Are Debit Cards Outweighing Credit Cards?

Banks are becoming leerier to issuing credit cards. The alternative is to issue debit cards so that there are no default payments. Although this is good in the short term, they also eliminate a huge stream of income by not being able to collect interest.

Many people are trying to avoid using credit cards by turning to debit cards instead.  Some banks have turned to prepaid programs tapping into the unbanked markets – the millions of people who don’t have a bank or credit card account – and some employers are turning to employee payroll debit cards. Employees have their paychecks deposited onto a card which they use for all their purchases to try to avoid debt. According to The Nilson Report, debit purchases are expected to climb 13% in 2008, to $1.2 trillion. According to Visa, debit spending could surpass credit this year.

Retailers pay over 2% of credit card purchases to banks, three times the amount for debit cards. This is good news for merchants because their fees on transactions over the holidays could decrease significantly. However, banks are not going to go quietly into the night just yet. Be prepared to see an increase in overdraft fees. Typically, a bank would decline a debit transaction if you did not have enough money in your account to cover the transaction. Now, we could see banks allowing transactions to go through and hitting the customer with many more overdraft fees.

Like with any fees charged by the card processing industry, the government is attempting to regulate this money maker as well. Banks are having to come up with creative ways to enhance consumer spending and collect fees in trying times. MasterCard launched its Savings program that offers debit users discounts on luxury brands, as well as at retailers such as Home Depot and Target. Some banks pay higher interest rates to consumers when they use their debit card.

Are debit cards becoming the payment method of choice by consumers?  Will banks push for debit pay off?  These days debit cards are widespread and seem to outweigh the number of credit cards being used. Only time will tell what new programs the banks have in store for consumers and merchants alike.