The shakier the credit markets in the US
get, the more promising the outlook grows for debit cards. There
are several emerging and high-growth debit markets that should
carry substantial transaction volume and value as they come to
fruition. Charles Davis reports.

As the US banking industry copes with tighter financial markets,
new waves of bankruptcies and foreclosures, and economic
uncertainty, the debit card’s increasingly dominant position as a
payment vehicle will continue through 2009 and beyond, a new
research report from global financial services consultancy
TowerGroup says. Prepaid cards will also continue their rapid
growth as a result of foreclosures affecting credit scores and
consumers continuing to require the benefits of payment card

The report, Crediting Debit: How Debit Cards Will Grow in a
Changing Environment, by senior TowerGroup analyst Brian Riley,
explores why debit cards will continue strong transaction growth
regardless of a downturn in the economic climate and its uncertain
impact on aggressive credit card lending. In fact, the study leaves
the impression that the credit industry’s loss is the debit card
market’s gain.

The report found that debit card transactions grew three times more
quickly than those for credit cards from 2005 to 2007, as consumers
separated purchases into lending versus spending products. As
consumers and businesses work their way out of a sluggish economy,
TowerGroup projects the weakened economy will continue to erode the
rate of credit card transaction growth.

Turning away from credit

Although personal savings rates in the US fell to record lows in
2004, debit card volume continued to grow. Even as consumers feel
the squeeze, their reliance on payment cards for business
transactions is visible. US consumers haven’t stopped spending, nor
have they eschewed cards – they’ve just turned to debit instead of

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“Debit card volume continued steady, aggressive growth as savings
rates in the United States fell to record lows in 2004,” wrote
Riley. “While consumers tightened budgets or were unable to save
discretionary cash, they continued to need to transact by payment
card for their everyday needs. Although consumers might not have
the cash flow to save, financial institutions are still the
distribution channels for payroll and benefits; the need to
transact against these accounts continues even as savings rates

TowerGroup believes the debit market is primed for growth from
channels and relationships beyond the confines of traditional
retail banking products. There are several emerging and high-growth
debit markets that should carry substantial transaction volume and
value as they come to fruition. These include person-to-person
payments via the emergence of mobile and contactless transactions,
micro-payments covering low-value transactions, and preloaded debit
products aimed at the teenage and college markets.

Debit growth overtakes credit

The growth rate for credit cards between 2005 and 2007 was 5
percent compared with 17 percent and 18 percent for signature and
PIN debit, respectively. Debit card transactions first exceeded
credit card transactions in 2005, and debit should continue to
maintain its lead, said Riley.

In 2006, debit card volume reached $130 billion while savings
totalled $40 billion. In 2005, debit card volume was $110 billion,
and Americans saved about $40 billion.

“Deep inside these growth numbers are market factors that shifted
volumes from the credit card to debit and prepaid products,” Riley
wrote. “During the period under examination, primary and secondary
mortgage activity enabled consumers to pay down many credit card
balances. Debit cards absorbed a shift of consumable purchases,
such as gasoline, groceries, and consumer expenses, leaving the
credit card for durable goods purchases. Prepaid cards, a subset of
signature debit, brought many cardholders into the branded payments
market who either chose not to have credit or were not qualified.
The issuance of debit and prepaid cards, secured against available
cash rather than creditworthiness, opens the debit card to a
universal audience.”

Riley sees several channels for future debit markets as well.
Micro-payments form an emerging debit channel that offers
substantial transaction volume on low-value payments. The market is
highly suitable for mobile and contactless payments, with the
potential to reach $1 trillion.

Cross-border debit card products have not received much attention
because of the complexities of PIN debit and low rates of merchant
acceptance, but the growth of cross-border remittances and
multinational banks could create new opportunities. For example,
Riley noted that Canadian card processor Interac successfully
processes Canadian debits in the US through a relationship with
Metavante’s debit processor, NYCE.

Debit card products

Government benefits is currently a niche market dominated by
Citigroup and JPMorgan Chase, but rich opportunities exist in
speciality markets including child support and unemployment.
Unemployment benefits in the state of New York alone exceed $1
billion, and many state and federal programmes remain

Debit card products aimed at teenagers, business-to-business
payments, payroll, immigrants, the under-banked and health care
will grow, the report said.

“Debit cards will continue their accelerated growth despite changes
in the US economy,” the report said. “The product type provides
access to consumer asset accounts. While distribution of debit
cards is broad, activation remains low, although product
enhancements such as contactless and mobile payments will help
drive transaction activity. Substantial data exists in transaction
records that can empower forward-looking issuers to stimulate usage
from their debit card base. Debit cards have only begun to attack
the cash and check market. Numerous channel verticals, including
teenage cards, retirement accounts, health care savings, and
vacation travel, will provide additional throughput for the
payments network.”

Finally, there are the opportunities to mine debit transaction data
to cross-sell and drive debit use. While debit cards thus far have
been positioned largely as a defence mechanism for protecting
organic deposits, issuers stand to grow the product substantially
by mining that rich trove of transactional data, the report