Despite the rampant talk of rising spending via alternative payment methods, one thing is clear from the latest Federal Reserve Payments Study: debit card payments represent one of the most popular payment methods in the US. In this article, we will discuss why debit remains one of the most popular and efficient payment methods – and why nearly 10% of debit transactions between January and June 2023 occurred on cards where the issuer had changed the networks available to merchants.
According to the Federal Reserve’s 2022 Payments Study, debit cards accounted for nearly 88 billion payments – approximately 56% of all card payments in the US – in 2021. This amounts to an 800% increase in debit card transaction usage over the past two decades.
While digital wallet volumes have reportedly grown substantially, it’s important to recognise that the underlying payment method for most digital wallets in the US is some form of bank account or card, most typically a debit card. For example, wallets such as Apple or Google Pay are usually card-backed, meaning the underlying payment credential is a payment card.
Similarly, reloadable wallets typically utilise a card or bank account as the underlying funding mechanism. For merchants who have elected to turn on contactless acceptance for in-store transactions, accepting a card-backed or reloadable wallet isn’t really a choice, as there are no distinctions between the contactless card and near-field communication (NFC) used by digital wallets. Thus, when reports indicate that digital wallets represent 32% of online spending, it is worth noting that many of those payments may simply rely on debit cards.
In one word: co-badging.
As a result of regulation dating back to 2010, debit cards in the US offer merchants multiple competing network rails for an individual transaction. Until recently, this competition has primarily been available on card-present, PIN-entered transactions, but as of 1 July 2023, co-badging and routing should be guaranteed for all card-present and card-not-present transactions. In contrast, credit cards in the US are typically badged with only one card network, prohibiting merchant routing choice.
With multiple network options on a card, merchants are able to dynamically send each transaction to the most efficient network. For example, the merchant may elect to route a transaction to Network A if it’s the most affordable for a USD 10 transaction – or to Network B if it’s most affordable for a USD 100 transaction. According to CMSPI estimates, debit routing in the US and across the globe is saving merchants billions of dollars:
In the US, we estimate that debit routing is estimated to save merchants over USD 4 billion annually.
In Germany, routing to the local scheme Girocard can save merchants EUR 200 million annually.
In Australia, merchants can save an estimated AUD 800 million annually with access to eftpos, the domestic debit network.
In addition, some merchants are able to utilise their debit volumes to attract favourable pricing with individual networks. If a merchant observes that 70% of their transactions could be sent to Network A, they may elect to guarantee Network A routing priority for all available volume in exchange for interchange rebates, network fee cost reductions, or per transaction discounts. Essential to this calculus is understanding the real-time, card-level availability of the near-dozen debit networks in the US.
After a debit card is issued in the US, the issuing bank can adjust the available networks badged on the card without any need to reissue the card. As a result of this dexterity, US issuers regularly decide to change the available networks on cards, resulting in significant disruption for debit-routing merchants.
The extent to which available networks change on cards appears to be increasing. From January to December 2022, CMSPI’s debit optimisation tool observed that nearly 10% of transactions occurred on cards where the networks were different from the beginning of the period. This year, however, is shaping up to be one of the most active with respect to network issuance changes, with nearly 8% of transactions occurring on cards where the networks were different from January to June (Figure 1).
These swings in availability can seriously disrupt volume-based merchant debit incentives, as even just a 1% drop in network issuance can cause a merchant to fall below the required volume tier for incentives.
Figure 1: Share of transactions occurring on cards where the networks have changed
It is clear from the Federal Reserve’s data that debit represents one of the most dominant payment methods in the US, and it is still growing to the tune of 7% YoY. With debit’s enduring role in US payments, it is essential for merchants to review their own data to understand their exposure to networks and how that is changing over time.
Network badging changes can occur simply due to the change in an issuer and network’s relationship, without any forewarning to merchants. In some months, up to 2.5% of transactions can take place on cards with different networks from the preceding month. This means that merchants must monitor network issuance changes regularly to ensure that their arrangements are and remain optimal.
This editorial piece was first published in the Payment Methods Report 2023, which provides an in-depth overview of the latest worldwide developments in how people pay, the payment methods space, the innovative technologies that these methods work upon, and the best strategies on how to win at conversion and retention.
Christian manages the company’s industry engagement and strategies on regulatory trends, finding innovative ways to develop data-driven narratives on the biggest issues in the payments industry. Christian works with stakeholders across the payments industry to promote competition and foster a more productive payments ecosystem, drawing on CMSPI’s market-leading data insights.
About CMSPI
As the leading global payments consultancy, CMSPI has an unrivalled track record of saving global merchants millions by optimising their payments supply chain.
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