Lender Angst and Consumer Frugality Drive Debit Card Usage

TowerGroup attributes the increasing use of debit cards to changes in consumer behavior and cautious lending strategies by credit card issuers. As consumers save more and limit discretionary spending, many turn to debit cards to help manage their purchases. Concurrently, card issuers, most of which face a year of net income loss in 2009, are wary of the implications of upcoming regulations. Because debit cards link directly with consumers' demand deposit accounts, debit cards typically force consumers to spend only to the amount in their account unless the debit card is linked to a line of credit.

"The debit card market showed steady growth since its inception, but it is now the 'top-of-wallet' card for American consumers as a result of tightened credit lines and consumer frugality in the face of an uncertain economic future," said Brian Riley, Research Director for Bank Cards at TowerGroup. "Debit cards evolved from a method for consumers to simply withdraw cash from their bank accounts to a payment vehicle that offers an efficient way to transact. With direct deposit of payroll and government benefit payments now common, the debit card is even more important to consumers." Riley continues by stating that the debit card offers an outstanding launch point for financial institutions that are prepared with customer cross-selling strategies.

In contrast to the credit card, which requires qualification and lending extension, debit provides a means of settlement against funds on hand for consumable and durable purchases. In addition, it offers consumers the flexibility to pay electronically for items using multiple platforms, including contactless payment devices and mobile phones. Debit cards and accounts will see even faster growth as mobile payments mature in the United States.

TowerGroup recommends that to foster customer loyalty, card issuers implement strategies to accommodate consumers' shift to debit cards. Even while debit reward programs starting up, card issuers can benefit by cross-selling additional products such as credit cards, investments and mortgages to their debit card customer pool.

"The traditional debit card business model will evolve as a result of inevitable market changes with mergers, new regulations and the greater consumer acceptance of prepaid cards," said Dennis Moroney, Research Director for Bank Cards at TowerGroup. "Card issuers will have to embrace the debit card platform to keep up with a new financial world in which debit and prepaid cards become the dominant payment methods."