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Lending Briefing: Debit cards are taking over

  • This year, debit cards have emerged as the preferred payment method for the majority of US consumers, dethroning credit cards.
  • Younger generations are behind this switch – even though they're also getting credit cards, Millennials and Gen Zers prefer to pay with debit.

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Lending Briefing: Debit cards are taking over

Debit cards are becoming increasingly popular. This year, they emerged as the preferred payment method for the majority of US consumers, dethroning credit cards.

According to a survey by 451 Research, 56% of consumers preferred to use debit cards as their primary payment card, whereas 40% still opted for credit cards.

This represents a 180 degree flip compared to last year, when 40% of consumers said they preferred debit cards while 55% preferred credit cards. 

So what's going on?

First, it's important to note that the pandemic has laid the groundwork for this shift. During lockdown, in general people were spending less and were more careful about their debt. Moreover, stimulus payments were distributed through debit cards, which also influenced debit card usage.

Plus, the study found that lower-income households tend to use their debit cards more than credit. Credit cards start to have a clear advantage over debit for households that earn more than $75,000 a year. 

But the biggest driver is that younger generations are clearly favoring debit over credit cards – Gen Zers recorded the highest percentage point increase in debit usage, up nearly 30 points from 2021. 

This is happening for several reasons. Millennials and Gen Zers are not as embedded into the credit system as older generations, and newer, flexible payment options like buy now, pay later are making credit cards even less attractive. 

Gen Zers are the most active BNPL users, and the repayments are mostly done via debit cards. This could continue to drive increased debit card usage in the future as well, as BNPL continues to be marketed as non-credit. 

Younger consumers are more concerned with taking on debt than their older counterparts, for good reason, especially given their recent experience during the pandemic and the recession that may come in the near future. 

This is not to say that credit cards are facing a decline. Overall credit card originations increased 26% in the last year, with younger consumers fueling the increase as they want to begin building their credit histories. 

Credit cards remain a strong pillar of the American economy – there are now 500 million credit cards in the US, more than ever before. 

It's essential to build a credit history in order to make essential purchases in adulthood, like a car or a home. Yet it's still hard to get approved, and eligibility continues to be an issue. 

Fintechs have taken note of this and are coming to the market with faster and easier ways to underwrite these more invisible segments of the population. But until those solutions scale, it looks like younger and lower-income consumers will be reaching for their debit cards first.

Chart of the week

CFPB's BNPL report

The long-awaited CFPB report on Buy Now, Pay Later has finally arrived! In some ways, it confirmed what we were all thinking – BNPL is mostly used by younger generations to buy stuff they don't really need, like clothes and beauty products.

My colleague Rabab Ahsan did a great job unpacking the whole thing to bring you the main takeaways

What we're reading 

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Rippling launched its own spend management products that integrate with its existing payroll solution for small businesses

Ethereum's fork and its potential impact on DeFi lending markets

U.S. banks lost a record $370 billion in deposits last quarter

Goldman’s Apple Card business has a surprising subprime problem

What we're writing

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Across the board, federal banking agencies seem to be preparing to clamp down on market activities by enforcing regulations in the finance industry.

A day in the life of Rachel Anderika, chief risk officer at Anchorage Digital Bank

While her role may involve focusing on the future, Anderika has a special place in her heart for the past, including diving into history books and sailing her 100-year-old boat.

Banks and lawmakers are still wary of the stablecoin bill, causing a slowdown on its road to law-ville

We take a look at what's happening behind the scenes of the stablecoin bill – why banks are concerned, and what the outcomes might be.

4 charts on why Americans want to buy financial services directly from their brands
More than 60% of Gen Z, Millennial, and Gen X consumers are interested in buying financial products from non-financial brands – with gaming, home fitness, and fashion topping the list.

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