Card-not-present transactions may be rising, but this is far from a referendum on debit products. Instead, the growth of e-commerce and the emergence of digital wallets have created more avenues for this staple product.
One reason why debit cards have staying power is they are often the first product new banking customers encounter, but they are far from a starter service. Debit usage spans generational divides, presenting a unique opportunity for banks to develop lifelong customer relationships.
However, as Ben Danner, Senior Debit Analyst at Javelin Strategy & Research, detailed in the Invisible Debit: When the Card Disappears, Usage Remains report, traditional financial institutions no longer have a corner on the debit card market.
The increasing prevalence of fintechs and neobanks, and their widespread adoption among younger generations, has created new challenges for financial institutions and made it imperative for banks to optimize their debit offerings.
The Most Common Funding Source
Alongside the growth of digital-first financial services companies, new payment methods such as real-time payments and stablecoins have burst on the scene in recent years. Amid the expansion of these accelerated payment rails, some have speculated that physical payment methods will decline in the future.
“Gen Z and Gen Alpha have been using fintech apps and P2P to do all these everyday payments that generations before would have probably handled with things like cash or a bank transfer,” Danner said. “So, what’s happening with debit cards? They are going invisible. It means that they’re just moving into digital wallets like your Cash Apps and Venmos of the world, and you connect a debit card to that.”
Yet debit cards remain deeply embedded in consumers’ financial lives. This trend is driven in part by Gen Z consumers, who have proven to be strong debit card users for several reasons. First, many are still relatively new banking customers, making debit cards their primary payment tool. Second, these younger consumers may not yet have the credit history needed to qualify for a credit card.
Since most younger consumers are digitally native, they are often highly proficient with digital wallets like Apple Pay and Google Wallet, as well as financial services embedded within apps and e-commerce platforms. Given Gen Z’s widespread reliance on debit, it follows that the main funding source for many of these wallets and services is the humble debit card.
When the Card Isn’t Present
Despite increased competition from fintechs, traditional financial institutions have not stood still as the next generation of customers migrates to digital-first providers. Many banks have made substantial investments in upgrading their online and mobile banking experiences.
Large banks have also collaborated to create Zelle, a closed-network payment rail that serves as a fee-free, near-instant alternative to peer-to-peer apps. While these innovations have expanded payment options, they have also influenced how consumers use debit cards.
“I look at card-present versus card-not-present transactions,” Danner said. “That means exactly what it sounds like. At the transaction, is there a physical card that was presented to make the purchase? If it’s an online transaction, it’s always considered card-not-present because the merchant can’t verify that the physical card was used.”
“It’s interesting because card-not-present has been increasing as more payments move online and move digitally, but that also means that it’s still on a card, it’s on the card network rail,” he said.
Changes to debit routing networks could also impact both merchants and financial institutions.
There are two primary types of debit networks. The first is dual-message networks, often referred to as signature networks. Operated by major credit card companies like Visa and Mastercard, these rails allow for a delay between payment authorization and settlement. This buffer gives restaurants time to add tips and merchants an opportunity to conduct fraud checks.
The second type is single-message debit transactions, which combine authorization and settlement into a single message after consumers enter a PIN at checkout. PIN debit transactions are typically less costly for merchants, leading many retailers to use them through least-cost routing when possible.
While this generally doesn’t present issues for in-store transactions, PIN debit transactions can create challenges in e-commerce environments.
“There was an amendment that happened in 2023 with Regulation II and it required issuers to have at least two unaffiliated networks for debit card transactions,” Danner said. “They amended it to include not just the physical card, but also card-not-present, so this meant online stuff too.”
“Now you’re going to have an influx of people doing the single-message network transactions online, which is pretty risky from the merchant perspective,” he said. “Looking at the Fed data, there was a lot of fraud taking place on single-message, card-not-present networks, so be careful if you’re taking a look at adding that capability in.”
Preparing for Digitalization
These security considerations add another layer of complexity as banks work to modernize their debit card offerings and attract new customers. While many institutions have experimented with incentives such as cashback rewards at select retailers, the customer experience is often the more important differentiator.
“If you want your debit card program to succeed, you should prepare for digitalization,” Danner said. “That is having things like digital wallet provisioning for the card. When the customer opens the account for the first time, there should be buttons available within your mobile app that you can instantly add that debit card into something like an Apple Wallet, and it pushes the credentials out to the wallet apps.”
Digitalization also means providing the instant access consumers have come to expect. In the past, new customers might have waited days to receive a debit card in the mail. Today, that delay can feel like an eternity.
As a result, providing a virtual debit card has become table stakes for banks. When a customer opens an account, the institution should immediately offer a virtual version of the card that can be used while the physical card is in transit. This not only satisfies consumer demand for immediacy but can also benefit banks by accelerating engagement and card usage.
“If they don’t have that physical card and you’re fully relying on the physical card, that’s spending that you’re missing out on,” Danner said. “Let’s say they spend $500 or $600 in that first week using their debit card. Expand that out to 100,000 customers not spending $500 or $600, and that’s a lot of money in interchange that is lost.”
Remembering the Physical Card
Modernizing the debit card experience has become imperative as demand for digital-first solutions continues to grow. However, that doesn’t mean banks can afford to neglect the longstanding fundamentals that have made debit cards such a durable and widely used payment product.
“I don’t think the physical card is ever fully going to go away, because it still has its purpose,” Danner said. “Just expect that more customers are going to be digitizing their cards and putting them in these different wallets, for better or for worse.”
