Spending Cap Popular With Debit

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A recent study attributes the rise in popularity of debit cards to consumers' preference for a payment card with a built-in spending cap.

According to the San Francisco consulting firm Edgar, Dunn & Co., consumers use debit cards largely as a method of fiscal restraint. In the study of more than 6,500 respondents, conducted over the Internet during September and October, 38% listed debit as their card of choice, compared to 22% for standard credit cards, 20% for cobranded credit cards and 15% for loyalty credit cards.

Because of the shaky economy over the past few years, consumers have become more focused on controlling their spending and have favored debit accordingly, F. Alan Schultheis, a director of Edgar Dunn, said.

But preference and actual behavior do vary, he said; respondents who expressed a preference for debit cards revolve almost the same amount of debt as those who prefer credit cards.

Though the study was conducted independently, Edgar Dunn does consulting work for card issuers. It advises them to attach loyalty programs to debit cards in order to boost their use. Debit reward programs should target merchants such as gas stations, restaurants and especially supermarkets, because debit cards are used less frequently for high-ticket transactions such as travel purchases, Edgar Dunn said.

More than 50% of debit cardholders would spend more on their cards if incentives were attached, according to the study. Those respondents said their spending would increase by an average of 22%.

"We are recommending now to banks to look at opportunities to have loyalty on their debit cards, but to do it in a segmented way," said David Poe, CEO of Edgar Dunn.

Banks have promoted debit cards-particularly signature debit-over the past few years, partly for the higher interchange fees that flow from merchants to issuers, Poe said. Banks are also trying to reduce the use of checks because of the expense of processing them.

Edgar Dunn conducted a similar study in 1999, but it did not track debit card use. The 2003 study showed a substantial increase in preference for both loyalty cards (those that have a rewards program but are not attached to a second brand) and cobranded cards. Among credit cards, the preference rate for cobranded cards rose to 33% from 25%. The rate for loyalty cards rose to 25% from 10%.

The drop in the standard card preference rate to 36% from 57% reflects the growth of reward cards, the consulting firm said.

Preference for affinity cards, which earmark a certain percentage of funds to an organization of the cardholder's choice, fell to 3% from 8%. Edgar Dunn said that decline might have leveled off.

The average number of cards per wallet has risen from 3.3 to 4.3, the studies showed.

In a separate study of debit cards released Monday, Packaged Facts, a division of MarketResearch.com of New York, found that women prefer to use debit cards more often men do for clothing, health care, gasoline, groceries and electronics. In all categories, women use debit on average about 10% more than men.

David Morris, who wrote the report, attributed the trend partly to women's higher shopping rates, including for small purchases. He also said that women could be drawn to the fiscal restraint built into debit cards.

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