PHOENIX–Consumer preferences for paying by credit or debit card typically are too deeply entrenched for merchants and banks to succeed easily in steering customers to one or the other option for financial reasons, one banking industry analyst contends.
Moreover, the bottom-line benefits to merchants of shifting customers from paying with a debit card instead of a credit card are more dubious than many may assume, David Stewart, a senior expert at McKinsey & Co., told attendees this week at BAI Payments Connect in Phoenix.
If proposed Federal Reserve Board rules capping debit interchange at 12 cents per transaction go into effect as outlined, cutting issuers’ existing interchange revenue by as much as 70%, merchants would have new incentives to steer consumers to initiate more purchases with relatively less-costly debit cards, Stewart said.
The Fed plans to issue its final rules next month, as required by the so-called Durbin amendment within the Dodd-Frank Act (
Issuers also would have a greater incentive under the proposed rules to encourage customers to pay via credit cards, whose higher interchange rates will be even more lucrative, relatively, compared with debit cards, Stewart noted.
“Merchants will try to steer consumers from credit to debit, and large issuers are going to be trying to steer their cardholders to higher-interchange products, but it won’t be easy,” Stewart said.
The reason is that consumers are unlikely to budge from long-established payment habits, even if merchants and issuers dangle promotions or discounts as incentives for shoppers to pull one card versus another from their wallets, Stewart said.
“Merchant-steering to debit will be much more difficult than many believe,” he said, suggesting that any discount offered to customers paying with debit would need to be “surgically” applied.
“You can’t put up a sign that says ‘Use debit and get a 1% discount on your purchase’ (without the cost of the discount) coming out of your bottom line,” Stewart said.
Merchants would need to displace some 42% of credit card purchase volume with debit card transactions to offset the cost of providing even a small discount, such as 1%, to debit customers, Stewart estimates.
Moreover, such a promotion would be most effective if it were offered only to habitual credit card users, which would be somewhat difficult to do, Stewart suggests.
For example, a merchant could tout a discount for paying with a debit card to credit card users by printing a message on a checkout receipt, but that likely would not displace a significant share of overall credit card spending, Stewart speculated.
“To offer a blanket discount for debit card usage would be very difficult to pull off economically,” he added.
Issuers attempting to persuade debit card users to switch to credit cards would face equally daunting obstacles, Stewart said.
Consumers tend to become habitual credit card user to accumulate points from credit card rewards programs, Stewart said, noting that many credit card users are “transactors” who prefer managing their daily expenses by paying a lump sum at the end of the payment cycle to a card issuer. Such credit card users, who represent at least half of all cardholders, also are “very attached” to earning rewards points with each purchase, Stewart said.
Credit card rewards programs tend to be richer for consumers than debit-rewards programs and some issuers in the wake of proposed new debit-interchange rates have announced they are curtailing debit-rewards programs (
Debit cardholders are just as addicted to their own card habits, Stewart said. McKinsey data show that habitual debit card users prefer it to credit cards as a method of managing their daily cash-flow and they are unlikely to switch card types.
“In general, debit users don’t want to pay with a credit card, ... and most debit users believe credit lags debit in important attributes,” Stewart said. Moreover, “20-somethings have grown up with it drilled into their heads that credit is dangerous (i.e. risky to their financial stability and credit scores). There are some real perception issues there to overcome,” he said.
Consumers’ preferences for using debit or credit may not change, but issuers and merchants soon will begin to show a strong preference for PIN-debit transactions, which carries a lower interchange rate than signature debit does, Stewart suggested. Signature debit comprises more than half of all debit transactions.
“The economics of debit for issuers will flip-flop if there is a fixed price for debit,” Stewart said. “Now, instead of promoting signature debit, the mix of signature-PIN will shift fairly dramatically,” he said, noting that issuers may prefer the additional layers of security PIN debit provides, versus signature debit, if all things are equal.
