Mercator Blog

Recent Reversal of Judge Leon’s Ruling on Swipe Fees Unlikely to Delay Consumers’ Shift to Alternative Payments
Date: March 27, 2014
Karen Augustine
Manager, Primary Data Services
A collective sigh of relief no doubt arose from U.S. financial institutions after the March 21 U.S. Court of Appeals decision reversing U.S. District Judge Richard Leon’s ruling on debit card swipe fees that would have lowered interchange further and increased the number of networks available on every card. The latest decision upholds the earlier Federal Reserve Board implementation of the Durbin Amendment that capped the debit interchange rate to about 21 cents per transaction and requires only one signature and one PIN network be enabled on debit cards. This reprieve, however, is unlikely to stop consumers from shifting to alternative payment solutions. The providers of prepaid cards, online payment services, and emerging solutions from outside the payments industry don’t have to worry about interchange fees and government regulations and can stay focused instead on delivering a better shopping and buying experience for merchants and consumers.

According the latest Insight Report from Mercator Advisory Group’s CustomerService Survey Series, Consumers and Debit 2013: A Shift to Alternative Financial Services, the percentage of U.S. consumers using debit cards declined 15% since the Durbin Amendment was enacted. Young adults are especially likely to have shifted away from using debit cards. For the first time since the annual survey started tracking payment card use in 2009, young adults are no more likely than average to use debit cards and far fewer use them today than did at debit cards’ peak in 2011 (58% of young adults used debit cards in 2013, down from 75% in 2011).

In fact, fewer young adults and consumers even have a bank account today compared to consumers surveyed in 2011. Instead, more consumers, especially young adults, are using alternative payments such as prepaid cards and online payment services and services obtained from providers whose primary business is not in the payments field, such as retailers, convenience stores, and Apple (for funding iTunes accounts). For example, significantly more consumers purchase money orders or initiate money transfers using services outside of the banking industry than do so from a bank or credit union.

Financial institutions need to reevaluate the appeal and ease of use of their debit cards and work more closely with merchants to develop “top of wallet” applications that will capture the attention and convenience that their consumers demand.

For more information on the demographic shift and changing landscape of debit card use, please refer to Mercator Advisory Group’s CMSS Insight Report, Consumers and Debit 2013: A Shift to Alternative Financial Services, which is based on an online survey of 3,000 U.S. adults reflective of the U.S. Bureau of the Census demographic profile. The report also presents survey findings on consumers’ use of a broad range of payment services, brand awareness and use of eight brands of payment services, channel used for alternative payment services, account opening experiences, awareness of new fees and reaction to those fees, other changes to checking accounts and interest in new services for debit cards and willingness to pay for each service.