Consumers Favor Cards for Payments in Increasing Numbers

This past year saw a significant increase in consumers' use of debit cards and prepaid cards, while credit card usage remained strong, according to industry reports. The trend is expected to continue, insiders say, potentially creating new revenue streams for banks.

Celent indicates that plastic now accounts for 28 percent of consumer expenditures, double the amount of 10 years ago. When recurring payments (such as utilities and auto payments) are taken into account, that figure is closer to 50 percent, the Boston-based consultancy notes.

Although credit cards remain the preferred payment method for many consumers -- according to Visa (San Francisco), nearly a third (32 percent) of merchant payments were made with credit cards in 2005 -- researchers, including Celent, predict that debit cards will offer stronger growth opportunities for card-issuing banks seeking new revenue streams. Visa reports that debit accounted for 15 percent of merchant payments in 2005, up from less than 10 percent in 2002.

According to a Celent study, "The Future of Consumer Card Payments," issuers no longer view the debit card as a means to reduce check writing and save money on clearing costs. Today, debit has become a revenue channel for issuers that effectively promote the use of signature debit at the expense of PIN debit, the consultancy reports, since signature transactions tend to bring in higher interchange fees than do PIN-based transactions.

MasterCard (Purchase, N.Y.) recognizes the opportunity presented by debit cards for itself and its member banks, and pursued debit aggressively in recent months, reports Rick Lyons, the company's group head, debit and prepaid products. "We had a year-long effort trying to get more people interested in using the MasterCard debit card," he notes. "It's easier than cash and provides more-concise record keeping."

And once people start using debit cards, Lyons claims, they're unlikely to go back to cash or checks for at least a portion of their payments. For banks, this change in behavior means they can earn more on interchange fees and save big bucks on the check processing side of the business.

The Convergence of Credit and Debit

Issuers should expect to see the lines between credit and debit cards blur in the coming years as debit adopts many of the successful business practices from its cousin, predicts Celent. For example, issuers are encouraging the use of debit through rewards programs. But while these initiatives have been successful in the credit card space, they are not as numerous or seasoned in the debit card space, notes Dan Schatt, a senior analyst with Celent. According to Schatt, 73 percent of credit cards include rewards programs, compared to only 35 percent of debit cards.

As the convergence of credit and debit advances, experts say, opportunities will arise for banks to leverage technology across the two lines of business -- for example, sharing customer databases and CRM methodologies, and analytics and segmentation technology.

Both Schatt and MasterCard's Lyons expect credit and debit cards alike increasingly to be used to purchase prepaid cards as gifts. Some issuers earn fees from the prepaid cards, too, either by selling MasterCard or Visa prepaid cards that can be used at any location that accepts cards or by offering a variety of merchant-specific cards in the bank lobby, according to Lyons. "Some [banks] are using it as a customer-retention tool," he says. "If the customer can do his banking and buy these while he's at the bank, it saves him time."