By Patti Murphy
The Takoma Group
Debit cards are fast becoming the payment instrument of choice for U.S. consumers. Economic uncertainties are driving some of the growth. So, too, is consumer and merchant frustration over costs, primarily card rates and merchant interchange. As many of the researchers I've met over the years have explained: Most small, mom-and-pop business owners exhibit the same behaviors in both their personal and business lives, and that includes pricing sensitivity.
"The debit card market showed steady growth since its inception, but it is now the 'top-of-wallet' card for American consumers as a result of tightened credit lines and consumer frugality in the face of an uncertain economic future," said Brian Riley, Research Director for Bank Cards at TowerGroup.
The Needham, Mass.-based research firm estimated debit cards today account for 50 percent of all noncash transactions. Riley attributed the increased favor debit cards have gained to consumers' desire to better manage their purchases. In a recent research report co-authored by Riley and entitled, Shuffling the Cards: The Migration of Frugal Consumers and Cautious Lenders to a Debit Card World, TowerGroup predicted continued growth in debit as card issuers tighten credit lines and consumers become more thrifty.
Because debit cards link directly with consumers' demand deposit accounts, consumers are forced to spend only to the amount available in their checking accounts.
According to Visa Inc., the value of purchases made using Visa-branded debit cards in 2008 surpassed dollars spent using Visa credit cards for the first time ever - $206 billion in debit transactions compared to $203 billion in credit card payments. The actual number of debit transactions exceeded the total of Visa credit transactions in 2002, which suggests debit cards are being used for many small-dollar purchases.
Efforts by the U.S. government and employers to move more benefits and payroll checks to debit cards (either tied to individual bank accounts or in the form of prepaid cards) are also contributing to the trend.
One year after introducing a low-cost debit card option for Social Security benefits recipients, the U.S. Department of the Treasury reported more than half a million Americans have signed up for what has been dubbed the Direct Express Debit MasterCard.
For many of these consumers, there may be no turning back if responses to a recent survey by Mercator Advisory Group are any indication. The report entitled, The Consumers and their Credit Cards: A Cooling Relationship Threatens Post-Recession Outlook, suggested that as many as two-thirds of consumers could be classified as "payment changers."
These folks reportedly have taken specific steps to reduce credit card usage, including shifting payments to debit and prepaid cards. According to Mercator, "a vast majority indicate" these changes are apt to be permanent. "With this survey fielded at what might turn out to be the nadir of consumer sentiment in the recession, cardholders may be feeling empowered by turning away from credit and saying they will do so permanently," said Ken Paterson, Vice President for Research Operations at Mercator and author of the report.
"Future behavior could definitely depart from consumer expectations, but as a referendum on the appeal of credit cards today, the consumer point of view is certainly bearish," he said.
However, unbanked and underbanked consumers are bullish on prepaid debit cards, as are numerous companies that have emerged to serve this market. Absent prepaid cards, unbanked consumers are compelled to spend with cash and money orders and to use a combination of check cashing, payday loans and other nontraditional arrangements to manage day-to-day finances.
One major player in the prepaid market, Green Dot Corp., headquartered in Southern California, reported that more than $2 billion in payments were made in 2008 using its network-branded prepaid cards.
A survey of underbanked consumers recently conducted by the Network Branded Prepaid Card Association and the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp. in Chicago, found 96 percent of users liked prepaid cards and 94 percent liked them enough to recommend a reloadable prepaid card to friends and family. Additional findings from that survey of the underbanked:
"Reloadable prepaid cards give consumers with little or no access to credit or traditional financial services the ability to budget, spend and save like a mainstream consumer," said Kirsten Trusko, NBPCA President and Executive Director.
An e-mail recently came across my desk from a public relations firm representing FirstView Financial, a 5-year-old Atlanta firm that specializes in serving unbanked and underbanked consumers. Quoting FirstView's President and Chief Executive Officer Cherie M. Fuzzell, the e-mail read in part: "A traditional checking account is not the best solution for most unbanked customers" because of nonsufficient funds penalties and other fees. "Instead, many consumers would benefit from bank account alternatives offered by prepaid card providers." Fuzzell is a one-time general counsel for leading card acquirer Elavon Inc. (formerly Nova Information Systems Inc.) Other former Nova executives also hold key management roles at FirstView. The company's Chairman, Joseph P. Meyer, takes credit for founding the first payroll debit card company in 1997.
Concerns about prepaid cards are being raised in consumer circles, however. A report just published by Consumers Union in cooperation with the Consumer Federation of America and the National Consumer Law Center warned that prepaid cards can be "inferior" to traditional bank debit cards. The report sited high fees and potential differences in the treatment of prepaid card funds under Federal Deposit Insurance Corp. payout rules. "Until these consumer problems are solved, consumers using prepaid cards may find themselves stuck in a second-tier and much less desirable banking system," the report stated.
CFSI has taken issue with the findings, insisting that its own research indicated consumers are financially savvy and making solid choices, adding that "if they choose the right prepaid product, the fee structure is a far better deal for them than fees from overdraft, check cashing and more."
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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