Debit cards for travel expenses gained unexpected momentum during the COVID-19 pandemic as consumers adjusted their spending habits and increasingly relied on funds available in their bank accounts. Travel has traditionally been dominated by credit cards, which offer rewards, greater purchasing flexibility, and benefits designed specifically for hotels, airlines, and rental cars. However, data from PSCU indicates that debit cards captured a larger share of travel-related transactions as pandemic restrictions began to ease and consumers returned to hotels, rental cars, and other travel services.
The shift is particularly noteworthy because using debit for travel can have implications that consumers may not encounter with everyday purchases. Hotels and rental car companies routinely authorize amounts above the expected final charge to cover incidental expenses or other potential costs. With a debit card, these authorization holds can temporarily reduce the amount of money consumers have available in their checking accounts. Consumers with higher cash balances, including those who received Economic Impact Payments during the pandemic, may have been better positioned to accommodate these holds. If the trend continues, increased debit card use for travel could also contribute to higher average debit transaction values and alter the traditional payment mix within the travel industry.
Travel has always been the domain of credit cards. Whether for the reward points or for the available funding, credit cards rule. The COVID-19 pandemic has again, at least temporarily, created new spending habits. An article in Digital Transactions reporting on data from PSCU found here, has uncovered that consumers are using their debit card for hotels and related travel expenses.
Since it is customary for hotels and card rental agencies in particular to place an authorization amount for a value greater than the final cost, consumers may be tying up their balances for days. Perhaps those that are flush with cash from Economic Impact Payments and don’t need those funds for essential items are in a position to manage these big transactions.
Likely this will drive up the average debit card transaction level. Here’s some of the data that the article highlighted:
Released Thursday, the index shows that debit card use accounted for 35% of transactions at hotel and motels, up from 29% in March 2019 and 27% in March 2020. Credit use at hotels and motels has increased, too, reaching 39% in March. That’s up from 33% in 2019 and 34% in 2020. PSCU, a St. Petersburg, Fla.-based credit union service organization, publishes the monthly index based on data from financial institutions it works with.
Other travel segments are showing some life, albeit at different pacing. Overall airline purchases are slowly climbing back from the low point in April 2020. For March, debit transactions are down 6% from March 2019 and credit transactions down 33%. “Each have shown monthly improvement, with March 2021 marking the most notable jump since the onset of the pandemic,” PSCU says.
Auto rental has fared the best in travel, particularly in debit transactions, which are up 38% in March from the same month in 2019. Credit transactions have yet to return to positive territory, the report says, and are down 8% in March 2021 from March 2019. The one positive is that when looking at March 2021 and March 2020, credit transactions are up 56%.
The increased use of debit cards for travel expenses illustrates how significantly consumer payment behavior shifted during the pandemic. PSCU’s data shows debit gaining ground in hotels and motels while also recording substantial growth in rental car transactions compared with pre-pandemic levels. Although credit cards continue to play a major role in travel spending, consumers appear increasingly willing to use debit for purchases that historically have been associated with credit.
Whether these habits persist as travel activity normalizes remains an important question for issuers and the broader payments industry. Consumers who have accumulated additional savings may be comfortable using debit for larger purchases, particularly when they prefer to pay directly from available funds rather than add to a credit card balance. At the same time, authorization holds associated with hotels and rental cars can make debit a more complicated choice by temporarily restricting access to funds.
If debit cards for travel remain more popular over the longer term, issuers could see changes in transaction values, spending patterns, and the types of purchases consumers place on debit. What began as another pandemic-driven shift in payment behavior could ultimately provide insight into a broader change in how consumers choose between debit and credit.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
