The Fed Says Online Debit Counts, Too

Consumers’ usage of debit cards has finally surpassed that of credit cards. Through the second quarter of 2022, 56.2% of consumers preferred debit as their primary payment card, compared to 39.5% for credit, according to a report from S&P Global Market Intelligence.

Those numbers represent a dramatic change in the payments landscape, as just 40.2% of consumers cited debit as their primary payment card as recently as last year, compared to 54.6% for credit.

The reasons for the overwhelming shift are varied. On a broad scale, they include lower or no fees for debit card use, faster settlement, the additional security feature of a PIN for card-present transactions, and no interest charges. Another factor is that consumers view debit as a way to prevent overspending and to better manage
their finances.

“Predictability, low/no fees, and greater ease of managing money are the primary benefits of using debit cards,” says Jordan McKee, director, fintech research and advisory for 451 Research, a technology-research group within S&P Global Market Intelligence, by email.

When drilling down into the reasons, however, two stand out: the growing issuance of contactless cards and the popularity of buy now pay later loans, McKee says.

In the United States, 59% of consumers have a contactless card, and 34% of those consumers say they are using their card more often due to the card’s tap-to-pay functionality. Those factors are opening the door for debit cards to be used for more everyday and smaller-ticket purchases, according to the report.

“As we have seen in markets like Australia and the United Kingdom, contactless debit cards tend to displace cash for smaller-ticket purchases, leading to an increase in card utilization,” the report says.

Dovetailing into that trend, the report points out that consumers have begun to favor debit cards more for everyday purchases during the Covid 19 pandemic, a category where debit usage has been particularly strong. As a result, consumers have started using credit cards more for discretionary spending, according to the report.

BNPL’s influence is being driven by Gen Zers, millennials, and Gen Xers, all of whom, the report says, are heavy users of BNPL. Consumers who view BNPL loans as a replacement for credit card debt say they can pay them off using their debit card.

“Our research shows that Gen Z and Millennials are often credit-averse, and prefer the predictability of debit,” McKee says. “The rise of BNPL options has helped younger consumers continue to rely on debit while still gaining access to greater purchase flexibility.”

Debit card usage among Gen Zers, Millennials, and Gen Xers has grown substantially the past year. Debit usage among Gen Zers has risen
26.8 percentage points since 2021, while Millennials and Gen Xers increased their debit card usage by 18.4 and 18.6 percentage points, respectively during the same period.

Lastly, security is likely playing a role. Indeed, 71% of payment card users indicated that privacy and security are major factors influencing their payment card choice, according to the report.  “While debit and credit are both subject to security/fraud protections, consumers might view debit as a more secure payment method since it offers an additional layer of authentication via a PIN,” the report says.

Despite younger consumers’ growing preference for debit cards, the jury is out on whether the trend will continue as those generations age.

“As younger consumers—those with the strongest preference
for debit—mature, the question remains if they will ‘graduate’ into credit card users,” says McKee. “BNPL will likely play a role here and could result in these consumers continuing to rely heavily on debit while leveraging BNPL tactically for larger purchases.”