Durbin Debit 101 (required): Retail Deposits Have Changed Radically Overnight
Lesson one discussion board: Consumer Adoption of Debit
Lesson 1: Debit Landscape. While it may seem obvious to those who have been in the industry for the past decade or more, with the recent changes in the debit landscape in the US, it bears repeating that retail deposit access management is fundamental to the overall health of US financial institutions, retailers and to the economy in general. Just as “Paying With Plastic” has become the primary way consumers conduct anytime, anywhere commerce worldwide, using plastic to access funds on deposit has become the primary way US consumers conduct commerce.
We will start this course with a baseline overview of the key stakeholders in the debit business along with the major economic and behavioral drivers of each. In the next lesson we will look at how those fundamental forces interact, and sometimes conflict, as the marketplace evolves. In the final lesson plan we will review the major changes afoot in the industry from the confluence of these forces and how they may evolve. We’ll take that same basic approach to each of the courses we plan to teach over the next few months, but for now, let’s get started with the fundamental forces at work with each of the key stakeholders in debit transactions.
Consumers: Want to Pay Electronically With Funds on Hand. Despite all the noise in the news about consumer borrowing and the rise of unsecured credit, retail consumer spending is very much a story of people using the funds they have to buy the things they want and need. Of the nearly $9+ trillion in consumer spending this year, nearly two-thirds of consumer spending is via direct access to funds at hand (deposits in either a Demand Deposit Account or prepaid vehicle) via cash, check, debit, or ACH. If we add estimates for “monthly charge” behavior on either explicit charge products (example: traditional Amex consumer cards) or on credit cards that consumers pay in full every month, the total share of consumer spending against funds at hand rises to over 80% of all purchases. Consumers are also dramatically increasing their use of electronic payments, growing their use of cards (for a host of benefits including convenience, security, record-keeping, rewards, etc) at over twice the rate of overall spending. And as every US economist will tell you, growth in consumer spending is key growth in Gross Domestic Product, by some estimates accounting for as much as two-thirds of GDP. So, just by some simple math, consumer access to funds at hand could be responsible for as much as half of the overall US economy.
Retailers: Want to Facilitate Sales Cheaply and Conveniently. When a consumer shows up at a merchant checkout with a basket of goods, the retailer wants to close that sale as quickly and efficiently as possible. Electronic payments certainly win here as well, providing rapid transactions, automated information, guaranteed payment, and streamlined checkout processing. By and large, electronic payments have been a boon to retailers – for large established retailers electronic payments, particularly debit, are replacing enormous cash management operations that require the management and movement of millions of pieces of paper. Retailers of all sizes enjoy the ability to access large populations of consumers with a consistent process. For example, a new business owner can open a retail storefront or build a website, sign up for general purpose card acceptance, and have immediate access to over 2 billion consumer accounts worldwide as customers. What’s at issue for retailers, particularly the largest ones, is that while the benefits of electronic payment are clear, the value prop – particularly the cost of acceptance—has not behaved the way they would expect. A large grocer expects to pay less per pallet of soda with more pallets bought. Payments acceptance unit costs have not scaled the same way as card payments volume has grown within their business. And while most retailers have seen acceptance costs remain relatively flat on a per-transaction basis, the rapid growth in consumer adoption of electronic payments means that retailers’ overall costs of acceptance have risen in absolute terms, even if they have seen some decline in unit costs.
Financial Institutions: Want to Compete Sustainably for Consumer Deposits. While there have been many changes in the retail deposit business over the past 10-15 years, the most significant changes in the US marketplace have perhaps been these two: 1) the fall of Glass-Stiegel, which created a national marketplace for retail deposits and drove consolidation in deposit institutions, creating truly national banks for the first time, and 2) the growth of card-based access to consumer deposits over national networks – whether the existing Visa/MasterCard rails or the EFT/ATM networks as they consolidated in concert with bank and processor consolidation. The combination of these trends created major deposit organizations, managing millions of consumer accounts with increasingly sophisticated card portfolio management practices. As these organizations grew in size and scale, they began to exert more influence on the networks that balance the interchange between banks bringing consumers and those banks bringing merchants to their payments platforms. Increasingly, deposit institutions have competed vigorously for consumer relationships, providing increasingly valuable and convenient services to consumers at very low direct cost to account holders. Revenues from payments enterprises in retail banks, especially transaction revenues from electronic deposit access, have made it possible for banks to give the average soccer mom on her way home from practice access to electronic networks to fill up the car, secure supplies for the school project, and buy dinner essentially for free.
Summary: Consumer spending – and particularly consumer access to funds at hand– drives GDP. Retailers and banks both have businesses built on the need to facilitate this consumer access. Retailers have enjoyed growth in business and processing efficiency but are looking for ways to have those benefits at lower unit cost. Banks have provided consumers with low- to no-cost deposit accounts and free anytime access to funds, sustaining their retail franchises largely on the basis of transaction revenues generated by card transactions. Until very recently, these two big business interests negotiated that interaction between themselves. However, now that they have engaged the national legislature and the Federal Reserve in the management of that interchange between them, how will they mutually support the growth of their businesses that are dependent on electronic consumer access to deposit funds? In our next lesson we will review the possible ramifications of the Durbin amendment and its potential impact on the business of providing consumers with anytime, anywhere access to their money. We will then conclude the lesson with a review of how the marketplace might evolve, and how payments constituents should be thinking about the growth of their businesses in that context.
Lesson one discussion board: Consumer Adoption of Debit
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