Is the debit card revolution finally here?

Federal Reserve Bank of Kansas City - Economic Review, Fourth Quarter 1994 by Caskey, John P, Sellon, Gordon H Jr

Compared to cash, debit cards have both advantages and disadvantages. For example, some consumers may find that carrying a debit card for payments is more secure. [18] In addition, if cash is used for purchases, consumers must devote time to replenishing cash stocks through trips to a bank or ATM machine. On the other hand, cash transactions are more rapid than debit card transactions. This suggests that consumers will use debit cards to avoid carrying around large amounts of cash or to avoid frequent trips to a bank or ATM machine. If so, debit is likely to replace mostly large cash transactions, not small cash payments. [19]

Debit cards also have a number of advantages and disadvantages compared to checks. Some consumers may find the debit card more convenient than checks if it means that they do not have to carry checkbooks. The checkout time with a debit card can also be faster than the checkout time with a check, particularly where use of a check requires approval. Alternatively, some consumers may prefer checks since an on-line debit card transaction results in an instant debiting of their deposit account, while a check payment usually will not clear for about three days. For consumers with account balances near a bank-specified minimum balance level or near a zero balance at the end of the pay period, a three-day delay could be significant. Checks also permit more detailed record keeping, since the check-writer can note the purpose of the payment or other such information on the face of the check. Thus, for most consumers, the choice between on-line debit and checks may come down to weighing the delayed payment of checks versus the time saved using debit. While there is less of a tradeoff between an off-line debit card and a check, since both involve delayed payment, many consumers will not have access to an off-line card.

For most consumers with credit cards, debit cards are less likely to be an attractive alternative. Consumers who use credit cards for the line of credit are unlikely to be interested in a debit card. Some convenience users of credit cards could find advantages to the debit card, however. Since the consumer's account is automatically debited in the case of debit card payments, the consumer would not need to write a check at the end of the month to clear a credit card balance. Some convenience users might also find it easier to enforce personal budgets with the debit card since it limits them to spending what they have in their deposit account. In addition, many food markets and some other retail stores permit debit card users to obtain cash at the point of sale. This is rarely permitted with credit cards. On the other hand, credit cards generally offer convenience users interest-free grace periods of about a month and do not limit the consumer to spending only what is in his or her deposit account.

While the debit card is likely to offer some convenience advantages to almost all consumers, it could be particularly useful for those consumers who do not have access to the complete range of existing payment services. Only about two-thirds of families currently have access to an unsecured bank credit card. Moreover, 12.5 percent of families do not have a transaction account (Kennickell and Starr-McCluer). A debit card could free those without credit cards from the occasional need to carry large amounts of cash for major purchases where checks are not accepted. For those without a transaction account, a prepaid debit card or government-sponsored debit account could provide relatively inexpensive payment services that are more secure than cash transactions.