The Debit Card, Long ‘the King of Payments,’ Finds Itself Under Siege, Expert Says

For decades, debit cards have been reliable revenue generators and relationship builders for financial institutions of all sizes. But now that bulwark for banks is under threat from multiple alternatives, putting financial-services executives on the defensive and forcing them to rethink their card strategies, argues a new paper out this week.

New services like Amazon.com Inc.’s Prime Reload, along with older but re-energized products like decoupled debit and credit cards, could shake the dominance of bank-issued debit cards, says Sarah Grotta, author of the report, “The Evolution of Debit Cards.” Grotta is director of the debit advisory service at Mercator Advisory Group, Maynard, Mass.

Consumer and small-business debit card transactions total almost 70 billion annually, according to Federal Reserve data, spinning off billions in interchange income for issuers. Indeed, for issuers with less than $10 billion in assets, that income is exempt from the interchange caps imposed by the Durbin Amendment.

No other payment product throws off as many transactions, says Grotta. But that’s no reason for bankers to be complacent. “We can’t just assume all is well over here,” she tells Digital Transactions News.

Already, debit transaction growth is slowing down markedly. Total U.S. transactions, both dual- and single-message, on Visa- and Mastercard-branded debit cards grew less than 1% in the first quarter from the same quarter in 2016, according to data from the networks. By contrast, that rate of growth from the first quarter of 2015 to the first quarter of 2016 was a much more robust 11.51%.

For one thing, credit cards are on an upswing after years in the doldrums following the 2008-09 financial crisis. The number of U.S. credit card accounts is approaching 460 million, up from a post-recession low of 380 million in 2011 and returning to a level last seen in 2008, according to Federal Reserve Bank of New York numbers cited in the report.

And, increasingly, credit card users are deploying these cards as a form of deferred debit, paying off their balances in full each month, says the report. The growing number of these so-called transactors is pushing debit card usage to the side among some consumers.

The impact of this trend is especially telling with households earning $100,000 or more annually. While 70% of these households considered themselves debit card users in 2009, that proportion has dropped to 50%, according to a Mercator consumer survey. For smaller institutions that issue debit cards but not credit cards, this “has a big impact,” says Grotta. “What does that do to their bottom line?”

Meanwhile, decoupled debit could also make inroads, Grotta says. Banks briefly tried these cards, which rely on the automated clearing house network for processing, a decade ago, only to give up on them, leaving the field to retailers like Target Corp. and its debit REDcard. Processors First Data Corp. and Fidelity National Information Service Inc. (FIS) also support decoupled debit programs, Grotta points out, and a company called Zipline manages such programs for convenience stores and petroleum retailers.

The advent of same-day ACH, meanwhile, is likely to make these programs even more attractive for both issuers and consumers, Grotta says.

Other developments have the potential to threaten debit cards. In June, Amazon launched Prime Reload, which allows Prime members to earn 2% discounts on purchases. Users submit both a checking-account and debit card account number, which are used to fund virtual gift cards for purchases at Amazon. Now, potentially, that concept could be used at Whole Foods stores, as well, Grotta points out. “I think it has real legs,” she says.

Another potential threat is the so-called request for payment, which has been deployed in other countries and is seen as part of the wider trend toward faster payments. This method allows merchants to text or email a payment request to customers at the time of purchase. Once authorized on the spot, funds move to the merchant’s account within seconds, according to the report.

Grotta cautions that traditional debit cards are in no danger of toppling any time soon, but are at risk of seeing measurable erosion over time. “It’s not an emergency, debit is still the king of payments,” she says. “But we need to take account of new payment [methods]. They could encroach on that income [for banks]. And they could start to wear away at that connection they have to their checking-account customers.”