Pandemic Ushers in New Era for Debit Cards
COVID-19 gives new life to debit card (and pseudo debit card) payment products
Even though Americans have been spending a lot less during the pandemic, the use of debit cards is on the rise, as debt-wary consumers favor straightforward access to their money, paving the way for a new wave of payment card products.
Debit card use didn’t suffer at all during the height of the pandemic, at least according to one credit card network’s recent financial reporting. In its latest SEC 8K filing, Visa reported that debit card usage was up 8.5% year-over-year as of June 30. By comparison, credit card use was down 1.1% over the same period. The trend is even more stark between April and June in particular. During that three-month period, credit card use dropped a steep 21%, and debit card use was up 8%, year-over-year.
- Consumers are relying on debit cards to avoid debt and quickly access funds such as tax refunds and unemployment benefits during the pandemic
- An increased appetite for debit has opened a door for new products that cater to financially vulnerable consumers who want financial control and credit card convenience
- Three fintech companies—Point, Chime, and SoFi—have released payment card products that serve a debit friendly audience but offer benefits akin to credit cards, such as cash back and travel benefits
- A move away from cash and other high-touch payments during COVID-19 may encourage consumers to keep using debit cards with “contactless” payment technology in the months ahead
“When consumers do spend, they are more likely to be spending from their available funds (like a debit card account) rather than spending on a credit card,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory Group. “Many are becoming more credit averse because they are uncertain about the future.”
For people leery of accumulating debt, debit cards check a lot of boxes: They are easy to use, directly connected to available funds, and familiar. Some fintech companies are paying attention to this trend and rolling out new products for this hungry audience. The latest example is the Point Card, a payment card released today that includes features usually associated with credit cards—without the credit.
Debit Cards Seen as Less Risky
Overall consumer spending took a hit when stay-at-home orders temporarily shuttered businesses, disrupted travel plans, and changed how consumers made transactions day-to-day. Spending has started to rebound as some local economies reopen, and people are continuing to rely more on debit cards.
Why? During periods of financial unease, debit cards—and the accounts they are attached to—may feel more concrete than credit cards. The dollars going in and coming out are more tangible than charging to credit cards and paying off those balances, according to Erika Rasure, assistant professor of business and financial services at Maryville University.
“When lives are in flux and there is uncertainty, most people have a tendency to watch every dollar in and every dollar out,” said Rasure, who is also the president of St. Louis Financial Therapy. “So we naturally become more controlling of those dollars. ‘I can’t control anything else going on, but I can control my spending.’”
New Payment Products Speak to Debit-Focused Consumers
As a result, banks—and fintech companies—are closely watching the market and focusing on debit card users, who often have more financial stress, lower annual earnings, and less education than those who turn to credit cards more often.
“They are thinking about the needs of that specific population that really sees value in their debit card and really want to have it front and center in the way they do business,” said Grotta.
Several new and upcoming debit and payment products offer appealing credit-card-like features, such as robust rewards and dynamic account management through mobile apps, all with no risk of accumulating debt.
This brand new debit card became available to users today and offers the rewards and benefits of a credit card. There’s a membership fee—either $4.99 per month for an annual plan ($60 paid up front), or $6.99 per month (pay-as-you-go)—but since it’s a debit account, there’s no credit check, no interest costs, and no way to rack up a balance.
With the Point Card users can earn a base rate of cash back on all purchases, and higher rates of cash back on popular purchase categories like subscription services (think Netflix and Spotify) and food delivery and rideshare services.
The earning rates are competitive with those offered by many cash-back rewards credit cards. The Point Card also features some extra benefits like cellphone insurance, trip cancelation and delay insurance , and primary rental car collision insurance, perks that are typically only offered by premium travel rewards cards.
The corresponding Point app is intended to give users a clear look at their finances and encourage mindful spending and budgeting with weekly spending limit tools and purchase notifications.
"Point is a better everyday spending alternative to a traditional, elite credit card like an Amex. We believe you shouldn’t have to go into debt to receive great rewards and benefits," said Point co-founder and CEO Patrick Mrozowski.
The Point Card is compatible with mobile wallets (Apple Pay and Google Pay), and supports contactless card payments. Those looking for added protection when shopping online can generate a unique virtual card number to pay.
Chime Credit Builder Visa Secured Credit Card
While this is technically a secured credit card, it acts a lot like a debit card and is designed for consumers seeking less risk and more control over their finances and credit.
There are no fees, no ongoing APR, and no credit check when consumers apply. There isn’t a minimum security deposit either, unlike there is with traditional secured credit cards. The security deposit cardholders do pay can be used to pay off any charges on the card, also unlike most secured credit cards. Cardholders replenish the deposit anytime and spend against that amount.
“The Chime Credit Builder Visa Credit Card is launching at a time when debit cards continue to gain popularity,” a spokeswoman told The Balance via email. “With student debt at all time highs, many young Americans prefer the control of debit cards and are furthering the trend, but this has limited their ability to establish a credit score.”
Unlike a debit card, Chime reports account history to each of the three major credit bureaus (TransUnion, Experian, and Equifax) monthly, which can boost cardholder credit scores, especially for those who are new to credit or rebuilding their scores.
Existing Chime customers can now join a waitlist for Credit Builder, which is slowly rolling out to members this summer.
Samsung Money by SoFi
It’s a less robust payment product, but this debit card for Samsung Pay users is the tech company’s entrance into personal finance through a partnership with fintech firm SoFi. It’s a digital and physical debit card that offers rewards on each purchase (though they can only be used to buy Samsung products and apps), interest on savings, and no account fees. The Samsung Money by SoFi card is already equipped to make pandemic-friendly payments, too.
“These days, contactless payments and transactions have become more important than ever,” a Samsung spokesperson told The Balance via email. “Consumers are increasingly looking for a money management platform that is easy to use and provides them with better controls over their financial lives.”
Much like other new debit card products, Samsung Money by Sofi (which launched on July 23) is advertising security features, easy money management, and extra perks for brand loyalty. Users will have access to Samsung discounts in the weeks to come, according to a company press release.
A Perfect Payment Storm
Debit cards were popular before the pandemic set in, but there are several new factors contributing to the recent acceleration. For one, the pandemic arrived at about the same time debit card use typically peaks each year: tax season.
“If you think about what’s been happening, you had tax refunds rolling out, then people got stimulus checks, and then the extra unemployment benefits,” said David Shipper, a senior analyst for market researcher Aite Group who focuses on debit, credit, and prepaid cards. “If you think about how much cash has just been pumped into checking accounts, that increase totally makes sense.”
The pandemic has further incentivized a move away from cash, too.
Some retailers have discouraged cash payments to keep the virus at bay during the pandemic, or have asked customers to pay with exact change or cards to help them cope with a national coin shortage. That means many consumers who typically pay with paper bills may now be using debit cards to pay instead. Contactless card payments are also becoming more common as ongoing social distancing encourages more physically removed transactions.
The consumer switch from cash to debit cards for everyday payments is a win for the banks, too, because cash payments generate less revenue—and less loyalty—than debit cards do. “Banks are trying to keep people under their umbrella,” said Grotta. “The more dependent the consumer becomes, the more the institution benefits.”
More Change to Come
The pandemic isn’t over, and the worst of the recession may be yet to come. If that’s the case, debit cards may not be the long-term king as consumers seek (and need) financial resources to fall back on.
“Unfortunately I think we will see a spike in credit card use eventually,” Rasure said. “How long will the unemployment benefits last? How will the election affect things? There will be an end date to some of this social support. When that happens, we will be living in a danger zone.”
For now, the new debit card (and debit-card-like) products are meeting consumers where they are with something many want right now: reliable simplicity.
“There is a window of opportunity for fintech and online-only banks now, and going forward,” Shipper said. “Once cardholders experience how simple it can be to open, use, or manage their bank account digitally, they will be less reliant on their local branch.”
Visa, Inc. "Form 8-K: Current Report," Page 14. Accessed July 30, 2020.
Visa, Inc. "Form 8-K: Current Report," Page 12. Accessed July 30, 2020.
Board of Governors of the Federal Reserve System. "The 2019 Federal Reserve Payments Study: Initial Data Release." Accessed July 30, 2020.