August 13, 2009

Debit cards are taking center stage in consumers' lives as the U.S. deals with this recession, says TowerGroup. According to a research note from the Needham, Mass.-based firm titled "Shuffling the Cards: The Migration of Frugal Consumers and Cautious Lenders to a Debit Card World", debit cards are far more resilient in the current recessionary economy than credit cards.

In less than 15 years, debit card transactions in the U.S. grew from 1 percent of noncash transactions to more than 50 percent. TowerGroup predicts that debit card transaction volume and card spend will grow through 2015, through the current recession and ensuing economic recovery.

Consumers are changing their spending behaviors and are shying away from credit cards in an effort to limit discretionary spending. TowerGroup believes that because debit cards link directly with consumers' demand deposit accounts, these cards typically force people to spend only to the amount in their account, unless the debit card is linked to a line of credit.

Add to this cautious lending strategies among regulation-wary credit card issuers and the stage is set for a surge in debit card usage—especially once mobile payments technology becomes widespread in this country, says TowerGroup.

TowerGroup recommends that to foster customer loyalty, card issuers implement strategies to accommodate consumers' shift to debit cards. With debit reward programs starting up, card issuers can benefit by cross-selling additional products such as credit cards, investments and mortgages to their debit card customer pool, the firm notes.

"The traditional debit card business model will evolve as a result of inevitable market changes with mergers, new regulations and the greater consumer acceptance of prepaid cards," said Dennis Moroney, research director for bank cards at TowerGroup, in a statement. "Card issuers will have to embrace the debit card platform to keep up with a new financial world in which debit and prepaid cards become the dominant payment methods."

ABOUT THE AUTHOR