Survey Finds Debit Outlook Remains Strong but Challenges Begin to Mount

First, the average penetration rate for debit cards has essentially flattened, up only 1% over the 72% last year to 73%. Average activation rates industrywide improved only slightly, moving from 56% last year to 59% in this year's survey.

Since just about all new checking accounts opened now have debit cards attached to them, Hayes attributed the slowing penetration rate to legacy checking accounts where the account holders have declined debit cards and will probably not change their minds.

In addition, activation rates can be a difficult figure to measure precisely since it is based only on when a cardholder validates a purchase with their signature and not a personal identification number. It's possible, for example, for someone to use their debit card only for transactions at ATMs or with a PIN and never have his card formally identified as activated. Hayes blamed Visa and MasterCard policies that put the emphasis on the signature debit transactions for the way issuers report active and inactive debit cards.

But Hayes stressed that the survey showed that debit card usage has continued to grow. Every segment of financial institution except community banks saw their total monthly use of debit cards rise and debit cards in the industry, on average, are used over 16 times per month. However, there were indications that the rate of growth is slowing and would require the industry to continue to press forward to open more segments of the economy to the cards.

The survey also documented that debit card fraud remains on the minds of card executives, with incidences of card fraud continuing to rise across all kinds of transactions.

Overall, 68% of card losses came through signature debit fraud, 25% through ATM fraud and 7% through PIN debit fraud. This last was somewhat surprisingly low since PIN debit fraud has been the type that has drawn the most industry attention over the last couple of years. On average, in terms of gross dollar volume, the survey reported that signature debit losses have risen 15%, from 4.71 basis points of gross dollar volume in 2005 to 5.40 this year. By comparison, though still a small part of overall fraud picture, losses from PIN debit fraud had risen 80% from 0.61 basis points of gross dollar volume in 2005 to 1.09 basis points this year.

Somewhat discouraging for the industry's overall fraud effort, the report found the "unknown/other" category for where card data had been compromised was still the largest or second largest classification. In situations where card data alone is compromised, data breaches accounted for 34% of the compromises while 33% remained unknown. In cases where both card information and PIN were compromised, 38% of the compromises remained with causes unknown while only 15% were laid to data breaches where most of the industry's prevention efforts are concentrated.

Significantly, although there is pending legislation that could sharply sting card interchange, card executives ranked the pressure on interchange rates as only fourth in their list of key debit challenges in the coming year. Instead, 68% of executives surveyed said maintaining transaction growth, likely through some sort of rewards program, was the biggest debit challenge they faced, with 66% saying fraud losses were the biggest challenge, and 56% reported combating the efforts of retailers at point of sale to get cardholders to use their PINs.

However, 20% of the executives surveyed listed "decoupled debit cards" as a challenge while 2% listed them as an opportunity. Decoupled debit cards are issued by parties other than a financial institution but can be linked to the cardholders checking account though the ACH direct debit system.

–dmorrison@cutimes.com