There's a war going on for your wallet, but if you play your cards right, it's one you can win.
Merchants and bankers are competing to steer you to use the card that's most profitable to them, with bankers pushing credit cards and merchants pushing debit cards.
At the core of the battle are changes in interchange rules that limit how much banks can collect from merchants whenever customers swipe their debit cards. Once those fees were capped, it created a clear distinction between the types of transactions -- and both sides are sweetening deals to steer you into making the choice that benefits them.
"If I'm a well-off consumer, and I've got a wallet full of credit cards and debit cards, I might say, 'Well, who's going to give me the best deal?' 'Where am I going to get the best rewards?'" says Ken Paterson, vice president of research operations for the Mercator Advisory Group, a payment industry consulting firm.
"If I have confidence I can pay off my balance, then I might feel comfortable using a credit card," Paterson says. "If I am someone who is being very careful about my spending and don't want revolving balances, I'm probably still going to reach for the debit card."
Debit vs. credit card swiping
Pay with a debit card and the retailer is happy. The new federal rules cap debit card swipe (or interchange) costs at 21 cents plus a few pennies extra to cover fraud and other costs on debit cards issued by major banks and credit unions. Before Oct. 1, 2011, when the new rules took effect, retailers paid twice that amount -- or about 44 cents on the average debit card purchase.
Pull out a credit card in the checkout line and bankers are happy. There is no cap on credit card interchange fees, which can be even higher than the old debit card swipe fees. The average credit card interchange is 2% to 3% of the amount of the transaction, depending on the type of card used and type of purchase. Plus, if consumers revolve their credit card balances and incur interest charges on their accounts, banks have an opportunity to rack up interest revenue from credit card purchases.
After the major banks tried and failed to launch debit card usage fees to make up lost interchange fee revenues by charging consumers to access their own money, payment card industry analysts were predicting that banks would increase existing fees or add new ones. That has already begun to happen. Some also predicted that banks might attempt to give customers an incentive to use their credit cards more.
Sweetening the rewards deals
In recent weeks, banks have begun to sweeten rewards deals offered on credit cards. The more you use the credit card, the better the rewards -- and the more banks are able to cash in on the higher credit card interchange revenue.
Holiday shopping rewards offers include an expanded selection of rewards points, perks, experiences and cash-back bonuses. Many of the bonus rewards are tied to spending thresholds that require a minimum amount of purchases to get sign-up rewards. Previously, sign-up bonus points were typically smaller, but came with no strings attached.
Capital One, for instance, is offering up to 15 bonus rewards per dollar spent. Bank of America is sweetening the deal for its Upromise World MasterCard card holders. In addition to the regular cash-back deals, the bank is adding another 11% in cash back bonuses through Dec. 31, 2011. Issuers were ramping up rewards before the holiday season and are expected to continue with enhanced rewards offers even after the shopping season ends.
In addition to rewards, banks have stepped up efforts in recent months to gain new credit card holders. Equifax, the credit reporting agency, released data showing new bank credit card accounts jumped 25% between January and August 2011 compared to the same period a year earlier. Federal data compiled for the 2011 third quarter senior loan officer survey show a small number of banks are loosening terms on credit card loans to make it easier to get new cards.
Retailers counter with debit incentives
Shoppers should expect to see retailers try a number of methods in the coming months to entice them to whip out debit cards instead of credit cards at the cash register. Some will also beef up efforts to get you to pay with their own store branded credit cards or gift cards -- an even better choice for merchants because they carry no interchange fees.
"Some retailers are trying to figure out if there are debit-specific things that we can do that will encourage consumers to use less expensive forms of payment," says Duncan Mallory, senior vice president and general counsel of the National Retail Federation.
At IKEA, for instance, the home furniture store is offering a 1% discount on future purchases if customers use their debit cards at checkout. Duncan says that's just one example of ways retailers may try to sway payment decisions.
"Other things might be attempted," he added. "It's a form of reward. It's a win-win. The store wins and the customer wins, so, they are sharing the savings from the interchange fees with their customers."
For years, gas stations have offered customers discounts -- of a few pennies off per gallon of gas -- for using branded gas cards or for paying with cash. That kind of incentive may be expanded to other types of retailers who are looking to steer customers toward payment methods that are less costly for merchants.
Not all discount offers will work for every shopper, as Paterson and others notes. In the case of buying furniture at IKEA, for example, the 1% discount may entice some shoppers but not others to buy furniture with their debit cards, says Paterson.
"The question is: Is 1% a sufficient incentive for a consumer?" he asked. "If you're going to get a 1% discount on a $200 ticket, that's $2. If you've got the money in your checking account and you don't have a better deal on some other cards in your wallet, then that's probably a sufficient incentive. Across all retail broadly speaking from small to large, how strong an incentive is 1% going to be?"
He cited the Target private label store credit cards and debit cards as an example. Target's RED cards offer users 5% off daily purchases -- an amount, says Paterson, that's "much more visible from a consumer perspective."
Some purchases, such as big-ticket items are more suited for credit rather than debit. Many consumers don't have the discipline to save up to use cash for these purchases and don't have the money in their checking and savings accounts to cover, for instance, a $4,000 big-screen television purchase, with a debit card.
Consumers shunning credit cards
Both Duncan and Paterson note that banks would be swimming against the tide if they try to persuade consumers to increase credit card use.
"Customers are using debit precisely because they've decided that there has been a bit of a credit hangover," says Duncan, from the retail trade group. "There are a number of consumers who are reluctant to run their credit cards back up even on a monthly basis ... Certainly, some banks will try to do it. It's going to be a bit of an uphill battle to shift consumers from a payment method they prefer to one that they've already decided is less beneficial to them."
Debit cards have become the No. 1 non-cash payment method in the country. Users say they like the convenience of not carrying cash and avoiding the interest and potential fees of credit cards. As debit cards rose in popularity, credit cards have taken a nosedive. In the past three years, consumers have shed credit card debt at record levels, according to the Federal Reserve's monthly report on outstanding credit.
"For many consumers, debit is really their favorite way of paying," says Paterson, the payment industry researcher. "In the past three years, consumers are using debit cards more because they don't want to build up their revolving credit card balances. As a nation, we are still deleveraging our credit cards."
The new federal rules, more commonly known as the Durbin Amendment to the Wall Street reform law, allow merchants to set minimum purchase amounts for credit cards. For example: requiring purchases of at least $10 for credit card transactions. "You'll probably see more of that," Duncan says. "That's a way to encourage consumers to use methods less expensive to the retailers, which helps keep costs down, which helps keep prices down."
Making the sale matters more
In the end, merchants really want to make a sale, says Bob Baldwin, president of Heartland Payment Systems, a payment processor. They don't want any efforts to steer customers toward any one particular card to discourage shoppers.
"Historically, merchants don't want the payment method to get in the way of the customer making the actual purchase," says Baldwin. "They want to get them through the line."