Debit cards favored, as long as they’re fee-free 

“Credit or debit?”

Swipe a card to pay for goods or services, and you’ll likely get that question. Chances are, your response will be, “Debit.”

A recent poll found that consumers use debit cards much more frequently than credit cards. In fact, 68 percent of the respondents to a June 2011 AP-GfK survey stated they use debit cards more often than credit cards. Twenty-nine percent said they favor credit cards.[1] 

Based on the survey’s findings, it’s easy to conclude the fee-free nature of debit cards is key to their popularity. However, place a fee on debit-card usage and respondents are likely to ditch those cards:

• If charged a $3 monthly fee for a debit card, 61 percent of current debit-card holders said they would use a different payment method.
• With a $5 monthly fee, 66 percent said they would use a different payment method.
• Boost the monthly fee to $7, and 81 percent would change payment methods.

What would take the debit card’s place? Among those who would change payment methods:

• 53 percent said they were extremely or very likely to switch to cash
• 42 percent would choose checks
• 21 percent would favor credit cards
• 12 percent would prefer prepaid spending cards

These survey results come at a time when financial institutions are facing a new Federal Reserve-imposed cap that will sharply limit the revenues they can collect from merchants for debit-card transactions. Beginning October 1, 2011, the maximum fee banks may collect from merchants is 21 cents per debit-card transaction. Currently, the average debit-card “swipe fee” is 44 cents per transaction.

This new regulation is forcing many banks to alter or eliminate their debit-card reward programs. Others are considering new fee structures for checking and debit cards to make up for the lost revenues.

In an age of electronics and instant rewards, it says something when consumers would consider more traditional methods of payment as an alternative to debit cards.  Will this ultimately encourage adoption of new electronic payment forms – such as mobile payment options – particularly if they’re tied to credit or DDA accounts?