The debit card may be the workhorse of payment methods, but that hasn’t kept the product behind the scenes. In fact, debit has become the product du jour, with recent releases from fintech heavyweights like Venmo and Klarna. There have even been debit card launches by companies as diverse as Wyndham Hotels and Kraken crypto exchange.
As Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, found in the report Consumer Debit Payment Choice: Understanding Debit Card User Preferences, macroeconomic conditions, emerging features, and new players are likely to keep debit cards top of mind for years to come.
A Balancing Act
Though debit cards may be largely unchanged as a product, the way consumers use them has become more strategic. Inflation and interest rates have combined to put consumers under immense pressure in recent years, and supply chain issues and tariff concerns have added to their worries.
In years past, consumers tended to use debit cards for items like groceries or gas and credit cards for larger purchases. However, the tough macroeconomic environment is shifting behaviors.
“With fluctuation in prices and mostly rising prices, we’ve seen some consumers have to switch from debit to credit cards to pay for goods that they used to pay for every day with debit cards, mostly out of necessity,” Tavilla said. “There is a segment who don’t have the funds readily available, so therefore they have to resort to using credit, whether it’s to pay bills or to put dinner on the table.”
Conversely, another consumer segment has been forced to shift from credit to debit.
Credit card debt has hit historic highs, and annual percentage rates have been elevated. This mounting debt has caused many consumers to explore other payment types, such as buy now, pay later (BNPL) plans, but it has also caused more families to budget more strictly, live within their means, and rely on debit cards.
In some cases, consumers don’t have any other recourse. In response to the pressure on consumers, many credit card issuers have tightened their lending standards to mitigate the risk of default. This means some consumers can’t secure the credit lines that were available a few years ago.
Shouldering the Rewards Load
Merchants have also played a role in driving consumers to debit. Retailers have long considered credit card interchange fees to be a burden on their businesses, and many have steered their customers toward alternative payment types.
However, credit cards continue to be the dominant U.S. payment method, in part because consumers are attracted to the rewards and incentives. Historically, debit cards haven’t been able to compete with the array of travel and dining rewards that credit card issuers provide.
This is changing. There has been an increasing trend of debit card providers offering rewards. While these may not be as extensive as credit card rewards, the gap between the two is narrowing.
“In our study, we see that over 40% of debit card users say that they have cash back,” Tavilla said. “I was wondering: If there are only a handful of issuers that are offering debit cashback rewards where are these 40% of consumers getting cash back? What I found is these are often merchant-funded cashback rewards.”
For example, a merchant-specific reward could be that a user gets 5% cash back if they use their debit card at Lululemon.
This model differs from the credit card rewards model, in which issuers fund their rewards programs with the revenue they receive from interchange. Because the debit interchange has been so low, it hasn’t been profitable for issuers to offer cashback rewards.
As merchants shoulder the rewards load, it will likely cut into their profits to return revenue with cashback offers, but these incentives could pay off in the long run.
“It makes sense because often the cost associated with debit cards for merchants is less than credit card transactions, so merchants would have an incentive to offer discounts,” Tavilla said. “There is an incentive for the merchants to pass those along to consumers to influence them to use debit over credit.”
Becoming More Debit-esque
Influencing customers, particularly younger generations, is one of the main reasons for the recent flood of debit card launches.
Peer-to-peer companies like PayPal, Venmo, and Cash App have provided debit products for years, but Venmo has sweetened its debit card rewards with15% cash back at retailers Sephora, Walmart, Lyft, McDonald’s, and Walgreens.
Additionally, many prepaid solutions are expanding to become more debit-esque, including features by which users can load funds onto the cards through cash or check deposits and check balances in a mobile app or on a website.
Finally, BNPL companies have also offered more financial products as they seek to expand their footprint, as evidenced by Klarna’s recent debit card launch.
In all these instances, fintech companies are reaching out beyond their roots with the goal of becoming full-service financial providers.
“I think we’ll see more diversification of debit products; it seems like there’s lots of crossover,” Tavilla said. “It’s a good strategic move, especially with younger consumers. Gen Z and Millennials are used to using debit cards, P2P payments, BNPL and other digital payments.”
A One-Stop-Shop Mentality
Many Gen Z consumers are digital natives who established relationships with fintechs like Venmo and Cash App early on. Gen Z is also a heavy user of BNPL, so it is a sensible step for those firms to try to capture more market share with younger users.
“I think it’s a practical and good strategy to expand and build upon those products and try to get consumers to adopt and cross-sell other products,” Tavilla said. “I think with that generation, they’re more open to using nontraditional bank products like Chime, Dave, Venmo, and Cash App.
“In their mind, it’s like a one-stop shop where previously these options might not have been available. You would just go to the bank to do a certain type of transaction or certain institutions offer a specific product, and that’s who you would go to, whereas nowadays with digital technology, it’s easier to offer a broader variety. Consumers tend to think in the super app or one-stop-shop type of mentality.”
