FEBRUARY 2004

Growing Popularity of Debit Cards

A new national survey of over 2,000 consumers found that the popularity of debit cards has been increasing among consumers. The Study of Consumer Payment Preferences conducted by Dove Consulting for the American Bankers Association found that between 1999 and 2003, the proportion of consumers using debit cards to make in-store purchases increased from 48 percent to 57 percent for PIN-based purchases and from 42 percent to 54 percent for signature-based debit purchases. Since 94% of all debit cards are branded by Visa or MasterCard, most consumers have the choice of using PIN or signature methods at the point of sale. According to the survey, 19% of consumers reported that they use their debit card as a PIN-based transaction device exclusively, while 14% use their card exclusively as a signature-based debit card. About 50% of all consumers said they use them interchangeably.

The growth in signature-based debit has been a mixed blessing for issuers. On the one hand, debit card usage was growing very slowly a decade ago because most transactions were PIN-based. Many merchants had not invested in the point-of-sale technology to handle PIN-based transactions. The advent of signature-based debit cards (accepted anywhere that Visa or MasterCard brands were welcome) significantly broadened the potential transaction base. Consumers responded by using their debit cards more frequently. Issuers also collected higher fees from merchants on signature-based transactions, which served to spur the issuance of signature-based cards. On the other hand, the higher fee structure on the signature-based card, coupled with the Visa and MasterCard “honor-all-cards” rule precipitated the successful class-action lawsuit filed by retailers against the two card associations.

In a separate, online survey of 6,500 consumers conducted last fall by consulting firm Edgar Dunn and Co., researchers found that 38% of consumers listed debit cards as their most preferred plastic payment method, followed by 22% who listed standard credit cards, 20% for cobranded credit card and 15% for affinity (loyalty) credit cards. Researchers also found that those who preferred debit cards did so because of the built-in spending cap (i.e., direct linkage to checking account balance limits the amount that can be charged).