The 2012 Debit Issuer Study, commissioned by PULSE, a Discover Financial Services company, presents an impartial assessment of debit card issuer performance and perspectives across electronic payments. This year’s study is based on primary research with 57 credit unions and banks that collectively represent approximately 87 million debit cards and 47,000 ATMs. The data presented examines debit performance metrics and the impact of Regulation II. This webinar goes over the findings. For more info: www.nafcu.org/discover

1. Executive Summary
2012 Debit Issuer Study
Steve Sievert
Executive Vice President, PULSE
November 29, 2012

2. Study Overview
 PULSE commissioned Oliver Wyman to conduct the 2012 Debit Issuer
Study, the definitive assessment of the debit card industry
– Based on primary research with 57 financial institutions (FIs), drawn from
across FI types and sizes, geographies and network affiliation
– Conducted in April and May 2012
– Sample includes ~87 million debit cards and is representative of the market
Segment Label Participants Segment Participants
Large banks (Top 60) LB 26 Regulated 27
(≥ $10 BN in assets)
Credit unions CU 15
Exempt (< $10 BN in assets) 30
Community banks CB 16
Total 57 Total 57
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3. Summary of Key Findings
 While debit growth remains strong, issuers report profound changes to their
business as a result of Regulation II
– For regulated issuers (≥ $10 billion in assets), how they manage their debit
business has fundamentally shifted
 Important changes in terms of the overall attractiveness of debit, the relative
importance of different transaction types, and interest in debit rewards and GPR
prepaid cards
– Many issuers were affected by the requirement to participate in at least two
unaffiliated networks
 Issuers report on how they make their network selection decisions and how the
dynamics within the transaction routing market are still playing out
– Certain fundamentals of the debit business remain true, post-Reg II
 For exempt issuers, economics and the importance of debit has been relatively
unaffected, to date
 For all issuers, debit growth remains robust and managing fraud is a challenge
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4. Summary of Key Findings (cont’d)
 New technologies and business models are generating considerable
interest among issuers
– 47% of issuers indicate that they would like to pilot mobile payments (to enable
their debit “cards” in a mobile wallet)
 However, of issuers that have tested it, interest has waned
– Most issuers are aware of Visa and MasterCard rule changes designed to
promote EMV (chip card) adoption; however, very few debit issuers plan to
migrate to EMV debit cards
 Issuers cite certain costs and uncertain benefits
– Will merchants adopt?
– Will the dates stick?
– How much fraud will be eliminated versus pushed to other venues?
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5. What Changed with Regulation II’s
Interchange Cap Provision
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6. Regulation II is shifting how regulated issuers manage debit business
Exempt issuers report no material change to their business, so far
Pre-Reg II strategy Post-Reg II strategy
Overall interest in  Fast-growing, high-margin fee  Significant reduction in debit revenue and
the debit business business contribution
 Focus on growth through increasing  Less enthusiasm to grow debit spend
Penetration, Activation and Usage
PIN vs. signature  Promote signature debit, since  Same interchange rate cap for signature and PIN
higher interchange rate more than  Promote PIN debit, since it now has a better
offsets the higher costs margin (as a result of lower costs)
Business debit  Highest per-txn contribution margin  Revenue declined by 87%
 One of the top three growth  Business debit is now unprofitable on a per-
opportunities within debit transaction basis for some issuers
Ticket size and  Grow large-ticket transactions to  Grow small-ticket transactions, since revenue is
performance capture more revenue/transaction now primarily driven by number of transactions
metrics reporting  Revenue and margin tracked on a (not spend)
bps of dollar volume basis  Revenue and margin tracked on a dollar per
transaction basis
Rewards  Use rewards as a lever to grow  Significantly lower interest in issuer-funded
debit usage and profitability rewards programs, given shrinking top-line
GPR cards  Limited interest in GPR prepaid  More issuers offer – and are interested in offering
cards; greater opportunities – GPR prepaid cards (exempt from the
elsewhere interchange cap under certain conditions)
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7. Overall interest in debit business
As required by Reg II, interchange rates dropped for regulated issuers
Consumer signature interchange Consumer PIN interchange
Interchange rate ($ per txn) Interchange rate ($ per txn)
144 bps 144 bps
85 bps 85 bps
143 bps 137 bps 72 bps 74 bps
56 bps
51 bps
73 bps
64 bps
Ticket Ticket
size $36 $34 $36 size $42 $39 $42
Pre-Reg II Post-Reg II
Note: Pre-Reg II refers to interchange rates reported by respondents for the period Jan-Sep 2011 (also referred to as pre-Oct 2011), while post-Reg II refers to interchange
rates for the period Oct-Dec 2011 (also referred to as post-Oct 2011)
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8. Overall interest in debit business
Debit interchange revenue per consumer card for
regulated issuers is now 45% less than that for exempt issuers
Average gross interchange revenue per active consumer card
Regulated vs. exempt issuers
Gross interchange
revenue per active
consumer card
Regulated
$51 per
$0.23 × 18.3 × 12 = active
card per year
Gross interchange
revenue per active
consumer card
$0.33
Exempt
$92 per
$0.41 × 18.7 × 12 = active
card per year1
$0.46
Transaction mix Interchange rate Blended Monthly Months
($ per transaction) interchange rate transactions per year
($ per transaction) per active
card
Note: Numbers may not add up as shown in chart due to rounding
1. Up 6% from $87 per active card per year from the 2011 Study
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9. PIN vs. signature
Regulated issuers now prefer PIN debit over signature
■ Historically, many issuers preferred  Many regulated issuers are
signature transactions employing various tactics to increase
– Many issuers had marketing or their share of PIN transactions
rewards strategies in place to
promote signature transactions
“We are promoting PIN debit over
 Post-Reg II, a PIN transaction is more signature as a cost-savings play.”
– Regulated FI
profitable to a regulated issuer than a
signature transaction “We need to move from signature to
– Average gross contribution margin is PIN. We may have some sweepstakes
for PIN transactions.”
$0.11 per signature vs. $0.18 per PIN – Regulated FI
transaction
– Due to the interchange cap imposed “We have been aggressive with
by Reg II, the signature-centric contacting customers with phone and
approach has been abandoned by direct mail to promote PIN.”
many regulated issuers – Regulated FI
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10. PIN vs. signature
Relative share of PIN and signature debit transactions
has remained steady, but might change post-Reg II
Trends in PIN/signature 2011 PIN/signature
transaction mix transaction mix
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11. Business debit
Business signature debit was significantly impaired by Reg II
Business signature interchange rates
231 bps 232 bps
241 bps
215 bps
$0.39
40 bps
26 bps
Pre-Reg II Post-Reg II
Note:, Pre-Reg II refers to interchange rates reported by respondents for the period Jan-Sep 2011 (also referred to as pre-Oct 2011), while post-Reg II refers to interchange
rates for the period Oct-Dec 2011 (also referred to as post-Oct 2011)
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12. Business debit
Business debit interchange revenue per card for
regulated issuers is 85% less than that for exempt issuers
Average gross interchange revenue per active business card
Regulated vs. exempt issuers
Gross interchange
revenue per active
business card
Regulated
$43 per
$0.25 × 14.1 × 12 = active
card per year
Gross interchange
revenue per active
business card
$0.33
$291 per
Exempt
$1.49 × 16.3 × 12 = active
card per year
$1.80
Transaction mix Interchange rate Blended Monthly Months
($ per transaction) interchange rate transactions per year
($ per transaction) per active
card
Note: Numbers may not add up to 100% because of rounding
1. Up 7% from $273 per active card per year from the 2011 Study
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13. Ticket size & performance
The debit market is expanding at the low-end, metrics reporting
with small-value transactions displacing cash
Ticket size distribution
Median = $19
Mean = $38
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14. Ticket size & performance
metrics reporting
Regulated issuers now prefer low-value debit transactions
 Interchange rates have shifted from largely ad-valorem based (bps on
dollars) to largely per-transaction based (dollars per transaction)
– As a result, the realized interchange rate (in bps) on small-value transactions is
now higher
– Some costs – network fees and fraud losses – are calculated based on ticket size
 Smaller-ticket purchases now have higher margins
“More income is made by growing “Large-ticket signature purchases now
transactions, we need to improve our cost more than we receive in
small-ticket penetration” interchange revenue”
– Regulated FI – Regulated FI
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15. Rewards
Interest in issuer-funded rewards programs is waning
Planned changes in current rewards program
% of issuers
65% of all
81% of issuers do
regulated not plan to
issuers do have a
not plan rewards
to have a program
rewards
program
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16. GPR Cards
More issuers now offer GPR prepaid, attracted by higher
interchange rate and ability to meet specific customer needs
Percent of issuers offering GPR cards1 Prepaid card sales growth
projections for 2012
13%
1. For regulated issuers, reloadable cards are exempt from the cap only if the following three conditions are met: a. There is no overdraft facility; b. At least one ATM
transaction is free a month; c. The funds can only be accessed through the card (i.e., no ACH-based bill pay)
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17. What Changed with Regulation II’s
Network Exclusivity Provision
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18. Network exclusivity provision
Many issuers needed to change their debit card
network participation in order to comply with Reg II
Overall card mix
Debit card counts as of December 2011
Dual function cards PIN-only cards
84% 11%
Cards already participate in (at Cards only participate in one
least) two unaffiliated networks PIN network
No change required Must change
• Add another PIN network
• Add an unaffiliated signature network
Cards participate in (at least) two PIN
networks
Cards only participate in No change required
affiliated networks
Must change Signature-only cards
• Add an unaffiliated network 5%
Must change
• Add an unaffiliated PIN network
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19. Network exclusivity provision
Many issuers expressed concern with how the
market for network transaction routing is evolving
Issuers concerns with loss of routing control
 Will transactions shift from a lower cost network to a higher cost network?
 Will networks lower interchange rates to try to attract merchant/acquirer
routing?
“Within days, half of our volume migrated “We don't have any control over the
over to the new PIN network. The shift was merchant’s routing and we don't know how
much faster than what we expected.” it will impact our income and expense.”
“We used to have a lot more control over how our transactions are routed, but now post-
Durbin we don’t have that level of control anymore.”
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20. Certain Fundamentals are Unchanged
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21. Market characteristics that did not change post-Reg II
Exempt  Debit economics for exempt issuers have not been significantly impacted
issuers’ by Reg II – at least, not to date – and hence their view of debit is relatively
interest in unaffected by it
debit – Interchange has declined by 0-3%, as compared to 30-60% for regulated issuers
– Exempt issuers are focused on improving debit performance metrics, rewards
programs and growing the business
Debit  Consumer usage of debit continues to grow strongly; growth in 2011
growth exceeded issuers’ expectations
 Issuers expect the positive trend to continue
Fraud as a  Fraud continues to be one of the top challenges facing the industry,
key impacting both regulated and exempt issuers
challenge  Issuers expect fraud rates to remain steady or increase in the future; few
predict declines
Outlook for  All issuers agree that regulatory pressure and fraud are the biggest
debit challenges to their debit business
 Exempt issuers see more growth opportunities in the debit business;
regulated issuers show greater interest in cost reduction opportunities
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22. Debit growth
Debit usage continues to grow
Key debit performance metrics in 2010 and 2011
Consumer
Business
2010 2011
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23. Debit growth
Consumer debit growth in 2011 exceeded issuers’ expectations
PIN transaction growth in 2011 Signature transaction growth in 2011
Projected vs. actual Projected vs. actual
Projected Actual
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24. Debit growth
Issuers believe that the positive trend will continue
Transaction growth projections in 2012
Consumer
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25. Fraud as a key challenge
Fraud remains a major challenge, with
data breaches as the primary source of fraud
Signature debit and PIN debit loss rates Primary sources of fraud1
In bps per $
8.06 bps
8.06 bps
7.50 bps 7.50 bps
7.50 bps 7.50 bps
5.24 bps
1.26 bps
0.99 bps
1.26 bps 0.99 bp
0.80 bps
Note: “Data breaches/compromises” include counterfeit cards/card compromise, as well as network, processor and merchant breaches. “Other” includes international fraud,
breaches by family/friends and false client disputes (“first-party fraud”)
1. Does not sum to 100% because issuers indicated multiple fraud sources
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26. Fraud as a key challenge
54% of issuers expect signature debit fraud rates to
increase in the future; 37% expect PIN debit fraud rates to increase
Fraud loss ratio predictions1 Fraud loss ratio predictions1
Signature debit PIN debit
Increase Stay the same Decrease
1. Time horizon for predictions is two years (2012-2013)
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27. Outlook for debit
All issuers report that regulatory pressure and
fraud are the biggest challenges to their debit business
Key challenges for 2012
% of issuers
“A decreased profit margin means “Ongoing regulatory pressure
a much smaller tolerance for around overdraft is also a big
increases in fraud for us.” challenge.”
– Regulated FI – Exempt FI
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28. Outlook for debit
Exempt issuers see more opportunities
Key opportunities for 2012
% of issuers
Regulated issuers will
remain less interested
in rewards
Cost reduction is a bigger
priority for regulated issuers
after Reg II
“We are trying to cut processing “We have implemented a
fees, plastic costs, paper merchant-funded debit rewards
statements, etc. This is an program in hopes to increase
enterprise-wide challenge.” activation.”
– Regulated FI – Exempt FI
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29. Beyond Reg II, issuers are most attentive to
two new developments: mobile payments and EMV
 Mobile payments allow consumers to use their mobile devices for
transactions at the POS
– Cardholders link card payment information to a mobile device and use the
mobile device to initiate a payment
Mobile
payments  Several solutions to mobile payments, utilizing different technologies,
currently exist in the market
 Many issuers view mobile payments as the natural next step after
mobile banking
 EMV (Europay, MasterCard, Visa) is the chip-based payments
standard used to store card data as mandated by EMVCo
 EMV features improved security, which will reduce card-present
transaction fraud
EMV
 EMV should also enhance card acceptance outside the U.S. (where
chip cards are prevalent)
 EMV could potentially allow multiple transaction types to be supported
on one card (e.g. combining debit and credit)
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30. Mobile payments
Many express interest in participating in mobile payments pilots
Mobile payments pilot participation
 There is limited participation in mobile
payments pilot programs, but strong
interest
– Large banks are the most active in
participating in pilots
– Some issuers have initiated employee
pilots
 Some issuers who have participated
in pilots have been unsatisfied, often
due to the absence of indicative
results
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31. Most issuers are familiar with networks’ EMV rule EMV
changes and expect the transition to be challenging
Issuers’ familiarity with EMV mandates
“We are waiting for developments and
% of issuers
question whether the deadline will be
pushed back.”
– Community bank
“Much needs to be addressed at a
processor level before banks can
adequately determine their individual EMV
strategy.”
– Large bank
“We are concerned about merchant
participation and the results from the lack
thereof when implemented.”
– Credit union
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32. EMV
Issuers are taking a “wait-and-see” approach to adopting EMV
Issuers’ plans to issue EMV cards “The top merchants may go
% of issuers
through a full transformation, but
most merchants will move slowly.
Merchants are worried about
investing too much initially and
then experiencing a rule change.
Most people will adopt a wait-and-
see approach.”
– Large bank
“We will be issuing our
platinum/international cards next
year. We will slowly migrate to
standard issue as the market
adjusts to EMV acceptance.”
– Community bank
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33. Summary
 Debit growth continues to be strong despite profound changes to debit as
a result of Reg II
– Regulated issuers are investing less in debit and are pursuing different tactics
than in the past (e.g. scaling back or discontinuing rewards programs,
promoting PIN over signature)
– The environment doesn’t seem to have changed for exempt issuers. Debit
economics are similar – for now
– The requirement to participate in at least two unaffiliated networks resulted in
major shifts in PIN network affiliations, routing dynamics are still playing out
 New technologies are generating significant interest among issuers.
Mobile payments and EMV are generating the usual mix of emotions
associated with change – excitement, skepticism and trepidation
– Issuers who have tested mobile payments are not particularly enthusiastic, but
many issuers are still interested in piloting the technology
– Very few issuers plan to migrate to EMV, largely driven by certain costs and
uncertain benefits
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34. Questions?
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35. Thank You
salesperson@pulsenetwork.com
pulsenetwork.com
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