Credit Card Volume Gains in Resurgent Economy, as Debit Card Use Trails

Credit card use, even in merchant categories dominated by debit cards, appears to be growing quicker than debit card use, reports the Federal Reserve Bank of Philadelphia in a whitepaper released Monday.

The report finds that, from 2007 through 2012, credit cards’ share of payments increased 5% at gas stations and grocery stores, and 2% at discount stores. The Fed’s paper is based on research from Visa Inc.’s Visa Research Insights unit and a study it conducted with consumer panels in 2007 and 2012, bookending the so-called Great Recession, which lasted from 2007 to 2009, and part of the subsequent recovery.

“Debit cards registered smaller share increases in each of these merchant categories, while cash and check shares declined,” the Fed noted. “In prior years, and for a number of years, losses in cash and check share have largely accrued to debit cards. But the larger share gains by credit cards during that five-year period suggest that they have recently displaced some cash and check use.”

The availability of credit card rewards, larger credit lines, and the reduction, and elimination in many cases, of debit card rewards, contributed to the growing popularity of credit cards.

In 2007, the percentage of rewards cards among the Visa panel participants was 56%, compared with 72% in 2012. Credit card dollar volume share made with rewards cards increased from 82% to 90% in that time period.

Larger credit lines, achievable because of better risk modeling, the report says, also contributed to consumers preferring credit cards over debit cards.

Though debit cards remain a very popular payment option, their popularity has waned as fewer issuers put money into debit-rewards programs. These had been popular until the Durbin Amendment to the Dodd-Frank Act, which limited debit card interchange for issuers with more than $10 billion assets by imposing an interchange cap of about 23 cents per transaction. The Fed implemented the amendment with Regulation II.

“With per-transaction revenues to issuers subject to Regulation II (those banks with $10 billion or more in assets) cut nearly in half, providing cash back or other incentives to cardholders to encourage increased use of electronic debit payments was no longer economically sustainable for these issuers,” the Fed says.

But, all is not lost for debit cards. They are fixtures for everyday purchasing, and a favored option for young adults, the Fed says. “Opportunities also remain for debit to capture smaller-ticket cash payments,” it says.

Long-term trends continue to favor electronic payments overall, the Fed says.