Debit Cards Are Taking Over
Contrary to popular belief, debit cards have always been second fiddle to credit cards. Banks and issuers have always thought that credit cards had a much stronger consumer value prop—with things like rewards and benefits—and issuers made a lot more off of revolving credit balances and the interest payments attached.
About a decade ago, that started to shift dramatically. Millennials, many of whom were in college at the time, were jaded by credit after the 2008 Financial Crisis, turned to debit cards instead of credit. Many folks had a lot of debt they were struggling to pay off or didn’t want to be beholden to credit like their parents, so they were spending way more on debit cards than credit cards.
A lot of these factors attributed to the rise and growth of neobanks—who have primarily offer debit cards over the last few years. Take a close look and you’ll see that very few consumer neobanks offer credit cards. Not only is it harder to add credit cards than debit cards (more on that in the coming weeks) but for a long time, a majority of digitally savvy consumers didn’t really want credit cards either.
That all culminated in 2020, according to Pulse Network, a debit card processor owned by Discover—based on their data, annual spend on debit cards surpassed credit cards for the first time. (This is an older report from August 2021, but the new one isn’t out yet. I’d assume that many of these trends are on the same trajectory, and generally think its great overview of what’s been going on in the debit world over the last few years. Shoutout to Barret Scruggs for sharing on Twitter!)
What’s driving debit card spend volume? Based on Pulse Network’s newest report, it’s contactless payments and account-to-account payments, as well as smaller banks making more revenue from debit purchases, giving them a stronger incentive to launch newer debit-related partnerships with neobanks.
Contactless Payments & Mobile Wallets
Contactless payments ( tap-to-pay from your card) grew by 6.3x over 1 year—which is pretty wild growth. In terms of overall debit transactions it’s still small—it accounts for 1%—but Pulse is bullish on the future of contactless payments.
There are a lot of trends backing this up too—30% of debit cards have NFC chips in them, enabling contactless payments. That’s up 3x from the year before. By the end of 2023, Pulse estimates that 94% of cards will be contactless.
As for mobile wallet growth, debit transactions through a user’s phone accounted for 2 billion transactions, a 51% YOY increase. Mobile wallets also account for 57% of in-app payments too, a number that should only increase as developers embed mobile wallet offerings more deeply into mobile apps for consumer convenience. Apple Pay is still crushing Google and Samsung offerings, as you can see from the graphic below:
Small Bank Interchange Revenue = More Fintech Partnerships
If you’re around fintech long enough you’ll hear about the Durbin Amendment. It’s really not that complex—basically there’s this piece of regulation (Reg II) that says if a bank has more than $10 billion in deposits, they make a certain amount of interchange revenue, and if a bank has less than $10 billion in deposits, they make more. On average, according to Pulse, those that fall under Reg II average 24 cents per transaction. Banks that are exempt (the smaller ones) make about 42.5 cents per transaction.
That may not seem like a lot but in the grand scheme of things, it adds up. Take a look at the graphic below:
Annually per active card, smaller banks make almost double what larger banks do. That is a significant difference and another major factor in a lot of the fintech partnerships we see between banks, banking-as-a-service platforms, and neobanks.
If smaller banks make more money on debit transactions, then they’re obviously incentivized to facilitate more of them. As long as they remain under the $10 billion cap, then they’ll be able to reap the rewards in the form of interchange revenue. With more and more neobanks popping up, and the proliferation of embedded fintech products, I suspect we’ll see more partnerships and collaborations which should in turn fuel more debit card growth.
Account-to-Account Growth Is Skyrocketing
As the banking ecosystem evolves, so do its products. Debit cards are a great example: one of their biggest uses now is to facilitate money movement between banks and fintech companies through debit card processing rails. Pulse (and most others) call that “account-to-account” or A2A.
In 2020, A2A transactions saw 60% growth compared to 2019 (which saw a 100% increase), and now represents 1 transaction per month across all debit cards, a new record. Overall, A2A made up 4% of all debit card transactions in 2020. And it might be considerably more than that—Pulse notes that only about 50% of issuers have updated their analytics to properly track A2A transactions.
A lot of this growth can be attributed to some of the largest fintech players in the US: Cash App, Venmo, Zelle, PayPal, and even non-fintech players like Uber and Lyft (see graphic below). More and more consumers are pushing funds to these products and platforms for their own spending convenience and to get the most out of their digital products. Cash App made up 61% of total account funding transfers, growing 109% year-over-year.
It’s easy to think that most Americans spend on credit cards, but that’s becoming less true. Between neobanks, new uses of debit transactions to fund fintech wallets and products, and mobile wallets becoming more prevalent, the US consumer is more debit-heavy than ever. From a financial behavior perspective, I think this is healthier—debit doesn’t put people into debt and helps you control spending within your means. And with these trends only pointing up, expect the rise of debit cards to continue throughout the 2020’s.