Credit, Debit and Prepaid Cards Industry Update: 2011 Study of Payment Trends and Member Preferences...

©2011 DFS Services LLC Confidential and Proprietary Do Not Copy or Distribute

1

Credit, Debit and Prepaid Cards Industry Update: A 2011 Study of Payment Trends

and Member Preferences

Kevin O’Donnell, Vice President Discover Financial Services


2

Who We Are

Note: Volume based on the trailing four quarters ending 1Q11

• Global brand known for service, rewards, and cardholder benefits

• In over 185 countries/territories

• Millions of premium consumer and corporate cardmembers many who travel to U.S

• $27 billion in volume• 50 franchises

• Comprehensive payments solution including credit, debit and prepaid

• $103 billion in volume• 30+ Issuers• Signed agreements with

126+ merchant acquirers representing 98% of U.S. merchants

• Enabled over 1 million previous non-acceptors

• Leading U.S. PIN- based ATM/debit network with 4,400+ participating financial institutions

• All top national PIN debit retailers accept PULSE

• Over 780K ATMs and cash access locations worldwide

• $118 billion in volume


3

How We Got Here

NAFCU Services Preferred Partner– Expertise and innovation in credit, debit, and prepaid solutions– Collaborative, flexible approach – Known for customer service, rewards, and loyalty– Commitment to your brand and your members financial health

Invited to share our findings to help you understand the market and grow your member base


4

As of June 20, 2011, the national average for a gallon of gas is $3.65 – up more than $0.92 from last year.1

Analysts estimate oil and gas prices won’t stabilize until summer.2

Price Spike – Libyan rebellion stops 1.5 million daily exports of crude3

Gas prices could surpass the 2008 record level of $4.11 per gallon.3

Unrest in Middle East

Oil SpeculatorsPush Up Price

Summer Blend Increases Cost

High Gas Prices Impact Consumer

Spending / Sentiment

High Gas Prices Impact Consumer

Spending / Sentiment


5

Consumer Confidence Versus Food, Gas and Unemployment

75

85

95

105

115

125

135

145

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

CPI:Food Avg Regular $/Gal Consumer Confidence Unemployment

Source: U.S. Bureau of Labor Statistics, U.S. Department of Energy and The Confidence Board


6

Today’s Agenda

Credit Usage– Credit – Debit and Prepaid Usage

Consumer and Member Interest– Mobile: Banking, Payments and Couponing– Merchant Funded Rewards

Solutions for Credit Unions– Gen Y Targeting and Offerings

Key Takeaways


7

Credit Usage


8

How Members Use Their Cards

Source: Millward Brown, 2011 Brand Tracking Study

I Have Used One or More of My Major Credit Cards in the Past Six Months

86%87%88%89%90%91%92%93%94%95%96%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month PeriodCU: Average Non-CU: Average CU Non-CU

Credit Union member year- over-year use is increasing


9


Transactor -- Always/Almost Always Pay the Entire Balance

42%

44%

46%

48%

50%

52%

54%

56%

58%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month Period

CU: Average Non-CU: Average CU Non-CU


Long term trend: CU

members less likely to be transactors


10

How Members Use Their CardsRevolver -- Usually Pay

Less Than the Entire Balance

40%

42%

44%

46%

48%

50%

52%

54%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11




11



I am Currently Paying Down a Balance on One or More of My Major Credit Cards

40%

42%

44%

46%

48%

50%

52%

54%

56%

58%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11



12

Polling Question


13

Opened a New Credit Card Account in the Past 3 Months

0%

2%

4%

6%

8%

10%

12%

14%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month Period




Keep product offerings current and competitive


14

I am Concerned About My Credit Card Interest Rate Rising Over Time

42%

44%

46%

48%

50%

52%

54%

56%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month Period




Credit Union members fear

rising rates


15

I Don't Trust Any Credit Card Company to Treat Me Fairly

10%

15%

20%

25%

30%

35%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month Period




Sell on your advantages but

know your competition


16



Grocery Spend

0%

10%

20%

30%

40%

50%

60%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11

3-Month PeriodDebit Avg Credit Avg Debit Credit

Members continue to prefer debit for grocery

by 50% to 30%


17



Gas Spend

34%

36%

38%

40%

42%

44%

46%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11


No significant shifts in debit vs.. credit usage,

even with higher gas prices


18



Dining Out Spend

0%

5%

10%15%

20%

25%

30%35%

40%

45%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11


Even split between debit vs.. credit


19



Routine Household Purchases

0%5%

10%15%20%25%30%35%40%45%50%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11


Members have slight preference for debit vs..

credit at 37%


20



Major Household Purchases

0%

10%

20%

30%

40%

50%

60%

70%

80%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11


Major household purchases have

increased from 59% to 67% on credit


21



Major Home Improvement

0%

10%

20%

30%

40%

50%

60%

02/10-04/1003/10-05/1004/10-06/1005/10-07/1006/10-08/1007/10-09/1008/10-10/1009/10-11/1010/10-12/1011/10-01/1112/10-02/1101/11-03/1102/11-04/11


Home improvement expenses have gone from

45% to 51% on credit


22

Debit and Prepaid Usage


23

Debit Transaction Mix

Consumer PIN and Signature Transaction Growth

9% 9%8%10%

13% 13%

0%

4%

8%

12%

16%

20%

24%

PIN Transactions SignatureTransactions

Tran

sact

ion

grow

th

2007-2008 2008-2009 2009-2010

Transaction growth decreased to 8% for PIN debit and increased slightly to 10% for signature debit

Signature debit accounted for 68% of total POS transactions in 2010

Some regulated Financial Institutions (those with at least $10 billion assets) expressed a desire to reverse the signature/PIN mix due to impending regulation

Source: PULSE 2011 Debit Issuer Study - Oliver Wyman - May 2011


24

Polling Question


25

Debit Card Usage

1. Active cards based on FIs active definition. PIN and signature transactions per card do not sum to total transactions per card due to the presence of dual- function cards. 2. Past participants are FIs that participated in both the 2010 and 2011 studies and that reported the same active rate definition for both years.

Monthly POS Transactions per Active Consumer Card1

Past participants2 FY 2010

16.4 16.3

5.35.56.25.2

12.313.7

11.7

14.0

16.4

14.0

0

4

8

12

16

20

Large Banks Credit Unions Community Banks Overall

Tran

sact

ions

/car

d

PIN Signature Total

Active cardholders perform an average of

16.3 POS transactions per month. Do you know your

number of average transactions?



26

73%

56%

73%

55%

73%

53%

Penetration Active Rate

2008 2009 2010

Debit Card Penetration and Activation Card penetration has remained flat since 2008, while active rates have declined

Defined as “any signature POS transaction within

the last 30 days”

Average Penetration and Active Rates

For active rates defined as “any transaction within the last

30 days,” the active rate is slightly higher at 60%, up from 54% in 2009.



27

8%9%

8%

10%

7% 7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

PIN Transaction Growth Signature TransactionGrowth

Tran

sact

ion

grow

th

2010 Forecast 2010 Actual 2011 Forecast

Growth Expectations for 2011 Financial Institutions expect continued debit growth – with or without the Durbin Amendment

Transaction Forecasts1 Projected 2011 Growth Rates

1. Weighted by 2010 transaction volume

0%

5%

10%

15%

20%

25%

30%

35%

0% 5% 10% 15% 20% 25% 30% 35%Signature txn growth (%)

PIN

txn

grow

th (%

)

Large Banks Credit Unions Community Banks



28

6%

73%

14%

67%

27% 22%

9%

27%29%

10%

0%

20%

40%

60%

80%

100%

Gift Cards Flexible SavginsAccount/HealthSaving Account

Cards

Payroll Cards General PurposeReloadable Cards

Other PrepaidCards

2009 2010

1. Regulated FIs are FIs with at least $10 BN in assets and are hence subject to the interchange cap; Exempt FIs are not subject to the cap but are subject to other provisions

Prepaid Card MixFIs offering Prepaid Card1

% of Issuers



29

Underbanked Consumers More Likely to Have Prepaid/Payroll Cards than Other Consumers

Source: Javelin, 2011 Prepaid Cards and Products, Expanding and Innovating for Mass Market Appeal, April 2011


30

Underbanked Consumers More Likely to Use Prepaid/Payroll Cards than Debit or Credit Cards



31

Gen Y Consumers Use Prepaid Cards More Frequently than Other Generational Segments



32

Consumer and Member Interest


33

Mobile Interest

Source: Yankee Group, A View from the Trenches: What Consumers Think of Mobile Transactions, February 2011


34

Mobile Banking Activities

The basic mobile transactions to

serve these customers

Source: Forrester Research, North American Technographics Financial Services Online Survey, Q4 2010


35

Mobile Banking Adoption/Interest


84% 93% 73% Already offer or plan to introduce.


36

Rewards Programs as Popular than Ever

Incidence of Most Frequent Use of Rewards Cards of respondents who have a rewards card

78% - Rewards card is their primary card

22% - Rewards card is not primary card

Criterion for Most Frequently Used Rewards Card of respondents who use a rewards card most frequently

Q. What is the most important reason you use your primary rewards card? (Base 173)

Q. Are any of these rewards cards your primary card? (Base 223)

Source: Auiemma Consulting Group, Online Survey of 508 Credit Users, Feb 2011

Reward cards attract a more affluent card member base. Use reward cards

to bring card to top of wallet.


37

Transaction Marketing Offer And User Flow

Source: Forrester Research, Boosting Revenue With Merchant-Funded Offers, May 2011

Transaction Marketing Process

Credit Union and credit card

providers Credit Unions and

credit card providers present the offer to the segment(s) the merchant wishes to

target.

Transaction marketing company Vendors enable Credit

Unions and card partners to match the

offer against debit/credit card

information.

Merchant Merchants create an offer for a specific member segment,

along with the amount and duration

of the offer.

Member The member

activates the offer and receives a reward once a transaction for

the merchant is posted.

1 2

4 3


38

Merchant Offers on Online Transaction History

Source: Forrester Research, Boosting Revenue With Merchant-Funded Offers, May 2011

My Credit Union


39

Solutions for Credit Union


40

Credit Union Member Demographics

Credit Union

Average Age 46.4

Age

18-34 26%*

35-44 21%

45-54 24%*

55+ 29%

Median Income $49.1K

Average Income

<$25K 19%

$25 - $50K 33%

$50 – $75K 20%

$75K+ 28%


*Statistically significant at 95% confidence level

Credit Union

Marital Status

Married 54%

Divorced 11%

Single 24%

Other 11%

Children in Home? 28%

BankingChecking 98%

Savings/CD 93%*

Investments 47%


41

Credit Unions and Generation Y

Source: Aite, The IT Priorities of US Credit Unions, February 2011


42

Gen Y Behaviors

Source: Javelin Strategy & Research, Gen Y: How to Engage and Service the New Mobile Generation, May 2011

Gen Y consumers are heavy users of both online and mobile servicesElectronic methods and devices are used for routine tasks such as balance inquires, statement viewing and CSR questions

Financial institutions have the ability to shape Gen Y behavior todayA strong electronic strategy is a must for attracting Gen YBy 2012, 90% of credit unions expect to have a dedicated budget for social media efforts


43

GEN Y Financial Needs

Source: Javelin Strategy & Research, Gen Y: How to Engage and Service the New Mobile Generation, May 2011

One out of five Gen Y consumers lacks a demand deposit account (22%); 6% still do not have any banking productsOne in every five Gen Y consumers switched financial institutions over the past 12 months

Financial institutions need to develop product offerings that resonate with this groupEducation and financial management are essential in developing “trusted advisor” role that Gen Y consumers value and will create relationships that translate into higher value


44

Example of Credit Unions Targeting Gen Y


45

Key Takeaways


46

Key Takeaways

Credit Union revolvers have decreased, but Credit Unions have more revolvers than overall portfolios

– Use APRs and rewards to attract either segment

Credit Union members are more sensitive to interest rate than general population

Credit Unions are seen as more trustworthy than other financial institutions and viewed as a financial consultant

Opportunity to capture more cardmember spend in categories like grocery, major household purchases or major home improvement with acquisition and usage campaigns


47

Key Takeaways

Reach underbanked consumers and Gen Y with prepaid products

Mobile banking growth and adoption rates are high. Usage and demand is growing. Basic functionality is used most.

Rewards attract more affluent card member base

Focus on developing a strategic approach to attract Gen Y as Credit Union members


48

Questions?

Kevin O’DonnellVice President

Discover Financial Services [email protected]

Credit, Debit and Prepaid Cards Industry Update: 2011 Study of Payment Trends and Member Preferences...

Business

Transcript of Credit, Debit and Prepaid Cards Industry Update: 2011 Study of Payment Trends and Member Preferences...