Why debit card use is on the rise—but so is fraud

Debit cards often lack the rewards and spending power of credit cards, and thus do not figure prominently in TV ads or direct mail flyers. Yet despite these limitations debit cards are beloved by millennials and anyone else who wants to avoid credit card debit. They are the power behind Venmo transactions and are now the preferred method for paying at the gas pump.

When debit cards rose to popularity in the 1990s and 2000s, banks were able to profitably benefit from rising interchange rates, and at one point commonly offered rewards on them — especially when consumers opted to sign for their transactions instead of using a PIN.

Merchants balked, and the Durbin amendment was born, slashing interchange for covered banks with assets of $10 billion or more. The result was that debit marketing programs at big banks were wiped out, and now M&A activity for exempted banks (assets under $10 billion) is given pause should a bank exceed the asset threshold and become covered under the Federal Reserve’s Regulation II (Durbin amendment).

According to a recent GasBuddy survey of more than 1,600 adults, the preferred method for paying at the gas pump was found to be the debit card, with 51% of consumers picking that payment form. Despite the allure of rewards, the credit card came in second place with only 37% of consumers picking that method.

“People don’t want to rack up credit card balances for a frequent purchase. In using a debit card, it makes people feel that they are more responsible,” stated Sarah McCrary, CEO at Gas Buddy.

GasBuddy is acting on these findings by offering a decoupled debit card that rewards users for fuel-ups but is not tied to any particular petroleum brand. Since the product's 2017 launch, Pay with GasBuddy has reached 600,000 enrolled members, averaging 15 -20,000 new sign-ups each month and has conducted a total payment volume (TPV) of $313 million.

“We partnered with WEX for Pay with Gas Buddy and market it to our users. It’s not branded with any particular [fuel] station so users are not limited. We think debit use at the pump is growing so that’s why we launched it,” added McCrary.
Ubiquity is a major contributing factor in driving debit card usage in-store and online.

Based on the 2019 Debit Issuer study commissioned by Pulse, debit card penetration of bank customers increased from 76% in 2017 to 78% in 2018. Similarly, debit card activation also rose to 67% in 2018, up one percentage point from the prior year.

“Consumers appreciate the pay-as-you-go aspect of debit and not going into debt with credit cards," stated Steve Sievert, executive vice president, marketing & brand communications at Pulse. "It’s more practical and has a lot of potential. There is an opportunity for issuers to continue to grow debit volume, particularly for low dollar ticket transactions."
For some people the use of a debit card isn’t necessarily a choice, if a credit card isn’t an available option.

According to the 2019 Federal Reserve Report on the Economic Well-Being of U.S. Households, 23% of consumers were denied on a credit application in the last 12 months. Add in the consumers who also received a lower credit line than they were expecting, and that figure rises to 31% overall.

The biggest population segment experiencing credit declines were those making less than $40,000 annually, with 37% being declined for all types of credit. While the Federal Reserve reports that 81% of consumers have at least one credit card, that is not evenly spread across all income brackets. Consumers making over $100,000 annually have a 98% penetration rate of having at least one credit card. In comparison, only 61% of consumers making less than $40,000 have at least one credit card.

Additionally, the Federal Reserve study found that 53% of Americans carried a balance on their credit cards at some point in the last 12 months. In other words, choosing a debit card may be the more responsible choice.
Debit card transactions experienced the fastest growth compared to prepaid and credit cards in 2017. Based on the 2018 Annual Supplement of the Federal Reserve Payments Study, there were 69.6 billion debit card transactions in 2017, up 10.5% from 2016’s 63 billion transactions. In comparison, credit card transactions grew by 9.4% to reach 40.8 billion transactions in 2017 vs. 37.3 billion in 2016.

While debit cards may be used more often for payment transactions, their TPV is less than that of credit cards due to their being used for lower ticket items – and with issuers targeting cash, the average ticket size has fallen. In 2017 debit card transactions had an average value of just $37, down from $38 in 2016. Prepaid cards fared even worse with the average transaction valued at $23 in 2017, down from $25 in 2016. Credit cards stayed at the same level in 2016 and 2017 having average transaction values at $88 each year.

The difference in average transaction values led to a TPV for credit cards at $3.6 trillion in 2017, up from $3.27 trillion in 2016. Debit cards, despite being used more often, had only $2.58 trillion in TPV in 2017, up from $2.41 trillion in 2016.
EMV chip cards have made their mark in both credit and debit portfolios by defeating counterfeit card fraud at POS.

The 2018 Debit Issuer Study from Pulse found that issuers had converted 91% of their debit cards to chip cards. The impact for merchants has been dramatic — in Visa’s December 2018 Chip Card Update it found that merchants who have completed a chip card upgrade saw counterfeit fraud dollar losses fall by 80% in September 2018 compared to September 2015.

Unfortunately, this means the easy target is the card not present (CNP) channel where consumers shop online or over the phone and where the EMV chip cannot be used.

According to the 2019 Pulse Debit Issuer Study, the usage of debit cards in the CNP channel now accounts for one quarter of all debit transactions — but accounts for nearly 70% of all gross fraud cases. The increase in fraud cases attributed to the CNP channel is almost double last year’s count. Given the growing trend of data breaches and card account numbers being sold on the dark web, it’s not difficult to imagine continued growth in attempted CNP debit fraud over the next few years.
When the Federal Reserve Board’s Regulation II (Durbin amendment) became effective on October 1, 2011, it capped debit card interchange for issuers with $10 billion in assets giving merchants a boon in savings from debit card swipe fees.

While the impact on issuers, consumers and merchants is often debated, one thing is clear – issuers when able (since the merchant has final choice) are driving debit volume to the networks that pay them the most.

According to the latest Federal Reserve Regulation II report, the average interchange fee before the Durbin amendment was $0.58 on a dual message network (e.g., Visa) and $0.34 on a single message network (e.g., Star) for a covered issuer. In 2018 those rates were $0.22 for a dual message network and $0.24 cents for a single message network. For exempt issuers, the pre-Durbin rates were $0.53 for dual message and $0.32 for single message. Today, exempted issuer get an average of $0.54 for a dual message transaction and $0.25 for a single message networked transaction.

While this may appear to be just pennies, the result is massive when it covers almost 70 billion transactions. Large banks that are covered by Durbin have lost almost 10 share points in the dual message network to exempt institutions, as those smaller banks drive volume to Visa and Mastercard, which are paying them more than twice the interchange than Star and Accel.