The US has the world’s largest payments market, as well as one of the highest levels of card penetration. In 2014, the US accounted for 86.6% and 88.2% of North America’s transaction value and volume respectively. However, the cheque market is slowly falling in the US, as it is in many areas across the globe
Electronic payments steadily gained ground in the US between 2010 and 2014, and in terms of transaction volume they have overtaken the once-dominant cheque.
The decline in cheque transactions gathered pace in the last ten years, largely due to a surge in the conversion of cheques into automated clearing house (ACH) debits. The shift towards electronic payments has also been aided by contactless technology, which launched in 2004 and is now gaining significant momentum. US consumers have a variety of contactless choices, as all major payment networks – Visa, MasterCard, American Express and Discover – have contactless cards available. As contactless becomes more widely accepted, payment card transaction value and volumes are expected to increase further over the next five years.
Focus has also increased on m-payments, with the launch of new solutions such as Samsung Pay, Android Pay, Apple Pay and the Starbucks mobile wallet. Competition in the industry is likely to intensify further with the launch of CurrentC and Chase Pay in 2016.
In a highly competitive and mature market, banks and card issuers are facing changing regulatory, competitive and customer dynamics. While card issuers are subject to rising regulatory requirements and increased competition, consumer behaviour has also changed; consumers are becoming increasingly value-driven and are looking for benefits beyond traditional products or services. This has put increased pressure on profitability, forcing issuers to reassess products, costs and revenue streams.
Credit card market recovering from the recession
The US economy and employment levels were badly hit by the global financial crisis of 2008-2009, forcing many consumers to default on credit card payments. Banks subsequently recorded high volumes of bad debt. Most banks cleaned their customer bases and deactivated bad credit accounts; the number of credit cards in circulation fell as a result.
Employment opportunities have improved with US economic growth since 2010. Supported by a strengthening economy and low credit card delinquency, banks have again started to focus on credit card business, albeit adopting a more cautious approach in terms of issue. In addition to targeting consumers with high FICO scores, banks and card issuers are now also offering cards to consumers with low credit ratings. For consumers with poor or fair credit histories, the average percentage rate (APR) is higher than normal, and the cardholder is required to make a security deposit with the bank to obtain a credit card.
Banks’ profitability under pressure due to interchange fee regulations
Profitability in the US cards and payments industry decreased following the regulation on interchange fee in 2011. Consequently, large banks saw their revenues on checking account and debit cards decrease, forcing them to adopt new strategies. To combat revenue erosion, banks increased checking account minimum-balances, maintenance fees and restricted reward programmes.
The Durbin Amendment caps the amount banks can charge retailers for swiping debit cards. The cap limits the fee to an average of $0.21 per transaction instead of the previous industry average of $0.44. The new limit took effect in the summer of 2011.
The current account fees that banks have found necessary to charge, to compensate for the Durbin Amendment, is gradually driving consumers away from debit cards. In the US, the regulatory burden on retail banking has compelled many to increase charges on their current accounts to maintain profitability. Free current accounts are diminishing, as banks impose fees to improve profitability. Wells Fargo ended its free current accounts in August 2012, making it mandatory for customers to pay a monthly service fee of $7 on all essential current accounts.
However, the Durbin Amendment only applies to financial institutions (FIs) with assets of more than $10bn – only a small proportion of the number of FIs in the US that issue debit cards, but also most of the cards in circulation. As a result, many larger banks have changed their focus on debit cards, and some are investing more considerably in credit cards.
Furthermore, for smaller banks and FIs, debit cards largely remain a profitable product to promote, and with the big banks’ emphasis on debit cards shifting, there may be an even greater opportunity for them to expand their debit card business.