A new report from TowerGroup charts the growing popularity of debit
cards in the US, with their usage growing strongly across a range
of consumer sectors during the economic downturn. Banks are now
capitalising on their ubiquity by using them as cross-selling
tools, as Charles


The worse the economic picture gets, the
stronger the forecast for the debit card grows.

A new report from US payment research
consultancy TowerGroup, the consulting arm of MasterCard, finds
that debit cards are far more resilient in the current recessionary
economy than credit cards, and as a result, stand to grow even more
rapidly in the teeth of the recession.

As Americans increase their personal savings
rate and forgo durables purchasing, the debit card’s role grows in
importance as a cross-selling tool.

“The debit card market showed steady growth
since its inception, but it is now the ‘top-of-wallet’ card for
American consumers as a result of tightened credit lines and
consumer frugality in the face of an uncertain economic future,”
said Brian Riley, research director for bank cards at TowerGroup,
and co-author of the report with Dennis Moroney.

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“Debit cards evolved from a method for
consumers to simply withdraw cash from their bank accounts to a
payment vehicle that offers an efficient way to transact. With
direct deposit of payroll and government benefit payments now
common, the debit card is even more important to consumers.”

The report finds that in less than fifteen
years, debit card transactions in the United States grew from 1
percent of non-cash transactions to more than 50 percent.
TowerGroup predicts that debit card transaction volume and card
spend will grow through 2015, through the current recession and
ensuing economic recovery.

Debit cards as a cross-selling

TowerGroup attributes the increasing
use of debit cards to changes in consumer behaviour and cautious
lending strategies by credit card issuers. As consumers save more
and limit discretionary spending, many turn to debit cards to help
manage their purchases.

Concurrently, card issuers, most of whom face
a year of net income losses in 2009, are wary of the implications
of upcoming regulations. Because debit cards link directly with
consumers’ demand deposit accounts, debit cards typically force
consumers to spend only the amount in their account unless the
debit card is linked to a line of credit.

Riley added that the debit card offers an
outstanding launching point for financial institutions prepared
with customer cross-selling strategies. In contrast to the credit
card, which requires qualification and lending extension, debit
provides a means of settlement against funds on hand for consumable
and durable purchases.

In addition, it offers consumers the
flexibility to pay electronically for items using multiple
platforms, including contactless payment devices and mobile phones.
Debit cards and accounts will see even faster growth as mobile
payments mature in the United States.

The report recommends that to foster customer
loyalty, card issuers implement strategies to accommodate
consumers’ shift to debit cards. Card issuers can benefit by
cross-selling additional products such as credit cards, investments
and mortgages to their debit card customer pool.

“Being able to cross-sell to debit cardholders
offers debit card issuers an opportunity to increase revenue per
customer and enhance the institution’s value proposition, but
prudence must be part of the decisioning process, particularly in
poor economic times,” the report said.

“Issuers must be sensitive to the fact that
job loss could bring higher risk to the relationship and that a
personal stability issue such as divorce or overindebtedness might
impair the customer’s capacity to repay debt.”

As a universal entry point for all current
accountholders, the debit card is a natural conduit for selling
credit cards, mortgages, and investments. For example, in 2008,
JPMorgan Chase generated more than 1.4 million credit cards, $11
billion in mortgages, and more than $15 billion in investment sales
through the branch-driven cross-sell channel.

According to the report, at mid-year 2008,
JPMorgan Chase had 10.6 million retail customers in its branch
network. Of course, 100 percent of those customers had current
accounts with debit card availability, but it is interesting to
note that 85 percent had credit cards, 54 percent had access to
online banking, and 34 percent used online bill pay.

The report identifies Wells Fargo Bank and
USAA as best in class in cross-selling, at 4.3 and 4.9
relationships per customer – and debit cards lie at the heart of
the relationship.

Continuing evolution of debit

“The traditional debit card business
model will evolve as a result of inevitable market changes with
mergers, new regulations and the greater consumer acceptance of
prepaid cards,” said Moroney. “Card issuers will have to embrace
the debit card platform to keep up with a new financial world in
which debit and prepaid cards become the dominant payment

Looking closely at the role played by debit
cards in the US economy, the report finds that debit card dollar
volume dominates credit in many consumable channels such as fuel,
fast food, and grocery. But credit cards are the dominant mode of
transaction in discretionary spending, such as for high-end
electronics, home repair, and big-ticket items.

“The confluence of several conditions put the
debit card in a strong position in the recession. Consumer credit
lines tightened, more disciplined spending prevailed, consumable
purchasing continued, and debit cards, as a deposit-based access
product, allowed cardholders to transact up to their available cash
limit without regard to their creditworthiness,” wrote Riley and

Also critical to the growth of debit cards is
the predominance of electronic deposit of payroll and benefits,
making the debit card the natural tool to transact and settle
routine payments. With a spike in direct deposit use – the study
says 72 percent of salaried workers now have their pay sent
directly to their bank accounts, and 92 percent of government
workers do so – debit cards make it easier for people to access
their money without paying ATM fees.