‘Payment’ might be one word, but it takes a multitude of forms. At its core, a payment is just the action of paying or being paid. But there are tonnes of ways in which this action can happen, depending on the method, as well as the parties involved. According to Chargebee, there are more than 200 alternative payment methods worldwide.
Here at Moorwand, we recognise the importance each payment type holds. That’s why we’re endeavouring to profile each of the main payment players through our ongoing series: ‘A History of Payments’. Crucially, we want to dispel common myths, review the headway they’ve made since they started out, and highlight their individual benefits.
You can find our first and second installments here, which take a look at the origins and developments of prepaid and credit cards. Now, for our third installment, we want to break down the debit card.
Unlike its credit card peer, which experienced a spending decline of 10% year-on-year in August 2020 following the pandemic, debit cards saw their spend surge 2.5% over the same period. They’re a payment method which appeals to a host of demographics, even teens. Fintech start-ups catering to these younger demographics in the US, such as Greenlight and Step, started out with debit card offerings. Now they’re landing $260 million and $100 million funding rounds, respectively.
What is a debit card?
Debit cards draw money directly from a person’s current account. As PocketSense puts it: “They replace the interest-bearing debt created by using credit cards and restrict the user to the actual amount of money contained in his account.” Cardholders can spend on their debit card in-store, or online – including via mobile wallets, such as Apple and Google Pay.
People can dip into an overdraft through their debit card, if required, unlike a prepaid card. Usually, this is a pre-agreed (or arranged) amount with the bank. Though unarranged overdrafts can also kick in if an account holder spends more than what’s in their current account. In this instance, cardholders are usually given a short time window – between 24 and 48 hours – to pay back the negative balance before fees incur.
Dissimilar to credit cards, debit cards are often considered the cheaper alternative and involve fewer fees. Though that doesn’t mean there are no fees altogether. As well as potential overdraft fees, when debit cardholders go abroad they can still incur fees when withdrawing money from an ATM, or paying for an item via a card terminal. Whilst this is still common among high street banks, digital banks like Monzo and Starling rose to fame in large part for dropping these fees.
Fintech start-ups have long been changing the way consumers use cards – both debit and credit. But particularly debit, considering the less stringent licencing required to issue them. As Lindsay VanSomeren tells The Balance, fintech-issued cards “are more tech than bank”. That’s because “fintech cards”, as she calls them, generally pull money from a deposit-insured bank – meaning the fintech start-up acts more like an intermediary than the issuer itself.
A timeline of the debit card
Barclays often prides itself as a bank that gets there first. And when it came to the UK’s first debit card, the bank didn’t disappoint. In 1987, it launched first-of-its-kind ‘Barclays Connect’. Nine months later, the bank had issued one million of them. The launch was helped along by the increase in electronic payment points – or ATMs – in the early 1980s.
In the US, debit cards landed nearly ten years earlier in 1978, thanks to The First National Bank of Seattle. Though according to Kansas City Federal Reserve, the first US debit card may have hit the market as early as 1966 thanks to The Bank of Delaware. Debit cards have traditionally trailed behind credit cards, which enjoyed widespread adoption throughout 1950s’ America.
But over time, scales have tipped in debit cards’ favour. In the UK, debit card volumes exceeded credit card volumes for the first time in 1995. Fast forward to 2019, and there were 61.9 million credit cards issued to UK residents, versus 97.3 million debit cards issued. “In other words, people are 57% more likely to own a debit card,” says Findr.
Whilst debit cards began as a product issued by familiar high street banks, today we’re seeing more and more fintech start-ups, as well as Big Techs, create their own debit card programmes to rival the ones of old. These schemes are solving problems that have long plagued incumbents’ offerings, such as credit assessments, credit building, and paycheck access.
Debit cards have, for some time now, been appealing to younger generations. Largely because they’re less likely to overspend on them. When US challenger Chime started out back in 2015, it found some 67% of millennials prefer debit cards.
The world’s advancements towards contactless, particularly under the economic stress of a pandemic this last year, has seen debit cards continue to soar in popularity. “Debit has been the hero for many payments companies this year,” the Wall Street Journal said in November 2020. In the US, Visa and Mastercard debit-card dollar payment and purchase volumes collectively rose 23% year-over-year in the quarter ending September 2020. The same measure for credit cards was down 8%.
Pros and cons of a debit card
When debit cards were first introduced, there were a number of basic benefits which drew in consumers. Whilst it might seem ‘old hat’ now, the cards quickly came into circulation because they freed people from carrying traveler’s checks or foreign currency. They also didn’t require a credit check, a factor still very pertinent for customers today. And with far more of them distributed now than credit cards, debit cards are simply a lot easier to get hold of.
In recent years, the reward schemes offered alongside debit cards have enjoyed fresh competition. “As fintechs entered the banking space with neobanks and challenger banks, debit card programmes received enhancements,” William Morales tells FinTechtris. “From physical cards being made of metal and laser etched, to rewards-based cash back on all spending.” Revolut launched its new glow in the dark debit card in April 2021 with boxer Anthony Joshua’s help, whilst Starling launched its first recycled debit card a month earlier.
Following the financial crisis, banks pulled back on their debit card rewards programmes. But as Morales points out, fintech start-ups have since lept at the opportunity to come up with new and improved alternatives. Because young consumers “want rewards but they want to get them in with debit”. US fintech Acorns launched ‘Cash Forward’, which invests cashback into exchange-traded funds (ETFs). Whilst its peer Stash translates cashback into fractional shares.
Debit cards have also enjoyed great success in the ‘kid banking’ industry, forming many of the players’ fundamental offerings. UK child-focused debit card start-up GoHenry raised $40 million last year, proving the flexibility a debit card can impart for its user.
But there are disadvantages to debit cards. Namely, they generally include less protection than a credit card, because they are covered by different sets of laws. This means a debit card holder will likely be liable for up to a certain amount of fraudulent transactions. But it depends on the country.
Looking into the future
It’s been a big year for cryptocurrencies. The price of Bitcoin has soared, even if it has experienced some crashes along the way. So much so, that experts are now saying it will reach $100,000 before the year is out. Because of its increased popularity, incumbent players such as Visa, Mastercard, and PayPal are all taking the digital asset much more seriously.
This means traditional debit card schemes could be in for a crypto-style revamp. Crypto debit cards are already offered en masse by exchanges. They essentially allow consumers to spend cryptocurrencies in the real world. In the backend, the card provider converts the digital currency into cash – otherwise termed fiat currency. PayPal is currently gearing up to offer this feature through its digital wallet, which is currently used by 300 million people.
This is just one of a number of potential futures for today’s debit card. And with innovation now happening at an exponential rate, it’s no surprise that even the largest, oldest companies are starting to get in on the action.