The Durbin Amendment reshaped debit card economics by limiting the interchange revenue that large banks could earn from debit transactions. As banks responded with new fees and pricing strategies, some observers suggested those changes were intended to encourage consumers to shift spending from debit cards to more profitable credit cards.
Consumer payment preferences, however, make such a shift far from certain. Many consumers specifically choose debit cards to control spending and avoid accumulating credit card debt. If debit becomes more expensive or less attractive, consumers may be more inclined to use cash or move their accounts to financial institutions offering lower-cost debit products rather than increase their reliance on credit cards.
In the wake of Durbin Amendment-driven pricing changes to debit cards at major banks, a new wave of conspiracy theories are suggesting that the goal of new fees is to drive consumer to credit cards:
Even if a debit card backlash occurs, however, the banks may be OK with that. Why? Because if customers use their bank-issued debit cards less, chances are they’ll be using bank-issued credit cards more.
A post from the credit card analysis site LowCards.com points out that credit cards aren’t covered in the new interchange regulations, and banks typically earn a healthy 2% with each and every credit card transaction. That’s far more than the piece of the action a bank gets from the typical swipe of a debit card. What’s more, if customers switch from debit to credit cards, they risk the danger that pushed so many consumers away from credit cards and toward debit card usage in the first place: credit card debt.
While this makes for good copy, consumer behavior suggests otherwise. Debit cards are the most preferred payment type. Fewer consumers carry credit cards than just three years ago, thanks to recessionary pressures. Debit holders in Mercator’s research continue to say they use their debit cards to avoid building their credit card balances. And if debit were to go away, cash would be the most likely beneficiary—or perhaps an exempt institution with “free” debit cards. Unfortunately for credit card marketers, getting consumers to switch to credit from debit is not an easy task in today’s economic environment.
Debit card fees may influence how consumers choose to pay, but that does not mean credit cards will automatically benefit. The reasons consumers prefer debit—including greater control over spending and avoiding revolving debt—remain significant barriers to converting debit users into credit card users.
Banks responding to debit interchange regulation therefore have to consider more than the relative profitability of individual payment methods. If consumers view new debit card fees negatively, they have alternatives ranging from cash to switching financial institutions. Understanding those payment preferences will be critical as banks adjust their debit card strategies in response to changing economics.