Article

Consumer use of debit, prepaid cards heats up

Choice and consumer awareness pack a card-market punch, two studies reveal.

August 9, 2006 by Valerie Killifer — senior editor, NetWorld Alliance

Consumers are using debit and prepaid cards more than ever, according to independent studies conducted by Greenwood Village, Colo.-based First Data Corp. and Boston-based TowerGroup.

The 2005-2006 Consumer Payments Usage Study, conducted by First Data Corp.'s Star Network, says debit is the fastest-growing payment method in the United States. The study, released Aug. 1, included responses from nearly 14,000 consumers in 35 states.

A second study, Prepaid Cards: The Latest Payment Option, conducted by TowerGroup analyst Dennis Moroney and released July 2006, asserts consumer awareness of stored-valued cards, more commonly referred to in the market as prepaid or gift cards, has increased 16 percent over the past five years, and has the potential to hit the $3 trillion mark by 2010.

The fast track

According to the Star study, the average consumer's point-of-sale activity has grown over the last five years, from fewer than eight transactions per month in 2000-2001 to more than 11 in 2005-2006. And having a choice between PIN- and signature-based transactions has driven the increase.

Consumers who were given a choice between signature- and PIN-debit transactions conducted about 23 monthly debit transactions last year. Those who weren't given a choice conducted about half.

The Star study reveals that when one debit choice is offered, signature is more prevalent than PIN. Consumers averaged 14 signature-based transactions in a month versus only 10 PIN-based. That breakdown is likely a reflection of limited choices, since 45 percent of the study's surveyed consumers said they preferred PIN over signature. Only 33 percent said they would choose signature over debit.

When consumers are given a choice between PIN and signature, they conduct more transactions, said Beth Lynn, senior vice president of Star's strategy and portfolio-management division.

"Institutions that try to steer customers in one direction or another may end up with less overall transactions, and may end up with customers using cash," she said.

Lynn said banks, credit unions and retailers need to continue providing both options, and let their customers decide which transaction they'd rather conduct at the POS.

The Star study also shows that monthly cash withdrawals at the ATM dropped from the nationwide average of 5.8 in 2004 to 5.3 in 2005. About 37 percent of the Star survey respondents said fees played a role in their cash-withdrawal habits. And Lynn said increased cash-back options at the POS also have cut into ATM use.

What's fraud got to do with it?

Consumers say they prefer PIN transactions because of perceived security.

"Institutions large and small reported fraud losses (from) signature to be four times that of PIN," Lynn said. "Any fraud is bad because it creates a perception in the consumer's mind that no matter which way, PIN or signature, it's going to be a risky transaction."

Lynn said Star is encouraging its financial institutions to educate consumers about debit-transaction security.

"There are lots of ways of committing fraud, whether PIN- or signature-based," she said. "We encourage institutions to de everything they can to use fraud solutions all across the board."

Gaining ground

Consumer attitudes also are changing, says TowerGroup analyst Dennis Moroney. In the prepaid or stored-value card market, consumer awareness, interest and application-use continues to grow.

FIs and processors can thank the retail and phone-card markets for the advent of stored-value cards, Moroney said. The cards were introduced as closed-looped systems in the 1970s as public-transportation passes and college-campus cards, according to the Federal Reserve. Prepaid phone cards hit the market in the '80s, but it wasn't until the early '90s that open-system cards were introduced on the retail scene.

Today, prepaid cards are an entry point for companies to develop card users, primarily among the underbanked and unbanked. Twenty-eight percent of U.S. households do not have credit cards, according to the TowerGroup study. Industry estimates also suggest that the U.S. market now includes between 10.5 million and 16.5 million unbanked or underbanked Hispanic consumers.

Those realities create a market opportunity for stored-value card growth, Moroney says, especially among the travel, healthcare, convenience, corporate and government markets. Hispanics, young professionals and urban consumers between the ages of 20 and 30 also fall into growth categories.

One hang-up: Stored-value cards are not without their own fraud issues. Accountability, capital adequacy, funds availability, and lost or stolen cards account for the majority of prepaid fraud.

A common goal

The increased use of PIN- and signature-based debit and prepaid cards has led to a decrease in paper transactions. Prepaid cards have almost replaced gift certificates, paper tickets and tokens. In contrast, debit transactions have replaced the use of cash and checks.

"Our goal is not PIN versus signature," Star's Lynn said. "Our goal is electronic versus not."

The more transactions FIs can move from paper to electronic-commerce, the greater the benefit for the FI and the consumer, she said.

"The issuing institution gains more revenue," Lynn said.

In addition, customers who are given the convenience of a debit card also have a reinforced relationship with their FIs.

Prepaid cards also have become relationship-building tools. They give non-credit-card users an alternative, and they have the ability to help those consumers evolve into credit-card users, Moroney said.