Behind the Rise of Debit Cards
From ATMs to Bob Dole, why debit cards are more than a recession trend.
May 6, 2010 — -- When Farah Patel needs to make a purchase, she often pulls out her MasterCard debit card, which deducts her purchases automatically from her bank account. The 30-year-old Greenwich, Conn. woman said she prefers it to her credit card.
"I don't want to pay for my gas with a credit card and know I'm going to be paying interest on gas," she said.
Patel is one of many debit card users who have helped MasterCard reach a new milestone. For the first time ever, the company said, U.S. debit card customers spent as much with their MasterCard debit cards -- $118 billion -- in the last fiscal quarter as they did with their credit cards. MasterCard and others say it's part of the ongoing trend of recession-weary consumers eschewing debt, and just spending the cash they have.
"It's a sign of the times," said Tim Murphy, group executive of core products at MasterCard. "Consumers are concerned about their financial future, even with some indications of some (economic) green shoots, people are spending sensibly, saving more and that, I think, is an important driver of debit spending."
Young people in particular, Murphy said, are seeing debit cards as "a spend management and budgeting tool."
But the use and growth of debit cards dates back long before the recent financial crisis: Visa introduced a branded debit card in 1975. Later, Visa's targeted investments into debit card technology and, more broadly, its work in building a national ATM network helped the card giant make a much bigger push into the debit card business in the mid-1990s.
"The opportunity and the launch of ATMs in the United States helped then to (extend) that convenience further of using a debit card to be able to then go to a retailer and make purchases," said Nikki Waters, Visa's senior business leader in global consumer products.
Visa also raised the profile of debit cards through major marketing campaigns, including a 1997 Super Bowl commercial featuring former Republican presidential nominee Bob Dole. Dole, fresh off his loss to Bill Clinton, appeared in an ad where he was asked to show identification when trying to use a check. The commercial said debit cards, unlike checks, don't require consumers to produce IDs at the register.
The Rise of the Debit Card
"The Dole commercials and that campaign really was reinforcing a couple of things -- this is safe, it's done and it has some features that make it better than a check," said Larry Woodard, the CEO of Graham Stanley Advertising and a veteran of financial services marketing.
Waters said that Visa's ads, even early on, also promoted the "control" benefit of debit cards -- that consumers, she said, "can watch their spend and manage their spend and manage their money the way they see fit."
Today, Visa is the market leader in debit card transactions, registering more than $320 billion in U.S. business in the first three months of 2010 -- more than twice as much as its closest rival, MasterCard, which introduced its first debit card product in 1988. Visa's U.S. debit card volume first exceeded its credit card volume in December, 2008.
"Visa was an early mover and they built share in signature debit quicker than MasterCard, and they dominate today," said Thomas McCrohan, managing director of equity research at Janney Montgomery Scott LLC.
MasterCard, meanwhile, said it's also done significant work "to expand debit card acceptance" and that it's continuing to grow its debit business, including a recent deal with SunTrust bank to issue five million new MasterCard debit cards.
Banks like SunTrust, analysts say, have an incentive to issue debit cards because they're less risky than credit cards -- credit card defaults skyrocketed during the recession -- while providing a revenue source through interchange fees, the fees that banks charge merchants for every plastic transaction.
Debit card users, meanwhile, may continue to rely on their cards for reasons that extend beyond post-recession prudence. For one thing, the losses suffered by banks in their credit card portfolios and recent credit card reform rules have meant that credit cards today are much harder to get than debit cards, said Bill Hardekopf, CEO of the card comparison Web site LowCards.com.
"Some of it has been forced on the consumer," Hardekopf said, "Credit card issuers have cancelled a great number of accounts. They have cut the credit limits on millions and millions of credit card holders, so people can't charge as much as they used to, and credit card issuers have tightened their approval rate."
Debit Cards for Tough Times
And then there are the benefits of going cashless.
"It is just so much easier than consistently carrying around cash all the time," Patel said.
Whatever the motivation behind debit card growth, for credit card companies, it's been a bright spot at a time of shrinking U.S. credit card revenues.
"I'd prefer that they were both growing," Murphy said, "but I'll take one."