The debit card, though long established as a reliable payment method, has seen significant innovation with recent entries from major fintech players like Venmo and Klarna. Even companies outside traditional banking, such as Wyndham Hotels and Kraken crypto exchange, have introduced debit cards.

A Balancing Act

While the core functionality of debit cards hasn’t changed much, their usage patterns are becoming more strategic. Rising inflation, interest rates, supply chain issues, and tariff concerns are pressuring consumers in various ways. Traditionally, debit cards were used for everyday purchases like groceries or gas, while credit cards handled larger expenses. However, today’s economic conditions are altering these habits.

“We’ve seen some consumers switch from debit to credit due to fluctuating prices and rising costs,” said Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research. “Some don’t have the funds available immediately, so they use credit cards to cover daily expenses out of necessity.” Conversely, others are moving from credit to debit as credit card debt reaches historic highs and interest rates remain elevated.

Moreover, some consumers can no longer obtain the credit lines they once had due to tightened lending standards. Credit card issuers have become more cautious to avoid default risks.

Shouldering the Rewards Load

Merchants are also influencing consumer behavior towards debit cards by shifting away from credit cards. Retailers often bear significant interchange fees with credit cards, prompting them to steer customers toward alternative methods. Despite this, credit cards still dominate due to their rewards programs that offer extensive travel and dining benefits.

However, the landscape is changing as debit card providers start offering rewards. More than 40% of debit card users now enjoy cashback, often funded by merchants through specific offers like 5% back at Lululemon. This model contrasts with credit cards, where issuers fund rewards from interchange fees. As merchants take on the responsibility for these costs, they seek to incentivize the use of debit cards.

Becoming More Debit-esque

The surge in debit card launches reflects an attempt by fintech companies to diversify their offerings and appeal to younger generations. Peer-to-peer platforms such as Venmo are now offering debit cards with special rewards programs, while traditional prepaid solutions are adopting features that make them more akin to debit cards.

Buy now, pay later (BNPL) firms like Klarna have also ventured into the debit card market. This trend suggests a broader strategy among fintech companies to offer multiple financial products as one-stop-shop services for consumers, particularly Gen Z and Millennials who are familiar with digital payments.

A One-Stop-Shop Mentality

Gen Z’s familiarity with digital payments and their preference for using fintech apps indicate that these platforms can effectively capture market share. Fintech firms aim to expand their offerings, making it easier for consumers to handle various financial transactions under one umbrella.

Tavilla noted that this approach is practical and beneficial. “It makes sense,” she said, “especially with younger consumers who are open to nontraditional bank products like Chime, Dave, Venmo, and Cash App.” For them, these services offer a more convenient and integrated financial experience compared to traditional banking methods.