Slowdown in U.S. Payment Volume Growth for Leading Card Networks

With Visa and MasterCard reporting their quarterly financials this week, we now have a picture of U.S. payment volume for the four main card networks (Visa, MasterCard, American Express and Discover) in 2012.  These four networks grew volume 5.3% in 2012.  This represented a significant decline from the 10.3% growth rate between 2010 and 2011.

  • Visa reported the largest decline in its volume growth rate, from 9% in 2011 to just 2% in 2012.  While U.S. credit card volume growth remained stable at 10% in both 2011 and 2012, debit card volume fell from a growth rate of 9% in 2011 to a volume decline of 2% in 2012.  This was largely due to new regulations that impacted Visa’s exclusive debit card network relationships with banks.  Visa did report significant improvements in y/y growth rates for both credit and debit volume between 3Q12 and 4Q12.
  • MasterCard credit and charge volume growth fell from 6% in 2011 to 3% in 2012 (although the y/y growth rate improved from 1% in 3Q12 to 3% in 4Q12).  Debit volume rose from 12% in 2011 to 15% in 2012.
  • American Express reported its U.S. consumer payment volume fell from 11% in 2011 to 8% in 2012.  During this period, small business volume slipped from 14% to 12%, while corporate services volume declined from 14% to 11%.
  • Discover reported declines in growth rates for its two main payment volume categories: proprietary Discover Network (from 8% to 5%); and PULSE Network (from 19% to 14%).

According to the U.S. Bureau of Economic Analysis, personal consumption expenditure rose 3.6% between 2011 and 2012, down from 5.0% between 2010 and 2011.  This means that even though card networks’ volume growth slowed between 2011 and 2012, it was still stronger than consumer spending, and so the networks’ share of consumer spending continued to rise.  We expect that volumes will continue to rise at moderate levels in 2013, as the leading U.S. issuers seek to balance volume and lending growth.

How to Generate Critical Mass for Mobile Payments

Mobile payments continue to receive widespread coverage in payments-related media, as various companies pilot and roll out mobile payment products targeted at both consumers and merchants.  In recent weeks:

While these launches are generating a good deal of hype in the industry, and mobile payments are the hot topic in 2012, it is worth noting that researchers assessing consumer and merchant interest in mobile payments are finding that consumer interest in mobile payments is lukewarm at present:

Most consumers are comfortable with established payments methods and feel that they do not have a compelling enough reason to change.  In addition, they have concerns regarding security and privacy.  In addition, most merchants have yet to embrace mobile payments.  The main reason for this is that there is a cost to equipping terminals for mobile payments acceptance, and merchants do not yet see the benefits outweighing costs.

However, with growing smartphone penetration, increased consumer use of mobile phones for shopping, and enhanced mobile payment and acceptance products coming on stream, most observers expect consumer and merchant attitudes to and usage of mobile payments to grow significantly in the coming years.

With this in mind, we have developed the following ten steps to overcome challenges and build a strong mobile payments franchise:

  1. Incorporate mobile payments into a digital wallet.  Although mobile payments on their own have a “buzz” factor as well as enhancing ease and convenience, these attributes on their own will not be enough to encourage widespread adoption of mobile payments.  Some mobile payment providers are looking to leverage power of the smartphone as well as social media apps to develop mobile wallets that will include targeted offer and loyalty program management functionality, in addition to mobile payments.
  2. Identify and target segments who are more willing to try new technologies and alternative payments.  In addition, develop strategies for other segments along the product-adoption curve.
  3. Conduct consumer and merchant research. Focus on identifying what these audiences would look for in a mobile wallet or in mobile acceptance tools, what offers and incentives would drive usage, as well as what factors reduce the likelihood to adopt mobile payments.
  4. Clearly articulate key selling points (over both existing payment methods and other mobile payments products), and incorporate these into all communications.
  5. Establish a partnership strategy that seeks to harmonize the different objectives and concerns of each stakeholder in a mobile payments consortium. (This is particularly important as there is widespread recognition that no one company can go it alone in the embryonic mobile payments space.)
  6. Develop local marketing plans, as mobile payments will tend to be rolled out initially in select markets rather than on a nationwide level.
  7. Conduct mobile payments pilots in select markets to assess and enhance the user experience, evaluate different offers and incentives, and test different media and messaging
  8. Create compelling incentives for consumers and merchants to trial mobile payments.
  9. Build referral programs to encourage initial mobile payments users to recruit friends and family.
  10. Once it has been launched, continually enhance your mobile payment solution to continue to meet changing customer needs, as well as to maintain a competitive advantage.

Card Networks Report Robust Purchase Volume Growth

With MasterCard and Visa reporting quarterly financials in recent days, we now have a fuller picture of purchase volume trends for the main U.S. card networks.  Each reported relatively strong year-on-year growth in U.S. card spending, led by MasterCard (+13%) and American Express (+12%).

It is notable that Visa and MasterCard are following different paths in growing purchase volume.  Visa, which has been the dominant debit card issuer, is reporting continued slower growth in debit card purchase volume.  This is due to some debit card portfolios switching to MasterCard, as well as the impact of the Durbin Amendment, and has resulted in Visa’s credit card growth outstripping its debit card growth for the past three quarters.

In contrast, MasterCard has reported accelerating U.S. debit card purchase volume growth.  Credit card volume growth has also accelerated, but continues to trail debit card volume.

American Express has consistently recorded double-digit volume growth as it follows its spend-centric approach.  Discover also reported strong growth in 2011, but this has trailed off in recent quarters.

During this period of strong purchase volume growth for both credit cards and debit cards, credit card outstandings have continued to decline, emphasizing the transition in the credit card sector from a lend-centric to spend-centric orientation.  Many leading U.S. credit card issuers are expecting outstandings to grow slightly in the coming quarters, but it is probable that purchase volume growth will continue to outstrip loan growth for the foreseeable future.

Card volume growth should continue to be significantly higher than overall U.S. consumer spending growth, as consumers switch from cash and checks, with particular growth opportunities for cards in categories where they have traditionally had small shares of payment volumes.

In the longer term, card networks and issuers need to plan for new opportunities and challenges created by a changed payments landscape, characterized by demographic shifts, new payments technologies and changing shopping behavior.