Tuesday, December 28, 2010

Oliver Wyman Reports that $11.8 BILLION of Debit Interchange Could Disappear

Oliver Wyman Report Finds $11.8 Billion of Debit Interchange Revenue Could Disappear Based on Proposed Draft Rules for Durbin Amendment

NEW YORK--(BUSINESS WIRE)--In the US banking industry, $11.8 BN of the current $16.2 BN generated in debit interchange revenue will disappear from the system, according to a new Oliver Wyman report titled, The US debit Market and the Durbin Amendment: Worse than the worst case scenario. Based on the proposed draft rules announced by the Federal Reserve on December 16, 2010, debit interchange revenue for regulated card issuers will decline by 73%, from an average of $0.44 per transaction today to, at most, $0.12 per transaction, as of July 21, 2011. With the new rates set in reference to a sub-set of all debit card costs, the economics of debit card programs will become significantly unprofitable.
“The new economics associated with operating a debit card portfolio are likely to lead to fewer rewards programs, more consumer fees, and a different set of banking choices.”
Between 2000-2009, debit has grown at an average annual rate of 18% and is now the most commonly used non-cash method of payment. In 2009, there were 37.9 billion debit card transactions performed in the US, representing 35% of total non-cash retail payments. Currently, card issuers generate an average of $87 of revenue per active consumer debit card per year, but starting on July 21st, for banks with at least $10 BN in assets, this figure will drop to $24 per year.
Card issuers with less than $10 BN in assets may also be affected, as there is no provision that requires debit networks to set different interchange rates between large, regulated card issuers and small, exempt card issuers. The Oliver Wyman report states that if debit interchange revenue for smaller issuers does decline, the result could be severe; not only will these programs become highly unprofitable, the very viability of some community banks and credit unions will be threatened.
Interchange revenue from debit cards provided many banks with the economic foundation to support free checking for mass-market customers; without this revenue source, financial institutions are likely to implement a range of direct-to-consumer fees.
In addition to price regulation, the proposed debit rules place certain conditions upon banks’ affiliations with debit card networks. A number of large banks will be required to partner with new debit networks by October 1, 2011, with the potential for even greater upheaval.
“The proposed regulation will have massive and far-reaching consequences for retail banks”, said Tony Hayes, Partner at Oliver Wyman Financial Services and author of the report. “The new economics associated with operating a debit card portfolio are likely to lead to fewer rewards programs, more consumer fees, and a different set of banking choices.”
The Oliver Wyman report recommends banks do the following: (1) restructure their core debit card business (2) re-price and reposition the underlying demand-deposit accounts (DDAs) and associated payments businesses, and (3) submit commentary on the draft proposed rules before the Federal Reserve’s February 22, 2011 deadline.
For a copy of the Oliver Wyman report, The US debit Market and the Durbin Amendment: Worse than the worst case scenario, please go to www.oliverwyman.com/ow/ow_durbin-amendment-debit-market.htm
About Oliver Wyman
With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is an international management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation and leadership development. The firm helps clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies (NYSE: MMC). For more information, visit  www.oliverwyman.com.

The US Debit Market and the Durbin Amendment

Worse Than the Worst-Case Scenario - What Banks Need to Do Now
On December 16, 2010, the Federal Reserve released its proposed rules to regulate the US debit card market, as required by the “Durbin Amendment”. In the time since the Dodd-Frank Act was signed into law on July 21, 2010 and now, many financial institutions and other parties involved with debit card transactions have been busy studying the statute and developing scenarios to understand what form the regulations might take and how their organization would respond. By all accounts, the Fed’s draft rules addressing interchange rates and issuers’ network participation are worse than anyone’s worst‑case scenario.

Based upon the draft rules, debit interchange revenue for regulated card issuers will decline by 73%, from an average of $0.44 per transaction today to, at most, $0.12 per transaction, as of July 21, 2011. Furthermore, the proposed rates do not distinguish between signature debit and PIN debit, meaning that the revenue differential between these two forms of debit use is likely to decline or disappear. For the banking industry, almost $12 BN of non-interest revenue will vanish from the system.

Today, issuers generate an average of $87 of revenue per active consumer debit card per year; from July onwards, for banks with at least $10 BN in assets, this figure will drop to $24 per year (equating to $13 per card, across all debit cards).

The median variable cost for an issuer to perform a signature debit transaction is $0.175, based on a narrow definition of “allowable costs”. The result is clear: with the new rates set only in reference to a limited subset of all debit card costs, and only based upon variable costs at that, the economics of operating a debit card program will become significantly unprofitable.

The question of issuer participation in debit card networks remains unresolved. The Fed is considering one of two potential rules:
  • All debit cards must participate in at least two unaffiliated debit card networks. In all likelihood, this will mean one network for signature debit and a different unaffiliated network for PIN debit.
  • All debit cards must be in at least two different networks for each authentication method (i.e., two networks for signature debit, and two networks for PIN debit).

Regardless of which network rule is adopted, there will be significant operational upheaval and customer disruption for many issuers. This rule applies to all financial institutions, whereas the Fed’s regulation of interchange revenue applies only to issuers with at least $10 BN in assets.

In short, the proposed Regulation II, as required by the Durbin Amendment, will have a material impact upon all retail banks.

We summarize in this paper key aspects of the Durbin Amendment and the draft rules recently released by the Federal Reserve (the final rules are scheduled to be announced on April 21, 2011). We also provide some perspectives on what banks ought to do now.

In sum, we believe that all retail banks need to pursue multiple concurrent strategies to prepare their business for these upcoming changes to the debit card market. These strategies include: (a) restructuring the core debit card business, (b) re-pricing and repositioning the underlying DDA and associated payments businesses, and (c) responding to the request for comment on the Fed's draft rules.

AuthorTony Hayes, Partner in the North America Retail and Business Banking Practice


Oliver Wyman
Jung Kim, 646-364-8355
Permalink: http://www.businesswire.com/news/home/20101222006068/en/Oliver-Wyman-Report-Finds-11.8-Billion-Debit

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2010 Holiday Full Season eCommerce Report: Spending up 15.4% to 36.4 Billion: SpendingPulse

2010 Season Saw Six Days with More than $1 Billion in Sales
PURCHASE, N.Y.--(BUSINESS WIRE)--MasterCard Advisors:
“Today eCommerce accounts for a much larger share of overall retail sales compared to a few years ago. And during this holiday season, it registered double digit growth for 6 out of 7 weeks” 
Data Source:
A macroeconomic indicator, SpendingPulse reports on national retail and services sales and is based on aggregate sales activity in the MasterCard payments network, coupled with survey-based estimates for all other payment forms, including cash and check. MasterCard SpendingPulse does not represent MasterCard financial performance. SpendingPulse is provided by MasterCard Advisors, the professional services arm of MasterCard Worldwide.
MasterCard Advisors’ SpendingPulse, a macroeconomic report tracking national retail and services sales, today provided summary results for eCommerce sales over the full 2010 holiday shopping season. During the period October 31 to December 24, U.S. consumers spent an estimated $36.4 billion, a 15.4% year-on-year increase over the 2009 holiday season.
“Today eCommerce accounts for a much larger share of overall retail sales compared to a few years ago. And during this holiday season, it registered double digit growth for 6 out of 7 weeks,” noted Michael McNamara, Vice President, for MasterCard Advisors SpendingPulse. “In terms of sub-categories, apparel was the clear leader, helping increase the channel’s overall lift. In terms of share, online apparel sales during the holiday season accounted for 18.8% of total sales in that category, compared to 16.9% in 2009. As for some of the other sub-sectors, online electronics, not surprisingly, also recorded significant gains, while Jewelry, although still in positive territory, lagged behind.
In terms of highlights, there were 6 days in the 2010 season that surpassed $1 billion in sales compared with 3 days in 2009. Top days included Tuesday November 30, which registered $1.16 billion in sales, and Wednesday December 1, registering $1.13 billion. The Monday after Thanksgiving generated $999.3 million in sales, a 25.3% increase compared to the Monday after Thanksgiving in 2009.
About MasterCard Advisors
MasterCard Advisors provides payments consulting, information, analytics, and customized services to financial institutions and their merchant partners worldwide. Addressing complex challenges in strategy, marketing, risk, and operations, MasterCard Advisors helps clients maximize the value of their payments businesses. As the professional services arm of MasterCard Worldwide, MasterCard Advisors is uniquely qualified to provide clients with insights and solutions that drive tangible impact and financial gain. For more information, go to www.mastercardadvisors.com.
About MasterCard Worldwide
As a leading global payments company, MasterCard Worldwide prides itself on being at the heart of commerce, helping to make life easier and more efficient for everyone, everywhere. MasterCard serves as a franchisor, processor and advisor to the payments industry, and makes commerce happen by providing a critical economic link among financial institutions, governments, businesses, merchants, and cardholders worldwide. In 2009, $2.5 trillion in gross dollar volume was generated on its products by consumers around the world. Powered by the MasterCard Worldwide Network – the fastest payment processing network in the world – MasterCard processes over 22 billion transactions each year and has the capacity to handle 140 million transactions per hour, with an average network response time of 140 milliseconds and with 99.99 percent reliability. MasterCard advances global commerce through its family of brands, including MasterCard®, Maestro®, and Cirrus®; its suite of core products such as credit, debit, and prepaid; and its innovative platforms and functionalities, such as MasterCard PayPass™ and MasterCard inControl™. MasterCard serves consumers, governments, and businesses in more than 210 countries and territories. For more information, please visit us at www.mastercard.com. Follow us on Twitter: @mastercardnews.


Meir Kahtan Public Relations, LLC
Meir Kahtan, +1-212-575-8188
MasterCard Worldwide
Naya Larsson, +1-914-249-3916
Permalink: http://www.businesswire.com/news/home/20101223005836/en/SpendingPulse-2010-Holiday-Full-Season-eCommerce-Report-eCommerce

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Discover Small Business Watch: Small Biz Confidence Falls after 3 Month Rise

Discover® Small Business WatchSM
Small Business Economic Confidence Falls in December after 3-Month Rise

Survey Shows Decline in Small Business Owners Who Think the Economy is Getting Better
FINANCIAL PLANNING: Economic Downturn Affects Small Business Retirement Plans
RIVERWOODS, Ill.--(BUSINESS WIRE)--Three months of rising confidence among small business owners stalled in December, as fewer see economy getting better and more see it getting worse, according to the Discover® Small Business WatchSM. The monthly index dropped to 81.6 in December, down 5.6 points from November. The index remains 4.6 points higher than one year ago.
“Do you plan to retire before age 60, between ages 60 and 65, between 65 and 70 or do you plan to retire after age 70?”
Twenty-five percent of small business owners said the economy is getting better this month, down from 33 percent in November; 51 percent said it is getting worse, up from 46 percent; and 22 percent said the economy is staying the same, up from 17 percent the prior month.
“Through the four years we’ve been studying them, small business owners have remained a bit fickle when it comes to their confidence in the economy,” said Ryan Scully, director of Discover’s business card. “Like the rest of us, they’re seeing some positive signs, but they aren’t ready to declare victory, especially not with 62 percent of them still rating the economy as poor.”
Other Confidence Indicators
  • 25 percent of small business owners expect economic conditions for their businesses to improve in the first half of 2011, a drop from 28 percent a month ago; 26 percent expect conditions to remain the same, up from 24 percent; and 43 percent expect conditions to worsen, down from 44 percent in November.
  • 21 percent of small business owners will increase spending on business development in the next 6 months, down from 25 percent in November. 42 percent will decrease business development spending, up from 40 percent; and 32 percent do not plan any changes, up from 28 percent last month.
  • 62 percent rate the current economy as poor, up from 59 percent in November; 30 percent rate the economy fair; 5 percent rate it good; and 3 percent rate it excellent.
  • 45 percent have encountered temporary cash flow issues within the last 90 days that have caused them to hold off on paying some bills, up from 43 percent in November, while 49 percent have not had cash flow issues; and 6 percent were not sure.
Financial Planning Poll: Retirement Planning Slows
The number of small business owners who have a financial plan for retirement is down from a year earlier, when the Watch first surveyed small business owners on the topic. This year, 50 percent of small business owners said they have a financial plan for their retirement, down from 62 percent in 2009.
At the same time, the recession has depleted the savings of 74 percent of small business owners, the same number as last year, while 20 percent said the recession had no impact, and 5 percent saw their retirement savings increase.
When asked how much their retirement savings they had lost, fewer small business owners than last year reported that they had lost between 30 and 50 percent of their savings.
Asked of those small business owners who said their retirement savings had decreased:
How much did the recession decrease your retirement savings?
  2009 2010
A decrease of up to 10 percent 12% 17%
A decrease of 10 to 20 percent 24% 17%
A decrease of 20 to 30 percent 17% 24%
A decrease of 30 to 50 percent 24% 18%
A decrease of more than 50 percent 19% 20%
Not sure 5% 5%
When asked how likely is it that they will have enough resources to last through retirement, 56 percent indicated it was somewhat or very likely, down 63 percent from last year.
How likely is it that you will have enough resources to last through your retirement?
  2009 2010
Very likely 24% 24%
Somewhat likely 39% 32%
Not very likely 25% 24%
Not at all likely 7% 11%
Not sure 4% 9%
Fewer Planning to Retire
More small business owners are putting the brakes on retirement. When asked if they plan to retire by a certain age, 38 percent of small business owners said they do not plan to retire, up from 30 percent a year ago.
When asked “Do you plan to retire before age 60, between ages 60 and 65, between 65 and 70 or do you plan to retire after age 70?” US small business owners say they:
  2009 2010
Do not plan to retire 30% 38%
Plan to retire before age 60 13% 14%
Plan to retire between ages 60 and 65 28% 21%
Plan to retire between ages 65 and 70 18% 19%
Plan to retire after age 70 9% 8%
Not sure 3% 1%
About the Small Business Watch
The Discover Small Business Watch is a monthly index measuring the relative economic confidence of U.S. small business owners who have less than five employees, a segment that consists of 22 million businesses producing more than a trillion dollars in annual receipts. The Watch is based on a national random survey of 750 small business owners. It is commissioned by Discover Business card, which strives to offer the best business credit card for American small businesses, and is conducted by Rasmussen Reports, LLC (www.rasmussenreports.com), an independent survey research firm. The numeric index is calculated by assigning values to responses to a set of five consistent questions. The base value of the Watch was established at 100.0 based on surveys conducted in August 2006. In addition to generating the index, the Small Business Watch surveys small business owners every month on key issues, and polls 3,000 consumers four times per year to gauge purchasing behavior and attitudes towards small businesses. For past results and survey data, visit www.discovercard.com/business/watch. For information on Discover Business card, visit www.discovercard.com/business.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company operates the Discover card, America's cash rewards pioneer, and offers personal and student loans, online savings accounts, certificates of deposit and money market accounts through its Discover Bank subsidiary. Its payment businesses consist of Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discoverfinancial.com.
The views and opinions expressed by small business owners and consumers who participate in the Small Business Watch survey are their own and do not necessarily reflect those of Discover Financial Services or its affiliates.


Discover Financial Services
Jon Drummond
Jessica Douglas
Permalink: http://www.businesswire.com/news/home/20101227005079/en/Discover%C2%AE-Small-Business-WatchSM-Small-Business-Economic

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PayPal Grows in Volume and Independence, says Auriemma Consulting Group

NEW YORK--(BUSINESS WIRE)--PayPal, once seen as a niche product primarily for eBay transactions, has achieved mainstream status for American consumers. According to a new survey conducted by Cardbeat®, conducted by Auriemma Consulting Group (ACG), more than three-quarters (76%) of American consumers have an active PayPal account, up sharply from 55% in their 2008 survey.
“but it’s striking to find that 69% of respondents 45 and older said they have an active PayPal account. Many of our respondents say they feel more comfortable using PayPal rather than their credit cards for online shopping.”
“PayPal has long been popular with young consumers,” noted Patricia Sahm, Managing Director at ACG, “but it’s striking to find that 69% of respondents 45 and older said they have an active PayPal account. Many of our respondents say they feel more comfortable using PayPal rather than their credit cards for online shopping.” The Cardbeat survey also found significant gains in frequency of PayPal usage, rising from an average of 10.8 purchases a year in 2008 to 14.0 annual purchases in the most recent study.
Although PayPal still accounts for less than 10% of total online sales volume, the seemingly inexorable growth of ecommerce drives more and more dollars to the payment service. While final volume counts await the end of the holiday shopping season, PayPal reported a 27% increase over 2009 in Black Friday online payments.
And those millions of PayPal accounts are increasingly bypassing the credit card networks altogether. “We’re seeing substantial gains in consumer willingness to provide their bank account information to PayPal,” Sahm said. In 2008 45% of survey respondents said that they were “uncomfortable””with the idea of providing bank account information to an internet-based payment company like PayPal; in the most recent 2010 study that percentage had fallen to 31%. “Where Visa and MasterCard formerly had a complementary relationship with PayPal when consumers used their credit cards to fund their PayPal account, the credit card networks are cut out of the exchange when PayPal is positioned like a debit card linked directly to the checking account.”
About Auriemma Consulting Group
Auriemma Consulting Group (ACG) is a full-service management consulting firm serving the payments and lending industries since 1984. Cardbeat is ACG’s syndicated market research study of credit card holders, conducted monthly in the U.S. and quarterly in the U.K. With offices in New York and London, ACG consultants are experienced practitioners, drawn from the credit card, private label, auto finance, mortgage, and retail banking industries that we serve. For more information, contact Pat Sahm at 212-323-7000 or patricia.sahm@acg.net.


Auriemma Consulting Group
Pat Sahm, 212-323-7000
Permalink: http://www.businesswire.com/news/home/20101227005084/en/PayPal-Grows-Volume-Independence-Auriemma-Consulting-Group

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