More Consumers Shun Credit Cards, Turn to Debit

By Eva Norlyk Smith, Ph.D.

U.S. consumers continue to move away from credit cards in droves, and debit cards are the new plastic. That’s the basic message from the recently released earnings reports for the last three months of 2009 from credit card giants Visa and MasterCard.

Visa reported that the number of debit card transactions increased by 17.1 percent over the same period in 2008, and by 13.8 percent from 2008 to 2009. MasterCard debit card transactions jumped 10 percent in the U.S. and 16 percent worldwide. At the same time, MasterCard credit card transactions in the U.S. fell almost 8 percent during the fourth quarter of 2009, while they increased by about 9 percent in the rest of the world, a widening spread.

The debit card payment volume, i.e. the amount of money people put on debit cards, also increased. Visa reported an increase in debit payment volume of 15.4 percent in the last quarter of 2009 over the same period the year before. On a yearly basis, Visa debit card payment volume increased by 7.9 percent from 2008 to 2009 for Visa, and 5.8 percent for MasterCard, while credit card payment volume fell 7.3 percent for Visa and 12.9 percent for MasterCard.

In dollar amounts, charges to Visa debit cards in the last quarter of 2009 stood at $238 billion, outpacing the $201 billion charged to Visa credit cards. Year over year, Visa debit card payments came in at a total of $883 billion, compared to $764 billion for credit cards. Visa is the leading payment processor for both debit cards and credit cards, with a market share considerably higher than that of MasterCard.

According to Visa Inc., in the U.S., purchases with debit cards now make up 54 percent of the total payment volume. The numbers reflect the fact that U.S. consumers are relying less and less on credit cards for everyday expenses, increasingly using credit cards mainly for larger purchases. Debit cards are also replacing cash and checks as consumers’ payment method of choice.

Both companies saw rising profits, with Visa increasing net income by 32.9 percent, and MasterCard reporting a 22.8 percent increase in profits over the fourth quarter of 2008. Visa’s earnings were boosted by the rise in debit card transactions. MasterCard came out ahead because it raised transaction fees, despite losing revenue from the lower credit card usage.

For consumers, the predictability of debit cards appears to be increasingly reassuring, particularly after a year of sky-rocketing credit card interest rates and increasingly unpredictable credit card terms for fees and credit limits. In addition, debit cards give consumers much greater control over their spending, as, unlike credit cards, they can’t spend more money than they have.

The earnings report also reveals that consumer spending may be showing early signs of recovery. Visa processed 10.9 billion transactions during the last quarter of 2009, up 3.8 percent from the previous quarter, and an increase of 12 percent from the height of the credit crisis in the last three months of 2008.

Visa and MasterCard are electronic payment processing companies; they don’t issue credit cards or lend money, but rather process purchases made with debit and credit cards carrying the Visa or MasterCard logo. The companies earn their income from the fees collected on each transaction.

Published: February 9, 2010