It’s not unusual for debit-card spending growth to outpace credit-card growth during economic downturns as people get more conservative with their money, but the pandemic has added new twists to that dynamic.
More than a year into the COVID-19 crisis, debit volumes are still surging while credit growth, while improved, is basically flat. Visa V,
The persistently large spread between debit and credit volumes was notable in the March quarter as company results were being compared to a year-ago period that itself saw an “unusually wide spread” due to the onset of the pandemic, noted MoffettNathanson analyst Lisa Ellis.
Of course, several pandemic-related factors are playing into these spending patterns. Debit volumes have been boosted by recent stimulus disbursements, while restrictions on travel and events have dampened credit spending. These trends are expected to be somewhat short-lived, as the impact of stimulus payments dries up and travel spending resumes upon a relaxation of government restrictions.
But another pandemic-era trend could persist. The COVID-19 crisis has sped up a shift away from cash amid concerns about the cleanliness of paper money, and in an increasingly remote world, people moved more everyday spending online, and to debit cards, with surging growth for services like grocery delivery.
“Debit is clearly the gateway to cash digitization,” Visa Chief Financial Officer Vasant Prabhu told MarketWatch, meaning that people often move to debit first when they shift away from cash. Visa is “seeing people develop digital payments habits” including in emerging markets that were more reliant on cash prior to the start of the pandemic.
“It is important to note that credit has improved without debit slowing, pointing to accelerated cash displacement,” he said on Visa’s earnings call.
Visa is upbeat about the prospects for debit growth even as the company expects a travel recovery that could help credit volumes and narrow the gap between the two payment types. While there was “very little separation in [the] growth rate between debit and credit” prior to the pandemic, Chief Executive Al Kelly said on Visa’s earnings call that “at least for the foreseeable future and maybe for longer…I think you’re going to see debit continue to grow above credit.”
Mastercard Inc. was somewhat more measured in its commentary, with Chief Financial Officer Sachin Mehra telling MarketWatch that he expects “some level of reversion to the mean” given the “sheer impact of what you’ve seen come through in the nature of stimulus payments.” When the stimulus impact wears off, he anticipates “a compression in growth rates between debit and credit.”
Visa and Mastercard power the technology that allows money to flow between the banks that issue cards to consumers and the banks that help merchants accept cards on the other end of the transaction. The card companies collect various fees from the banks in exchange for processing transactions, while also setting interchange fees that merchant banks pay the card-issuing banks.
Untangling the financial impacts to the card companies of credit versus debit transactions can be somewhat murky, Ellis told MarketWatch, but while she says there’s a “natural perception” that debit spending may bring in less money for the companies, there’s “no clear evidence” of that due to the nature of fee structures, which contain both flat fees as well as fees that vary by the dollar value of the purchase. With credit transactions, though, there’s more opportunities to sell valued-added services given the greater risk associated with credit spending.
The growing usage of debit cards for online spending has sparked government interest recently. The Federal Reserve put out a document Friday asking for public comments on a proposal to clarify that regulations requiring at least two “unaffiliated payment card networks” for debit transactions also apply to card-not-present, or online spending, so that merchants can “choose between competing networks when routing such transactions.”
“Recall the Durbin Amendment requires two unaffiliated networks to be enabled on debit cards—with one signature debit network and one unaffiliated PIN debit network satisfying the requirement,” wrote Barclays analyst Ramsey El-Assal. He noted that “information gathered by the Fed indicates certain bankcard issuers continue to enable only one dual-message network for card-not-present transactions.”
What the debit boom means
The future of debit growth has consequences for the card industry, Ellis said, as the implication of fast growth in debit volumes means that “debit as percentage of total card spending goes up,” and Visa has a higher proportion of debit spending than Mastercard.
Mastercard outperformed Visa in the two years prior to the pandemic, she wrote in a note to clients, but their performance converged during the crisis thanks to Visa’s higher mix of debit spending and some possible differences in the “travel-corridor mix” between the two companies that meant Mastercard saw a steeper drop in lucrative cross-border volumes.
She expects that Mastercard’s revenue growth could “modestly outperform” Visa’s during the recovery before revenue performance converges again in calendar 2023 and beyond, while Mastercard benefits from its higher exposure to fast-growing markets internationally and Visa benefits from its greater debit mix.
Debit volumes are also impacted by the “push-payment” platforms Visa Direct and Mastercard Send, which leverage debit-card infrastructure for people looking to send money to one another. Push payments have seen growing adoption during the pandemic from governments sending relief funds to citizens and could continue their rapid growth, including among gig-economy companies that offer workers the ability to access earned wages more quickly.
Visa’s more frequent disclosures on Visa Direct suggest to Ellis that the platform may be bigger proportionally than Mastercard Send is to Mastercard, and larger in absolute terms.
In thinking about the overall fast growth of debit, Ellis added that the implication for credit-focused American Express Co. AXP,
Amex made changes to its rewards strategy during COVID-19 crisis that helped “support customers while they were not traveling and not going out,” said Jeff Rauch, the company’s head of consumer customer marketing. It ran promotions and provided offers in areas like home dining and food delivery, he said, while also offering streaming and wireless credits.
While Amex expects to benefit from a rebounding economy and projects that travel and entertainment spending will be at 70% of 2019 levels by the fourth quarter, it’s also seeing what could be lasting momentum with the everyday-spend initiatives. The company disclosed that among Platinum card members, 95% who took advantage of streaming credits and 88% of those who used wireless credits offered last year are still spending money in those categories months later.
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