The popularity of debit cards is continuing to grow, even as the ways in which they are used evolve. More debit card spending is occurring in “card not present” transactions and a small but rapidly growing portion of debit transactions are flowing through mobile devices.
In a related trend, half of institutions surveyed plan to add digital instant-issue ability to their debit card lineups, pushing the payment credential to digital wallets ahead of delivery of physical cards, further accelerating the shift to mobile debit card spending. The push would apply both to original issuance as well as replacement of lost or stolen cards. Four out of five demand deposit customers have debit cards tied to those accounts and two thirds of those customers use the cards to make monthly purchases.
The 2024 Debit Issuer Study by Discover’s PULSE network, source of the data above, also found that 38% of debit cards have been loaded into digital wallets, with Apple Pay continuing to be the most popular choice. This trend by itself suggests how the economics of offering debit cards will morph as volume shifts to digital wallets.
The PULSE report says that “the growth in phone-based payments, Apple Pay in particular, is starting to become a drag on issuer economics.” Steve Sievert, EVP of marketing and brand management, points to the half-cent fee that issuers pay to Apple each time a consumer users their debit card via Apple Pay.
“As the number of transactions through wallets keeps increasing, and potentially cannibalizing physical point of sale transactions, the fee that issuers are required to pay to Apple could become a greater percentage of the overall economic calculation for debit cards.”
— Steve Sievert, PULSE
Some savings can be obtained through instant issuance — express delivery charges, for example — so both factors are part of each issuer’s own profitability equation.
Drilling into the Digital Wallet Debit Card Spending Trend
“We’re beginning to see an inflection point for the utilization of mobile wallets and consumers just generally becoming more comfortable with Card Not Present transactions,” says Sievert in an interview with The Financial Brand. (A ‘Card Not Present’ transaction refers to one where neither the card nor the cardholder is present when the payment is made, such as an online purchase or within a mobile phone app.)
The study found that mobile devices originated 7% of all debit card transactions and 15% of contactless payments made in-store in 2023, as shown in the graphic below. (Unless otherwise noted, statistics from the study include both consumer and business account debit card transactions.)
Sievert consulted past editions of the 19-year-old series of studies and found that in 2018 — pre-Covid — mobile devices only accounted for 1% of total debit card transactions.
A decade ago, he continues, predictions among issuers were for more like 25% of debit card payments to be via wallets. (Apple Pay launched in late 2014, followed by entries by Google and Samsung in 2015.)
“We’re nowhere near those very bullish initial forecasts,” says Sievert, “but this year’s data show that the trend is now headed in that direction, with consumers increasingly appreciating the convenience of using the smartphone or a wearable device to make payments.”
The average active debit cardholder transacted 34.6 times per month, mostly purchases, including both Card-Present and Card Not Present, according to the study. The number of purchases has risen 27% from 2020-2023. Spending among active debit card users averaged $17,274 for the year, up 8.1% per year from 2018-2023, outpacing the inflation rate. The latter was 4.1% over 2023, according to Investopedia. The average ticket amount paid with debit cards came to $46.89 in 2023, up 3.4% per year since 2018.
Digital wallet debit card payments specifically had a lower ticket size, $27.69, with card users averaging three debit transactions through a digital wallet each month.
Beyond smartphones and wearables: In a side note, the report referred to Amazon’s “Amazon One” pilot, which allows users to register their palm print and connect it to their preferred payment method. The study said issuers report low usage levels for debit cards registered to Amazon One. This may reflect the fact that the program chiefly serves Amazon retail locations such as Whole Foods stores, which incent purchases with Amazon-affiliated credit cards by Prime members. (Take The Financial Brand test drive of Amazon One here.)
Read more: For Younger Consumers, Payments Is Banking. Why That’s Trouble for Traditional Institutions
Cost Implications of the Migrations Towards Mobile Debit Transactions
“It’s great to see that consumers are increasingly engaged in the digital space, and that the investments that the industry is making in digital are resonating with consumers,” says Sievert. But he added that the issuers must carefully monitor the cost impact. A wild card is a pending Federal Reserve proposal to lower the cap on interchange fees for larger debit card issuers. The proposal — comments closed in the spring but consideration continues — calls for trimming the base debit card interchange fee for larger issuers to 14.4 cents from 21 cents.
In this context, larger issuers are those with $10 billion or more in deposits, called “covered issuers” in payments industry terminology. The study found that the average interchange rate among covered issuers came to 23.8 cents versus 46.7 cents among exempt issuers, those under $10 billion.
Sievert explains that if the Fed finalized the proposal, “the relative expense of supporting Apple Pay could jump by about 40%, because you’d be seeing a decrease in the overall interchange that would be generated for covered issuers on each transaction, including mobile wallet transactions.”
Issuers will have to strike a balance, Sievert says, between their customers’ mobile wallet engagement and the economics of the cards. Covered issuers’ average revenue per active card of $91, while exempt issuers averaged $162. The study found that half of covered issuers are considering higher demand deposit fees and higher required balances to counter a move by the Fed. Exempt institutions, on the other hand, “are looking to exploit their increased revenue advantage.”
Read more: P2P Apps Now Dominate Payments Between Individuals, Eclipsing Cash
Multiple Factors Threaten Debit Card Revenue and Usage
At the same time, issuers need to watch for more stringent regulation of overdraft fees charged by institutions with over $10 billion in assets — a matter that’s pending at the Consumer Financial Protection Bureau — and the potential impact of the CFPB’s pending open banking proposed rule, which could be finalized by the end of the year. The latter would require demand deposit account data to be made available to third parties, with customer consent, via application programming interfaces. Some respondents fear competitors could use the data to snap up their customers.
The report also highlighted a trend affecting covered issuers: Three out of five of those responding said that their debit card bases are either flat or actually declining.
“Since the overall debit market is growing faster than traditional financial institutions, what accounts for this gap in growth? It appears as though consumers are migrating to digital banks, person-to-person payment providers, and other fintechs. The rate of change is now sufficient to be a drag on the mainstream banking industry.”
— 2024 PULSE Debit Issuer Study
On the other side of the competitive scales, fintechs and neobanks continue to face their own angst. And ongoing developments on the banking-as-a-service front could have a drag on the nonbank contingent in the long run.
Further out, debit cards and digital wallet transactions face two other challenges.
One is the adoption of instant payments technology, which is still coming, especially on the consumer front, via FedNow and The Clearing House’s Real-Time Payments network.
The report found that institutions are weighing opportunities versus risks. “With responsibility for faster payments often sitting outside the retail or card division, perhaps the greatest risk is siloed decision-making and a lack of coordination within each institution,” according to the report.
The second is the recent move by Apple to permit developers to access the NFC (near-field communication) chip in the iPhone, which would enable them to build in-app purchasing into mobile applications — something for which Apple will also charge a fee.
Read more: How Can U.S. Banking Grow Instant Payments Faster?