed by prepaid cards rose to 6.3% in 2017, up 3.1 percentage points since 2009.
• Covered issuers received payments and incentives that equaled 68% of the network fees they paid to dual-message networks and 20% of the network fees for single-message networks. For exempt issuers, on the other hand, those numbers were only 29% and 16%, respectively.