Debit card payments surpass checks, credit cards

Debit cards have become Americans' first choice among noncash payment methods -- surpassing check writing for the first time ever, according to a new study released by the Federal Reserve Wednesday.

Credit card usage actually declined slightly for the first time -- a casualty of consumers spending and borrowing less during the recession, banks tightening credit and of an avalanche of negative sentiment toward abusive credit card practices that led many Americans to close their accounts or stop using their credit cards.

"Credit cards are viewed with distrust by consumers after all the shenanigans ...but it seems likely that the poor economy has shown people that credit should be saved for emergencies and not just used for things you don't really need and can't really afford," Linda Sherry, national priorities director for Consumer Action, said in an e-mailed response. "The best thing about debit cards is they require discipline, to pay as you go, and keep your checking account in balance."  

The Fed's payments study is published every three years and tracks trends in how people pay for retail merchandise. The study estimates the total number and value of payments made between 2006 and 2009 using checks, debit cards, credit cards, automated clearinghouse (ACH) payments (electronic checks often used to process recurring payments) and prepaid cards. The study also reviewed the value and number of ATM withdrawals during the same time period.

According to the Fed study, debit card use experienced the largest increase of any other payment type between 2006 and 2009. When not paying with cash, Americans used, in descending order:

  • Debit cards: 37.9 billion.
  • Checks: 24.4 billion.
  • Credit cards: 21.6 billion.
  • ACH: 19.1 billion.
  • Prepaid cards: 6 billion.

During the study period, the number of transactions using checks declined by 7.2 percent, continuing a steady slide away from paper checks that began nearly 20 years ago. Debit card transactions, on the other hand, rose 14.8 percent, prepaid card use increased by 21.5 percent and ACH payments went up 9.3 percent. Credit card use declined by 0.2 percent.

Richard Oliver, executive vice president of the Federal Reserve Bank of Atlanta, which sponsored the study, said in a press release the results show how much electronic payment processing of all payment methods has advanced. He added: "It is also likely that the results reflect changing consumer behavior during difficult economic times."

Why the rise of debit cards?Debit cards are plastic payment cards that are linked to either checking or savings accounts. Unlike credit cards, which allow users to borrow funds to complete purchases, debit cards tap into a user's own money reserves when making transactions. They have ascended to the No. 1 noncash payment method as people don't want to carry cash and like the convenience of swiping a card. The debit card can help those who budget keep track of how much they spend each day by keeping an electronic record.

Debit cards are also the payment method of choice for people with bad credit who have difficulty getting credit cards. In addition, they are preferred by people who want to avoid using credit cards, and those who receive government benefit payments and payroll checks that are directly deposited into their bank or credit union accounts.

Card industry observers have noted that banks and credit unions are shifting their revenue-generating focus more toward debit and prepaid cards and away from credit cards. The Credit CARD Act of 2009 severely limited lenders' ability to increase credit card interest rates and fees. Debit cards and prepaid cards have fewer restrictions for issuers and lenders have started marketing them more aggressively in recent months.

Unequal protectionsConsumer groups, however, have put the word out to card users that debit cards and prepaid cards do not carry the same consumer protections as credit cards and may be loaded with fees. Purchases made with debit or prepaid cards do not carry the same protections as credit cards if there are disputes with merchants about defective products. A credit card issuer can withhold payment to the merchant until the dispute is resolved. Debit cards carry no such safeguards. In addition, the card users' liability for losses if cards are lost or stolen can be greater with debit cards than credit cards.

Debit cards also can be subject to overdraft charges if users attempt to spend more than they have in their accounts. New Fed rules that took effect July 1, 2010, require banks and credit unions to get customers' permission -- called "opting in" -- before enrolling them in overdraft protection programs. The fees can range from $29 to $35 if card users overdraft their accounts.

"The banks have cleverly substituted debit (and prepaid) for cash, to keep interchange revenue up," notes Ed Mierzwinski, consumer program director for the U.S. PIRG, the federation for state Public Interest Research Groups."While the overdraft rules have helped, the regulators should have gone further. Consumer groups believe that all payment methods -- debit, payroll, prepaid, Internet and the emerging mobile payment systems -- should have upgraded rights," says Mierzwinski.

He noted that the impending startup of the new Consumer Financial Protection Bureau may lead to better payment card protections. The agency was approved as part of the massive Wall Street Reform law, but won't be open for business until mid-2011. Among its powers: writing and enforcing rules to protect consumers from unfair and abusive lending and financial practices.

Credit card use declinesConsumers' disfavor with credit cards has been broadcast in monthly G.19 reports, which are issued by the Fed and track outstanding revolving debt. The latest report, issued Dec. 7, 2010, shows consumer credit card balances have fallen for 26 straight months. The Fed's payment study echoes what's reflected in the G.19.  

"This is the first time since we've been doing these studies that there has been a decline in credit card payments," said June Gates, public information manager for the Federal Reserve Bank in Cleveland. The Fed began tracking payment methods in 2001. 

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