Payments

How COVID-19 Has Elevated the Role of Debit and Checking

By: Tom Bennett, Principal, Advisors Plus Consulting

Throughout the COVID-19 pandemic, the performance of debit has served as a bright spot for credit unions. While its usage suffered initially under stay-at-home orders, its recovery has been impressive. Recently, Visa’s Executive Vice President for North America, Oliver Jenkyn, spoke strongly about debit at the Baird 2020 Global Consumer, Technology and Services Conference – Visa’s internal analysis suggests there could be a $100 billion annual shift from credit to debit that happens over time.

While we’re still not sure what the long-term trajectory will be from the pandemic, several insights from PSCU’s weekly transaction trend analyses lend credibility to this aspiration and underscore the importance of debit for credit unions, including:

Debit has been swift to recover from the pandemic and is trending above historical growth rates. After the national spending splurge that occurred in early March, debit spending decreased by 19% two weeks later. Just three weeks after that debit growth was positive again, with spending up 6%. And with debit growth currently trending above 10% through June, overall debit spending has risen above its historical 7% mark, while credit card growth remains negative.

Debit growth has been strongest in card-not-present categories. Card-not-present transactions emanate from a variety of situations, including online purchases, recurring payments, digital wallets, etc. Historically, debit usage has lagged credit card usage in this category, in part because of perceptions around security. Since the start of April, debit card-not-present growth year-over-year has remained above 20%, with many weeks up 40% or more. Key online merchants like Amazon have shown continued year-over-year increases of over 100%. Digital wallets for ordering food delivery and groceries, etc. have shown similar growth. While we expect some tempering from greater-than-20% growth rates, debit is strengthening its top-of-wallet status across the card-not-present domain and shedding misperceptions around security.

Cash usage appears to have declined, likely replaced by debit. We have seen ATM withdrawal volume decline and stay down more than 30% year-over-year. In addition, cashback transactions at the point-of-sale also remain down over 30% while overall volume has recovered. Given this decline in cash obtained, it is likely that a large portion of historical cash transactions are flowing to debit and being captured via digital wallets and regular debit transactions.

Debit carries significant scale. Compared to credit cards, a typical credit union portfolio has three times as many cards, with each card conducting over three times as many transactions. Combined with the aforementioned growth rates, purchase volumes and card-not-present activity are significant and underscore the magnitude of debit as a payment vehicle.

The importance of debit (checking) has been further elevated though the pandemic. Debit has been a major beneficiary of stimulus funds and unemployment. In a previous blog, we suggested checking accounts are the most connected element in the consumer’s wallet, which can be linked to direct deposit, debit cards, mobile deposits, bill pay, person-to-person payments, etc. Never was this more pronounced than when the distribution of stimulus funds occurred beginning in mid-April, with smaller waves towards the end of the month. In fact, the first wave lifted debit spending from -11% the week prior to +6%. Similar benefits have accrued through the disbursement of unemployment and related benefits.

As we approach the next normal and safeguard for unexpected future events, we are certain that debit is integral to the success of credit unions and their members. Specific areas of focus that credit unions should pursue now with respect to debit and checking include reinvigorating checking account growth, capitalizing on digital payments, leveraging contactless opportunities and managing the connectivity of checking accounts. Stay tuned for a follow-up blog that will provide a deeper look into each of these areas.

Tom Bennett is a Principal Consultant with the Checking and Debit Card practice at Advisors Plus. Tom advises credit unions on ways to enhance portfolio growth and profitability through P & L and key metric performance analyses, competitive product assessments, and industry and peer benchmarking reviews. His combination of consulting knowledge and direct experience provides an informed and unique perspective to solve the challenges of our clients.