The Decade’s 12 Greatest Developments in Payments: #3 Debit Cards

Debit Takes the Plastic Throne in the U.S.

Think back to 1995. The Netscape IPO started the internet stock mania, Monica and Bill were just getting it on at the end of the year, and Alanis Morrisette’s “You Outta Know” was the top single. And only 2 percent of Americans had a debit card. Ten years later, roughly speaking, half of all card transactions took place on debit cards. Last year for the first time the dollar volume of transactions on debit cards issued by Visa exceeded the dollar volume on credit card issued by Visa, as the Robin Sidel of the Wall Street Journal reported. Pretty much all Americans who have a checking account get an ATM card that can be used with a signature or a pin to pay at the point of sale. And many Americans prefer to use these cards especially for paying for the staples of life.

Many of our readers outside the United States will be saying big whoops however they say that. In many countries around the world, debit cards were the main piece of plastic people paid with and credit cards were the curiosity. Nevertheless, despite having been available from the card associations since the mid 1970s debit cards just never caught on in the enormous American card market. A number of efforts that started in the mid 1990s cracked some difficult chicken and egg problems and as a result revolutionized the U.S. market. No other mature market of significance around the world to my knowledge has been transformed in this way.

Visa deserves a lot of the kudos for making this happen. They embarked on a major effort around 1995 to ignite the debit card business. Part of that involved behind-the-scenes efforts to persuade member banks to issue Visa-bugged debit cards and providing a business case for doing so. That was accompanied with a massive advertising campaign to educate consumers that debit cards were a substitute for checks. They put one of the best ads of all time on the 1997 Superbowl. It had a granny-looking clerk asking well-known losing Presidential candidate Bob Dole for identification to cash a check. Visa’s debit cards grew explosively. MasterCard has been playing catchup ever since. A 2005 poll of Visa debit users found that 63 percent said the card was their preferred method of payment according to 2006 BusinessWire press release by Visa. According to this poll 84 percent of these users said the Visa check card was as important or more important an innovation as the iPod. (Despite succeeding in convincing consumers to use their “Visa Check” cards I’ve never encountered anyone who calls them check cards.)

Visa doesn’t get all the though. The debit card was made possible by the earlier invention of the ATM machine. Visa leveraged the existing deployment of ATM cards which consumers were used to using for taking cash out. The ATM network owners also realized the power of the ATM card as a payment device. They worked hard at persuading merchants to install special readers that could accept ATM cards with a PIN. They succeeded in part by offering merchants very low fees for ATM debit card transactions. Lots of grocery stores signed on. As things developed, banks issued ATM cards that could be used as debit cards with a signature through Visa or MasterCard, or through a PIN with one of several ATM/debit-card networks. The cards therefore appealed to consumers who liked signature of PIN and to merchants who were looking for cheaper alternatives.

According to data from the Federal Reserve’s 2007 Electronic Payments Study, signature and pin debit cards accounted for 57% of all general purpose card transactions in 2006 and 35 percent of all general purpose card volume (this includes excludes store cards and prepaid cards). About two-thirds of both transactions and volume go through MasterCard or Visa with a signature, and one third through one of the PIN-debit networks.

Debit cards have also laid the basis for new innovations. They helped make prepaid card possible and may lead to significant changes in banking relationships if decoupled debit cards take off. They have led to an enormous change over the decade in how Americans use plastic.

Previous Great Developments in Payments During the Last Decade:


#4 The New Kid on the Block: PayPal

#5 Innovation Driven by Prepaid Cards

#6 What Has a Bigger Head and Longer Tail? Card Issuing

#7 How the ACH System in the U.S. is Encouraging Electronic Payments Innovation

#8 The Magstripe Lives On

#9 Shanghai Surprise

#10 Collateral Damage from the Financial Crisis – Consolidation and Regulation

#11 How the World War on Interchange Fees Transformed the Card Industry

#12 American Express Goes Global

David S. Evans bio