Payment Cards

Market Trends & Analysis

Community banks provide a menu of payment services ranging from credit, debit, and prepaid cards to support their customers’ payment needs. The Federal Reserve’s triennial survey highlights shifts in consumer payment behavior. The study finds cards continue to increase their share of non-cash payments.

Credit card payments saw robust growth at an annual rate of 9.9 percent by number. A notable trend is the rise of debit cards year over year, which were used almost twice as often as credit cards. However, the value of credit card payments exceeded the value of debit card payments by nearly 30 percent.

Crucially, in the post-COVID-19 environment, the debit card, which is linked to a bank account, has become a powerful financial management tool for consumers in the weakened economy.

Market Trends

Source: The 2019 Federal Reserve Payments Study

The coronavirus era accelerated existing trends with the shift toward digital channels and digital payment methods. Reflecting the increasingly digital world, mobile wallets, transactions from e-commerce activities, peer-to-peer (P2P) money transfers from apps (like PayPal, Venmo, Zelle, and Square Cash), and the gig economy are fueling card payments.

Online, the number of consumers who make half or more of their monthly purchases via e-commerce flourished during the pandemic. Economic indicators collected by the U.S. Department of Commerce estimate e-commerce transactions increased 32.1 percent in the fourth quarter of 2020 from the fourth quarter of 2019. This trend is expected to continue.

With the increase in digital payments, fraud is also on the rise as bad actors take advantage of the disruption from the crisis. The dollar volume of attempted fraudulent credit and debit charges soared 35 percent from the previous year. However, community banks are incorporating technology enhancements, such as tokenization and 3D Secure, to improve traditional payment cards' security.

Meanwhile, in the wake of the public health crisis, at the point-of-sale, perceptions of safety and touch-free convenience catalyzed a preference for contactless technology. Indeed, more than half (51 percent) of Americans now use some form of contactless payment, which includes tap-and-pay cards and mobile wallets like Apple Pay and Google Pay. Younger consumers are the most motivated to switch, with 72 percent of Millennials, compared to 56 percent of Generation X consumers and 31 percent of Baby Boomers, using contactless payments. More significantly, the market growth in remote transactions enabled by touchless technology is anticipated to continue in the coming years.

Looking ahead, evolving consumer behavior will drive two trends in the card industry: rewards and mobile payment technology. Recognizing the increased mobile wallet usage, community banks are expanding their digital capabilities with card features like cardholder controls and rewards ranging from cashback benefits to emerging perks like Bitcoin. Acquiring these digital capabilities is essential for financial institutions to maintain customer stickiness. Importantly, the key to remaining “top of wallet” will be incentive offers in combination with customer engagement to build loyalty.

Another type of card experiencing growth in the post-COVID environment is the general-purpose reloadable (GPR) prepaid card, or prepaid debit card. Community banks offer a suite of prepaid card products that range from general use, government programs to payroll, rewards/incentives, and health benefits. However, the largest opportunity lies with prepaid debit cards that offer an accessible banking option to reach the underserved community like the unbanked or underbanked segments, including Millennials.

Payments Graph

The first round of stimulus payments were sent to approximately 4 million consumers. Another 8 million Americans are anticipated to receive Economic Impact Payments on a prepaid debit card in the second round of stimulus payment. These are consumers who don’t have banking information on file with the IRS and may be largely underbanked.

According to a 2019 FDIC survey, 27.7 percent of unbanked households used a prepaid card, compared with 7.4 percent of banked households.


Position

  • ICBA strongly supports the continued viability payment card systems that recognize the important role of community banks as digital delivery channels evolve.

  • ICBA urges policymakers, payments networks, and digital wallet providers to ensure that the customer can choose their top-of-wallet card or preferred card-on-file payment method.

  • ICBA strongly opposes efforts that, while theoretically intended to prevent unfair, deceptive, or abusive payment card acts or practices, would adversely affect community bank payment card issuers and agents as well as their customers.

  • ICBA strongly opposes efforts to have the government set or limit payment card interchange or other fees, mandate interchange fee disclosure to consumers, or create antitrust exemptions allowing merchants to “negotiate” or “operate” in anti-competitive and collusive ways to the detriment of community banks and their customers. Government intervention should not diminish issuer or consumer choice by providing one payment card an advantage over another payment card.

  • ICBA supports consumer choice in payment card offerings through enhanced transparency, education and fairness. However, ICBA opposes any efforts to create a disclosure regime that would have the effect of limiting choices for consumers across the socio-economic spectrum or subject community banks to burdensome legal and compliance scrutiny.

  • ICBA supports efforts to improve payment card security and decrease fraud risk through evolving card security technologies, including data analytics, biometric technology, neural networks, tokenization, authentication, and end-to-end transaction encryption.

Background

Digital Delivery Channels. Technology has improved traditional payment cards with enhancements such as tokenization and 3D Secure. Digital delivery channels such as contactless mobile payments and scan-and-pay allow consumers to make payments by holding or swiping their phones near a terminal. This technology has become increasingly common in the United States with the proliferation of contactless credit and debit cards.

Consumer Choice. Digital wallets can enable greater choice by allowing the customer to select from multiple cards issued by multiple financial institutions. Wallets should accommodate any card issued and branded by a chartered and federally insured financial institution and honor the consumer’s preferred choice of payment card.

Consumer Protection. Community banks provide a menu of payment card services to execute the exchange of monetary value. Community banks strive to balance transparency, safety, soundness, and profitability in payment card programs that support the needs of a financially varied customer base.

Congress and the federal agencies must exercise caution by ensuring that efforts to establish and maintain an environment protecting consumers from unfair, deceptive, or abusive acts or practices do not unnecessarily impede community banks’ ability to respond expeditiously to changing markets and consumer needs. Policies that generate more compliance costs for community banks will not benefit consumers.

Congress and the federal agencies must recognize that community bank payment card programs need to be profitable. If not, community banks will be forced to consider discontinuing various products including cards, further consolidating the industry, resulting in fewer choices and limited access for consumers.

Payment Security. Payment card system stakeholders are concerned about mitigating security risks and the need to adopt more sophisticated and secure technologies such as chips, tokenization, analytics, neural networks, biometrics, authentication, cardholder controls and end-to-end encryption. To mitigate the risks resulting from increasing digital transaction volumes, it is critical for all stakeholders to deploy advanced technologies optimally designed to keep pace with the evolving threat landscape.

Government Intervention. The debit interchange price controls implemented by the Durbin Amendment continue to harm community banks, small businesses, and consumers. Additionally, merchants are vigorously pursuing various regulatory and legislative strategies to further shift their payment card interchange costs to consumers and are likely to continue to push Congress to regulate credit card interchange fees and further weaken payments network rules in the future. ICBA remains adamantly opposed to government intervention and price controls that negatively impact community banks and their customers.

Staff Contact

Aaron Stetter

Executive Vice President, Advocacy and Strategic Engagement

Washington, DC

Email • Twitter

Susan Sullivan

Vice President, Congressional Relations

Washington, DC

Email

ICBA Resources


Relevant Resources


How Expanding the Durbin Amendment Would Further Harm Community Banks and Their Customers

March 07, 2022

With the Federal Reserve Board proposing to reopen Durbin Amendment regulations governing debit card interchange and merchants pushing to extend price controls to the credit card market, interchange promises to be a hot-button issue in 2022.

As the debate proceeds, ICBA is reminding policymakers that the Durbin Amendment has distorted the debit card and consumer checking markets to the detriment of community banks and consumers nationwide.

Customers Worse Off

The Durbin Amendment imposed artificial price controls on the interchange fees merchants pay to use debit card networks, with the idea that merchants would pass their savings on to customers. Unsurprisingly, this market intervention hasn’t worked out as intended.

Researchers at the University of Chicago examined whether merchants passed savings to consumers in the form of lower prices and better services—and they concluded that consumers ended up worse than before. Merchants have retained most of their savings for themselves, with the lion’s share accruing to the nation’s largest retailers.

Meanwhile, those large merchants have not passed on any savings to consumers to date. The result of the Durbin Amendment hasn’t been a reduction in consumer prices—it has been a wealth transfer from community financial institutions to “big box” and large ecommerce retailers.

U.S. small businesses have also been harmed by the Durbin Amendment. According to research from the Federal Reserve Bank of Richmond, merchants who specialize in small-ticket items are nine times more likely to have encountered an increase in interchange cost than a decline.

Unintended Consequences

A provision of the Durbin Amendment that transferred routing decisions from banks and consumers to merchants illustrates the policy’s unintended consequences.

Because large merchants have direct connections to the payments networks, unlike smaller retailers, they can and do negotiate with the debit networks for more favorable rates and fees. Industry experts estimate that a threshold of about $3 billion in annual card sales is required to get a seat at the negotiating table—a process that is neither transparent nor competitive.

Allowing merchants to control debit routing at the point of sale dilutes issuer assurances to customers that their bank protects access to their account. Suddenly, banks have little or no control over the routing they have carefully chosen based on their organization’s and customer’s needs. 

Further, the practice increases community bank costs by raising fees to access debit card networks while artificially lowering interchange rates.

If additional transactions are included in these rules—such as online purchases—community banks will again be disadvantaged while “big box” and large ecommerce merchants benefit.

The Bottom Line for Policymakers

As policymakers consider expanding the Durbin Amendment, community banks must be heard. Here are the facts community bankers can share with members of Congress to illustrate the impact of this harmful policy.

  • Consumers are harmed by the Durbin Amendment by paying higher prices and transferring wealth to “big box” merchants.
  • While the Durbin Amendment “exempted” small institutions, Federal Reserve data clearly shows it has harmed community banks.
  • Card issuers eliminated debit rewards for consumers due to the negative financial impact of interchange fee caps.
  • Imposing these policies on credit cards would undermine competition and innovation to the detriment of consumers who use these payment services.

While “big box” merchants continue pressing to expand interchange price controls to boost their profits, policymakers must be reminded that the Durbin Amendment has been a costly and harmful policy for community banks and the consumers they serve.