Cash or debit?

While the winds of change have whipped through consumer banking industry, Packaged Facts sees role of debit cards being repositioned, not significantly reduced.

First, despite the hype surrounding debit interchange regulations, profit motivate is alive and well. The hype tends to obscure a very important fact: debit cards continue to generate huge sums for the banking industry. Our recent report on Debit Cards in the U.S. projects that debit interchange will bring in $14 billion in 2012. While this represents a 30% drop from 2011, it’s clearly not small change.  And over time, the industry will recoup revenue lost to debit interchange regulation, thanks to long-term electronic payments share growth.

Let’s not forget that debit cards remain far more profitable for their bank issuers than paper-based transactions. And with paper-based payments enjoying a recession-driven renaissance, debit remains the primary means of continuing to convert paper-based payments. And the silver lining of lower interchange rates is that debit may become a more palatable payment option for industries previously resistant to it.

But most importantly, consumers have not only grown accustomed to using debit, but they also see value and utility in using the cards. In banks’ continued quest to translate paper and check payments to electronic payments, the debit card remains their strongest ally: According to proprietary survey results contained in our report, almost two in three engaged debit card users (those who use their cards at least once a month) use their debit card so that they can avoid carrying cash, half use their debit cards so they can avoid paying with cash, and almost 6 in 10 use a debit card because it is more convenient than cash.

The downside? We expect credit cards to siphon away a small share of transactions made by affluent, credit-worthy debit card users, and we expect emerging prepaid card programs to siphon off a significant portion of major banks’ least profitable checking account holders. But given longer term electronic payment trends, this will only serve to moderate debit card payment volume and transaction growth—not kill it.