The humble debit card is having a renaissance as a host of fintech players turn to the decades-old technology to power new areas of financial services.It’s easier than ever for companies outside the traditional banking sector to issue cards to their customers, which has fueled a spate of creative offerings featuring perks like spending rewards that have largely eluded the category for more than a decade.
Fintech companies are also using the cards to let customers access their money more quickly, making it so workers can tap their wages ahead of payday and small-business owners can immediately spend the funds they made from their sales. The cards promise better access to quality financial services for people who’ve been excluded from the credit industry or who have been overlooked by the traditional financial system. Charles Schnell, a worker at an Ohio facility that makes plastic wrap, used to try to borrow money from friends when his bills didn’t align with the two-week pay cycle, but about a year ago he signed up for Payactiv, a service that allows workers to access some of their earned wages ahead of payday. Schnell gets the funds on a debit card issued by Payactiv and has used the money to pay bills and deal with expenses related to a family medical emergency. “It comes in handy when you’re running short on money, especially when you get paid every two weeks,” he told MarketWatch. Companies offering earned-wage access through debit cards say that they’re giving workers more financial flexibility, such that they will be less reliant on costly options like payday loans to handle bills and other expenses. Many customers using Branch, another earned-wage access service, “have little to no access to credit,” its chief executive Atif Siddiqi told MarketWatch. “Debit cards [are] a nice way of providing more transparent, accessible financial services to this demographic.” Debit cards issued by fintechs are just one piece of a larger debit ecosystem that has seen growing interest, especially during the pandemic. As is typical during periods of financial uncertainty, debit spending grew last year while credit spending contracted, partly because consumers were gravitating toward a less risky payment method. The value of U.S. debit transactions rose 5.6% during 2020, according to market researcher Euromonitor, while the value of U.S. credit spending fell 12.7%. Debit cards also became a bigger part of the overall card market, as the number of U.S. debit cards in circulation increased 1.7% while the number of credit cards dropped 4.8%, per Euromonitor data. Consumers typically focus on paying down debt and building savings during economic downturns, and higher unemployment can lead to higher default rates, said Kendrick Sands, the head of consumer finance at market-research firm Euromonitor “Debit has a few really key advantages,” added Seth Ross, the general manager of payroll provider Ceridian HCM Holding Inc.’s Dayforce Wallet, which offers a debit card that lets workers get their wages ahead of payday. “It’s accessible to everyone, there’s no bar of a credit check that’s required, and it’s really a democratizing force.” Money ordinarily moves slowly through the financial system, which can also pose logistical challenges for small businesses facing tight cash-flow situations. It may take five days for Harlem Biscuit Company, a New York City food establishment, to actually receive the revenues it makes by selling on delivery platforms like Grubhub or DoorDash, and even the company’s traditional payment processor, Square Inc., can take a day or two to deliver payments to its customers’ bank accounts. But Square also offers a small-business debit card that gives owners instant access to the money they make from sales. “It helps us really function in a day-to-day capacity,” explained Warren Satchell, Harlem Biscuit Company’s chief operating officer. While The Langston, a fried-chicken sandwich, is the company’s best seller, Satchell likes the ability to “react immediately” and purchase ingredients quickly when he notices that products like the sausage-based Frederick sandwich start showing surprise surges in sales. “Debit is having its moment right now,” said Francisco Alvarez-Evangelista, who follows the payments industry for market researcher Aite-Novarica Group. A few years ago, fintech companies mostly used debit cards to target people making under $75,000 a year, but now the market has “exploded” to include more segmented offerings, such as debit products aimed at immigrants or the LGBTQ+ community, according to Alvarez-Evangelista. Even retailers like Walgreens Boots Alliance Inc. are getting in on the action. ‘Regulatory arbitrage game’ Branch and others are able to provide free services like earned-wage access to customers by taking advantage of the way the card industry is structured. Merchant banks pay card-issuing banks interchange fees when consumers swipe their cards at a store, providing an avenue for fintech companies to monetize their debit products indirectly. Instead of charging a fee for customers to access services, fintechs can attach those services to a debit product and collect interchange on the merchant end. Debit interchange hasn’t been very lucrative since the Durbin amendment in 2011 capped fees on purchases made through cards issued by banks with over $10 billion in assets. But therein lies a loophole for fintech companies, which can opt to work with smaller banks that aren’t subject to the fixed rates, allowing them to set higher interchange fees that bring in more revenue. “These fintech companies have realized — rightfully so — that the way they monetize their consumer-facing apps is through debit,” RBC Capital Markets analyst Daniel Perlin said. “They’ve all decided to play the regulatory arbitrage game of using sub-$10 billion financial institutions.” Return of rewards While credit cards offer lucrative rewards that are partly funded by higher levels of interchange, the U.S. debit industry largely abandoned rewards following the Durbin amendment, thus limiting rewards opportunities for lower-income customers. That’s starting to change as fintech companies look for more innovative ways to reward consumers, presenting the chance for customers outside the credit system to earn perks for their spending. Working with Durbin-exempt banks is one strategy, because then fintechs are able to collect elevated interchange fees that can fund rewards, at least in part. Oxygen, a financial-technology company aimed at freelancers, recently launched a debit rewards program that offers free perks like 2% cashback, lost-luggage protection, and hotel-theft protection—all elements of typical credit rewards programs. The company says that Durbin-exempt interchange and one-time fees for optional higher rewards tiers help fund the program. “We think it resonates with this younger consumer with a proclivity to use debit but who doesn’t feel like they should be giving up the traditional rewards associated with credit,” said Ryan Conway, Oxygen’s head of business development and partnerships. Fintech companies including Square are launching into merchant partnerships as they use debit cards to help deliver offers like retail discounts. The company sees long-term promise in delivering more localized offers at nearby sellers that consumers are “actually going to value and actually going to use,” according to Chief Executive Jack Dorsey on a February investor call. Though buy-now pay-later company Klarna doesn’t yet offer its own debit cards in the U.S., the company primarily serves a broader base of debit customers looking to pay for goods and services in interest-free installments. Klarna offers merchant-driven rewards like redeemable points and exclusive sales for those who spend on its platform, which is one reason why, in Europe, 30% of transactions come from consumers who aren’t even choosing installment options and are instead just using the service to pay instantly and in full. “I think you will start to see more and more companies start to reward debit-card consumers, younger consumers, in ways credit-card companies did because it creates this loyalty,” he said. Merchant-funded offers represent an intriguing development as they could allow for a rewards model that isn’t reliant on interchange. Fintech companies can provide “a line of communication from merchants to customers” when it comes to offers, said Sands. “Overall it’s a positive development for consumers,” Sands said. “If the data is already being monetized one way or another, it’s better for consumers to get a portion of that.” Some merchants are looking to participate more directly, including Walgreens, which recently announced a bank-account offering for customers that will come with a debit card. Cardholders will be able to earn rewards points for their spending, tying in with Walgreens’ broader loyalty program. “A lot of these companies that historically launched credit cards are feeling comfortable launching a debit card because it’s more consumer friendly,” said Alvarez-Evangelista. That way, consumers “are not going into high debt to get access to your goods.” “So easy to launch” New technology is also helping to fuel the debit explosion thanks to more “turnkey” solutions that ease the process of issuance for those outside the traditional banking space. Five years ago, it might have required months of negotiations and integrations for a company to launch a debit offering, said Alvarez-Evangelista, but now the process can take just weeks. Instead of building custom solutions and pricing for every debit product, tech players and issuers have designed more straightforward offerings with a rich set of digital-banking features, like the ability for users to deposit checks remotely or turn on a virtual debit card from within an app. Still, there remains interest in more customizable offerings, and that area has also gotten a high-tech spin. Marqeta Inc., a $14 billion fintech company that recently went public, works with businesses that are seeking more unique applications of debit for specialized business functions. One customer, Coinbase Global Inc., built a card that lets users monetize their cryptocurrency holdings so they can convert them to dollars for in-store spending. Another client, DoorDash, relies on the company’s technology to dynamically populate information about deliveries and tips so that workers can request on-demand access to their wages and receive an accurate amount. “If you had thought years ago about developers building card products, it would have been unheard of,” Marqeta Chief Marketing Officer Vidya Peters told MarketWatch. “Now they’re using APIs [application-programming interfaces] like ingredients to build new card products.” Safety check While credit cards are often viewed as more secure than debit cards because they don’t offer fraudsters a direct line to someone’s bank account, there’s been progress in making the debit experience safer. “The reality is that credit-card companies have, in fairness, been really good to consumers if you get defrauded,” Klarna’s Sykes said. “We want to make sure the same experience is something debit-card customers can enjoy.” The buy-now pay-later company offers various security features like the ability for users to generate one-time virtual cards that they can use when shopping at unfamiliar retailers. “You don’t have to worry about whether [a retailer] is ever going to get hacked or if they’ll randomly recharge your card,” Sykes said. “It takes a lot of the stress out of making those transactions.” Building the future Some debit innovators still see a place for credit cards—and have ambitions of launching their own. “We recognize that there is a preference for debit, but we think that changes over time,” said Conway of Oxygen, which hopes to join the credit-card market later this year or early next. People looking to grow their businesses or grow “from a personal perspective,” will use credit, he continued. But others are pointing to a vast untapped potential for the debit universe, especially as cards get more integrated into other products. One goal for payroll provider Ceridian’s Dayforce Wallet is to leverage information about a worker’s spending patterns and work schedule to generate smarter insights. The digital wallet could one day surface an alert telling someone that based on his normal payment history, he might be short on an upcoming car payment, but also that an open shift his employer might cover the gap, according to Ross, who manages the offering. “Connecting information in new ways that can help people achieve goals with less stress and more seamlessly is the kind of thing that embedded financial services can do,” Ross said.