Consumer Debit Cards, Trends

Part
01
of four
Part
01

Consumer Debit Cards: Technological Trends

In the past several years, the consumer debit card segment has seen a number of technological changes/trends. Below is a summary of examples of these trends and how they have impacted the segment.

EMV Chip

Contactless Payment

Integration of Cards and Mobile Phones



Part
02
of four
Part
02

Consumer Debit Cards: Economic Trends

Consumer or retail banks, specifically their debit card business, are affected by the following economic trends: The upcoming global recession due to COVID-19 and growing financial technology adoption. Details about these trends are discussed below.

Upcoming Global Recession Due to COVID-19

  • According to the International Monetary Fund, a global recession can be expected in 2020 as a result of the COVID-19 pandemic. This recession is estimated to be worse than the 2008 to 2009 global financial crisis, but there is an expected turnaround by 2021.
  • On March 11, 2020, 80% of banking and finance leaders from the United States and Mexico stated that a potential global recession was among their top 3 concerns during the pandemic. On March 25, that number rose to 84%.
  • As a result of the recession, banks are expected to have a short-term drop in payments revenue as demand declines in sectors like retail, travel, and entertainment.
  • In the Netherlands, there is a sharp 24% year-on-year decline in debit card transactions as a result of the COVID-19 pandemic. Debit card transactions in recreational venues such as bars, restaurants, and theaters had the sharpest decline at 83%. Very few transaction types saw an increase, such as a 10% increase in toy store transactions, a 5% increase in supermarket transactions, and a 2% increase for DIY stores.
  • Apart from the impact of a recession itself, consumer banks may be required to assist customers affected by the pandemic, leading to a decline in revenue from fees. In the United States, the FDIC encouraged financial institutions to provide relief to customers affected by the COVID-19 pandemic. Many consumer banks have offered to waive fees relevant to debit card accounts, such as overdraft fees, and also waiving limits on debit card transactions and withdrawals.
  • Specific states might also follow the lead of New York State, which adopted an executive order for financial institutions to restrict or modify "fees for the use of automated teller machines (ATMs), overdraft fees and credit card late fees."

Financial Technology Adoption

  • The use of technology is no longer limited to software and hardware companies. All companies and industries are expected to use technology as a competitive advantage, and distinctions between tech and non-tech companies are less relevant. For example, although Goldman Sachs is better known as an investment bank with a retail segment (Marcus), the company employed more engineers than tech companies such as Facebook.
  • On the consumer end, global adoption of fintech, or financial technology, is growing. As of 2019, it was at 64% globally, nearly double from 2017 (33%). In 2015, it was at 16%.
  • Among those using fintech services, 75% were using money transfer or payment fintech services. The primary reason why consumers choose a fintech challenger over an incumbent consumer bank is because of attractive rates and fees. This poses a direct challenge to the debit card market, such as in the United States, where debit cards are most frequently used for payments.
  • Fintech services, along with other new entrants in the banking market, were amassing up to a third of new banking revenue as of 2018, posing a challenge to the banking industry.
  • As a response to the growth of fintech adoption, consumer banks have developed their own fintech services, either through acquisitions or by creating them in-house. The largest incumbent banks are spending 40% of their IT budgets on digital transformation.
  • In the UK, 63% of players were new entrants, and they have taken up 14% of banking and payment revenues. Revolut, a digital bank, became the UK's most valuable fintech startup in 2020 when it was valued at £4.2 billion. It reports having 10 million customers worldwide.
  • Fintech services also collaborate with small banks to be able to provide debit cards. Zero, Venmo, and N26 collaborated with small banks to offer debit cards with rewards that were comparable to credit cards. Almost two-thirds of consumers are willing to switch to debit cards over credit cards if they provide similar rewards.
Part
03
of four
Part
03

Consumer Debit Cards: Societal Trends

The growing preference for cardless debit card transactions, the increasing uptake of contactless payments, and the growing demand for practical, colorful, or personalized card designs are three societal/social trends impacting the consumer debit card space.

Growing Preference for Cardless Debit Card Transactions

  • More and more consumers are processing cardless debit card transactions. That, is they are transacting e-commerce payments, peer-to-peer transfers, and push payments without using their physical debit cards. Only the bank accounts behind these debit cards are used.
  • This societal trend is driving growth in the debit card segment of the consumer banking industry. Much of the growth in the debit card market in the United States, for example, can be attributed to the increasing demand for cardless debit card transactions.
  • In said country, cardless transactions grew by 24% in 2018 and accounted for a fourth of debit card transactions.
  • This trend has also prompted a number of banks to upgrade their mobile banking apps, and explore and launch digital debit cards. Bank of America, for example, has recently launched a feature in its mobile banking app that allows users to access a virtual or digital debit card. This digital debit card can be utilized for in-app, in-store, or online payments.
  • Debit account holders who are still waiting for their physical debit cards to arrive can also use this digital debit card. The digital debit card can also be used to deposit or withdraw money at the bank’s cardless ATMs.
  • Based on a study, consumers are craving additional mobile banking features, including the ability to turn cards on or off, the ability to dispute card transactions, and the ability to make cardless ATM transactions.
  • The State Bank of India (SBI) is reportedly urging consumers to do away with their physical debit cards and use their smartphones instead. It recently introduced its YONO digital banking service that allows users to make cardless cash withdrawals from ATMs. Instead of a debit card, a six-digit reference number will be used.

Increasing Uptake of Contactless Payments

  • Consumers are increasingly using contactless payment methods as well. Contactless payment methods utilize near-field communication (NFC) or radio frequency identification (RFID) technology that allows consumers to pay for products or services with just a tap of their card or device on the point-of-sale terminal. Consumers no longer have to enter their personal identification number (PIN).
  • This societal trend is changing the makeup of debit card payments. Contactless transactions now account for a significant fraction of debit card payments.
  • In the United Kingdom, for example, contactless payments now account for 50% of debit card payments. Around 647 million debit card payments in the country were made with contactless technology.
  • The change in the makeup of debit card payments in the country can be attributed to the growing adoption of contactless payment systems for public transportation, and of mobile devices with digital payment capabilities.
  • Almost half of commuters in the United Kingdom say that the launch of contactless payments is “the single most significant improvement to their overall public transport experience.”
  • Worldwide, more and more cities are implementing contactless payment solutions to improve the experience of their commuters.

Growing Demand for Practical, Colorful, or Personalized Card Designs

  • Banks and fintech companies are observing that more and more consumers are favoring practical, colorful, or personalized card designs, such as vertically-oriented designs, rainbow designs, and custom designs that allow consumers to use a photo of their own choosing.
  • As a result of this societal trend, banks are issuing debit cards that tout these designs. In the United States, for example, neobank Revolut has rolled out new card colors, and Wells Fargo has launched custom-designed debit cards that allow customers to adorn their cards with their photo of choice.
  • Wells Fargo is seeing a 24% year-on-year growth in the demand for these custom-designed debit cards.
  • According to the bank, the personalization option is not only a fun and cool feature for customers but a driver of customer satisfaction and customer retention as well. A representative of the bank says innovations in card design are expected to continue.
  • In the United Kingdom, Starling Bank was one of the first financial service companies to issue vertically-oriented cards. According to the bank, the design was for practical reasons, as most consumers in the country hold debit cards vertically for use at card readers, ATMs, and contactless payment terminals.
Part
04
of four
Part
04

Consumer Debit Cards: Legal and Regulatory Analysis

Legal and regulatory trends related to debit card issuers can be divided into three primary categories, consumer protection, transaction-related fees, and the role of debit cards through technological shifts. Within each category the legal and regulatory framework varies significantly by country, with some countries taking a more active approach to consumer protection and fee management.

Consumer Protection

  • Overdraft Practices vary by country, with many adopting policies between 2010-2011. For example, in the United States, regulations adopted in 2010 requires debit card issuers to provide consumers with the choice of utilizing overdraft protection or declining their purchase at the point of sale to avoid the requisite overdraft fees. In 2011, the European Union adopted a fairness test which allows lawmakers to review fees, such as overdraft fees produced via debit cards, to ensure that they are fair to consumers.
  • With total payment card fraud reaching $27,85 billion in 2018, consumer protection against unauthorized transactions has been a continuous source of regulation and law, globally, over the past decade. Regulation such as Federal Regulation E (Reg E) and the Electronic Funds Transaction Act describes the time limits and process for consumers to receive reimbursement for lost or stolen funds. The European Union updated their unauthorized transaction process via the 2019 Payment Services Directive 2 (PSD2), specifically creating an unconditional refund right for debits.

Transaction Fees and the Cost of Spending

  • In the past decade, a variety of countries and the European Union have sought to impose limitations on transaction fees charged by debit card issuers. These fee restrictions range from the United States 2011 cap of 21 cents plus 0.05% of the transaction to the European Union’s 2019 PSD2 surcharge prohibition.

The Role of Debit Cards Amid Technological Advancement

  • Throughout the 2010s, Europe, South America, Canada, and the vast majority of Asian countries began requiring the use of Europay, MasterCard, Visa (EMV), or chip-based debit cards. The use of EMV cards in the United States did not gain traction until October 2015, when legislation required merchants to adopt EMV card readers in order to avoid liability.
  • Adoption rates through 2019 show the United States and Asia Pacific region still lagging behind in EMV adoption rates, with 60.9% and 58.1% respectively, compared to Africa and the Middle East, where the adoption rate reached 89.4% in 2019.
  • E-Commerce and secure payment processing represent the next area of significant global change. North America and parts of the European Union have adopted a regulatory framework ensuring the security of online payments while countries such as China, Pakistan, and India still lag globally. Payment Card Industry Security Standard (PCI DSS) provides one of the most robust regulatory environments for online payment processing which still heavily utilizes debit cards in their process.

Regulatory Structure of Debit Cards

  • Regulations such as those listed above are implemented by individual countries except single currency groups, such as the European Union, which has crafted multi-country regulations such as the Payment Services Directive 2.
  • Most countries follow a similar approach to legal and regulatory requirements for debit card issuers, even sharing standards such as EMV technology. The largest disparity in the regulatory landscape comes in the form of timing and enforcement with countries such as the United States, Pakistan, India, and the Asia Pacific region often lagging behind the regulatory efforts of the European Union.

Sources
Sources

From Part 02
Quotes
  • "You should anticipate a short-term drop in payments revenues caused by the collapse in demand across sectors like retail, entertainment and travel. However, data from China indicates that while domestic demand certainly plummeted, a large share of expenditure moved to e-commerce platforms, as a result of which digital and online payment volumes spiked. A key driver of payments revenue is therefore likely to be a mix shift, with those markets that have less-developed e-commerce sectors being hardest hit. What is clear is that, even though some domestic demand will move online, tourism revenues will evaporate."
  • "Frankly, there isn’t much that banks can do to mitigate an overall drop in payments volume other than try to actively manage fixed costs and capacity. "
Quotes
  • "Goldman Sachs has known for many years that technology is a key competitive advantage in financial services. The firm’s Chairman and CEO Lloyd Blankfein once said “Goldman Sachs is a technology firm” and pointed to the fact that, at the time, the company employed more engineers than companies such as Facebook, Twitter, or LinkedIn."
Quotes
  • "The incumbents that are most responsive to this competitive threat are those that disrupt their own propositions and offer comparable FinTech services, either through partnerships, acquisitions or in-house development. In recent years, incumbents have brought forth their FinTech versions of disrupted services in areas such as online foreign exchange, online investment advice and management, and digital-only branchless banking."