Six Implications from the Rise of Debit Cards



The Federal Reserve released their triennial Payments Study this month, which covers the total number and value of all noncash payments estimated to have been made in 2015 by US consumers and businesses. The finding that especially caught my eye was the rise in debit card payments, which grew to 69.5 billion in 2015 with a value of $2.56 trillion, up 13 billion and $0.46 trillion since 2012. This was the largest increase in number of payments among all payment types studied.

This data seems to fit with the findings of many other recent studies suggesting millennials, who represent the largest generation in US history, are adopting credit cards at much lower rates than previous generations at this point in their lives, in favor of debit cards, alternative payments (like PayPal), and cash. There are many theories that attempt to explain why, and I’ve addressed several of them in a previous blog post. However, I haven’t come across any attempts to explain what this means for consumers and businesses in a broader context. So without further ado, here are six implications the rise of debit cards will have in 2017 and beyond.


1. More Consumers Missing Out On Rewards

When Dodd-Frank was signed into law back in 2010, America’s retailers got a big reduction in the debit-card fees they pay banks. But with the reduction in fees came the curtailing of debit-card rewards programs by the banks, to recoup their losses from the reduced fees. Good news for retailers; bad news for debit card users. Now, the only way to earn rewards on purchases is with credit cards, which if you remember from earlier in the post, young people aren’t using as much. So, more consumers are missing out on rewards, thus paying a little more for everything.

(This is actually one of the problems we’re trying to solve at Sezzle. By enabling bank payments between consumers and businesses, which is even lower-cost than debit, we are able to offer rewards for paying from your bank account.)

2. Increasing Costs of Credit Card Processing

Because the Durbin Amendment does not deal with credit card transactions, these fees have increased to compensate for the loss of revenue from debit cards. Fees in the US are staggeringly high relative to most places in the world, due primarily to lack of regulation around credit card transactions.

3. Increasing Profitability of Modern Payment Gateways

Modern payment gateways like Stripe, PayPal, and Braintree (a PayPal company) charge businesses a blanket per transaction rate, no matter if the payment was made with a credit card, debit card, or something else. These blanket rates tend to be at or near the processing fees traditional gateways charge for credit card processing, and much higher than they charge for debit card processing. So, the more transactions that are processed with debit card, the more money they make, because their underlying costs to process those payments are lower.

4. Increasing Profitability of Large Retailers

The modern gateways I mentioned above are typically used by smaller businesses, because they’re willing to pay a little more per transaction for the setup speed and ease of use these gateways provide. Larger retailers, however, will make the extra effort to find the absolute lowest processing costs available, because these costs represent such a large line item at scale. Thus, large retailers typically end up working with a traditional payment gateway so they can get interchange plus pricing, which adjusts the cost of each transaction depending upon the type of payment used. Because interchange fees on debit cards were regulated, large retailers with interchange plus pricing have seen the biggest benefits from this legislation. The National Retail Federation estimates that retailers have saved $8.5 billion as a result of the Durbin Amendment. And the more debit card usage goes up, the more they save.

5. Less Discretionary Spending Per Capita

Pew Research Center studies show that for most workers, real wages have barely budged for decades. Much of the spending during the boom years of the 90s was fueled by debt and inflated real estate prices, which consumers used to attain even more debt. We all know how that worked out. But a little debt is good, as long as you can pay it off in a timely manner. It allows people to spread the cost of their purchases out over time, which leads to more spending, which leads to a healthier economy. If consumers start altogether abandoning credit cards in favor of debit cards, it will negatively affect the economy, which isn’t good for anybody.

6. Lower Priced Goods & Services (Maybe)

Of the $8.5 billion saved by retailers as a result of Durbin, the National Retail Federation claims $5.87 billion of that was passed onto consumers in the form of lower priced goods and services. Some banks disagree with that estimate, believing that retailers have actually pocketed $36 billion from the provision, “turning it into nothing more than a merchant markup that pads bottom lines,” according to a statement from the Electronic Payments Coalition, a trade group that represents banks and card networks. I believe most retailers likely have lowered prices, since almost all of them have seen some savings as a result of Durbin, and they’re competing against each other for your dollar. Just how much is something we’ll most assuredly never know.


An interesting twist to all of this is the recent creation of the Financial Choice Act, which proposes to take a red pen to the core language of Dodd-Frank, including the Durbin Amendment. Many expect Trump’s administration to adopt some version of this new bill, which could mean serious pain for a retail industry already ailing from declines in brick-and-mortar store traffic and a sales slowdown. Debit card fees would go back up, which means prices for consumers would almost certainly go up as well. Thank goodness we’re launching Sezzle when we are, which should come as a welcome payment solution for merchants and consumers alike, with rewards and very low fees.

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