Consumers Won’t Tolerate Debit Card Fees: Study

Coming on the heels of passage of landmark finance reform, a new study from Mercator Advisory Group sponsored by National Payment Card Association strongly indicates that consumers are likely to turn away from ubiquitous debit-based payment products if, as expected, issuers were to institute fees.

The study found that consumers would first react to the institution of fees by turning to the use of cash but could be kept in the preferred electronic payments realm if merchants were to offer private label debit cards with no fees and rewards.

“Decoupled debit cards with no fees and rewards attached are a win/win for consumers and merchants,” said National Payment Card Association President Joe Randazza. “This study clearly demonstrates just how price sensitive the consumer market is. Decoupled debit allows these consumers to avoid fees and obtain rewards and at the same time helping merchants regain control over payment choices, capture additional spend with the resulting incremental income and encourage loyalty.”

The study was designed to look at the effect fees and rewards would have on everyday purchase payment decisions at the point of sale with specific focus on the use of debit cards. With the ascendancy of debit cards as a preferred payment method, the impact of fees on their use could have a profound impact on merchants, issuers and consumers.

With tighter regulation on issuers, it is widely accepted that consumers will see more fees added to their debit card accounts in the months to come as these issuers move to regain lost income. Specifically, the study asked consumers about the impact of monthly fees on debit card usage. The results showed that by adding just a $10 monthly fee would cause a majority to stop using their cards, clearly indicating a primary threshold had been reached. In addition, women were more likely than men to say they would stop using their card and more than three-quarters of individuals with incomes over $75,000 would stop using their cards across all store types.

The study also showed that faced with a monthly debit card fee, consumers’ first reaction would be to turn to cash above all other forms of payment. However, when asked about using a debit card product offered directly by merchants that was secure and without fees, an immediate one-third said they would be interested in such a product. When the benefit of merchant rewards was added to the offer, another 15 percent said they would be interested.

“Debit cards are currently the preferred form of payment for many consumers at convenience, drug and grocery stores but that preference is tenuous at best when even a modest monthly fee is introduced into the mix,” said Patricia Hewitt, director of the Mercator Advisory Group. “For merchants, this is a slippery slope unless they can offer some type of alternative. The study strongly indicated that a branded debit card of the merchant’s own, absent any fees and accompanied by rewards, could be very attractive. For merchants, cash is not king as spending levels and purchase volume are likely to drop. They need to offer an alternative to maintain their business and a branded debit card could very well be the answer.”

Mercator Advisory Group is the leading, independent research and advisory services firm exclusively focused on the payments and banking industries.

National Payment Card Association (NPCA), based in Coconut Creek, Florida, is a marketer of automated clearing house decoupled card-based payment systems. For more information, visit www.nationalpaymentcard.com.