By 2007, debit cards will edge out credit cards as the Internet payment vehicle of choice, says Ed Kountz, senior analyst at Jupiterresearch.
According to Kountz’ research, online credit card payments accounted for 42 percent of all online purchase volumes, compared with 39 percent of payment volumes for debit. But by next year, those numbers will reverse—39 percent for credit and 42 percent for debit. And by 2010, says Kountz, credit cards will account for 35 percent of online purchase volumes, compared with 46 percent for debit. That translates to an 8 percent annual compounded growth rate for credit between now and 2010, compared with 14 percent for debit.
“The conventional wisdom you’ll hear from the associations is that there’s really no overlap (between credit and debit),” says Kountz. “And from a value perspective, credit will continue to predominate. I don’t think you’ll see debit wipe up the floor or eliminate credit—that’s much too simplistic to say. But issuers need to be prepared for that shift as it comes down the pike; the short-term impact on credit will be moderate, but longer term, it does clearly pose a challenge for what has traditionally been a credit-dominated world.”
Credit’s predicament is only compounded, according to Kountz’ research, by the rise of non-card payment alternatives available online, such as stored-value cards and peer-to-peer payments. Such alternatives won’t be taking over the space anytime soon, but the growth rates will be strong: 21 percent for stored-value cards and 12 percent for peer-to-peer payments. And even though they’ll be coming off a very low base (4 percent of online payments in 2010), and be restricted to items like wireless content, market share for those payment vehicles will more likely be cut from credit’s hide than debit’s.
This can’t be good news for the credit card business. Even though some analysts like to spin the shift in consumer preference from credit to debit spending as no big deal, since the issuers collect their fees from whichever card a buyer uses, the fact is that the credit apparatus is deeply entrenched in issuers’ establishments. This means that at a minimum, the increased use of debit will create internal shifts at those companies as credit revenues and transaction volumes decline. Since e-commerce sales is the fastest-growing segment of card payments, Kountz’ research is at best unlikely to give credit establishments much comfort looking forward.
This is especially true because, as Kountz points out, paying online with a debit card means low-fee, PIN debit transactions, since no signature can be given to authenticate the transaction. Today, no adequate online PIN-entry mechanism is widely deployed, but so-called screen-based floating PIN entry is one possible solution. That innovation involves an on-screen PIN pad into which the buyer makes PIN entries by mouse click, instead of using numbers on their keyboard, thus maximizing security by making it impossible for a keylogger virus to steal the PIN. ATM Direct is currently conducting a pilot program for this system.
”The alternative is some sort of token that’s not necessarily a hardware plug-in,” says Kountz. “I’m still skeptical of the whole token approach. You can lose them or not have them with you when you need them, and for a consumer, it’s just one more thing they have to manage. But assuming (floating PIN entry) can be done securely and effectively from a consumer perspective, it’s a much more intuitive approach than adding hardware.”
The implications of Kountz’ observations for issuing banks can’t be encouraging. Although he declined to speculate on how the phenomenon he describes would affect them, the fact is that revenues from credit card operations are a significant fraction of the largest American banks’ earnings. Some 60 percent of credit card earnings are debt, and PIN debit interchange is significantly lower than signature debit and credit card interchange.
To the extent that online transactions migrate from credit cards to PIN debit, then, it’s a small step to conclude that the fastest-growing payments sector today is set to yield lower per-transaction revenues than the rest of the cards sector, in turn minimizing the revenues growth curve for those banks’ overall card operations. This hardly means that credit cards are disappearing, but combined with the likely future minimization of interchange fees, either through regulation or litigation, it does mean issuing banks are going to have to start running faster, just to stay in place, and much faster to get anywhere.
“Certainly, credit profitability, and credit overall, has been moderating growth-wise, and I expect that trend to continue,” says Kountz. “Resting on the laurels of the past is no longer enough.” (Contact: Jupiterresearch, Ed Kountz, 617 423 4372)