CardsFTW #2: Credit vs. Debit

Among the many impacts of COVID-19 is a shift in how consumers are paying for products and services. We’re all shopping online more; we’re avoiding handling cash and coins; and we’re making more digital payments.

A note in Mercator Advisory Group’s PaymentsJournal stuck out to me last week. There is a significant shift in payments between debit and credit this year. Based on network data for Visa and Mastercard, Mercator reports that credit cards lost 8.9 points of share (a 16% decline in share) between the last quarter of 2019 to the second quarter of 2020. Credit volume in Q2 was 44.7% of purchase volume and $596 billion in total (vs. $798B in 4Q19).

At the same time, debit volume grew dramatically in volume and share. Volume was up almost 7% to $738B. When you realize that Q2 typically is smaller than Q4’s holiday season, the fact that debit card volume is up is impressive. Not only did total volume grow, but the average transaction size grew, for both types of transactions. Debit grew 6.3% to $46.42 per transaction and credit was up to $85.94. People are both spending more on debit cards overall and more per transaction.

Debit Cards and Ecommerce, Growing Together

It’s easy to look at this data as a loss to credit, given the market share drop, but I think it’s more important to view this as a win for debit cards. Ecommerce continues to grow dramatically in 2020. Ecommerce grew 45% year-over-year Q2, per the U.S. Department of Commerce. If you’re buying products and services online, you are going to need a digital payment, which means a debit/credit card in most cases (sometimes just a PayPal account, linked to a bank account). If you’re a consumer who has traditionally been paying with cash and don’t have the income or credit to support a revolving credit card product, then debit is the best and most obvious choice.

We’re going to continue to see a shift towards digital payments and I don’t think it’s going to dissipate post-pandemic. The benefits of digital payments are substantial in terms of fraud and theft safety, consumer protections, and ease of use. As more consumers adopt debit cards today, they will continue to use them.

Corporate Cards Are Hot

The once-sleepy corporate credit card sector continues to grow and see new entrants. While extraordinarily well-funded Brex continues to be the leader among startups, new ones keep popping up. This week I learned about Mesh Payments and Tribal Credit. Add them to the list that also includes Ramp, Divvy, Emburse, Expensify, and more. This topic is going to require a deeper dive at a later time, but I am surprised that more companies are joining the fray here. Mesh appears to be focused on the virtual card space, managing online spend, and is issued by Metropolitan Commercial Bank. Tribal has the same pitch as Brex and Ramp, with Ramp and Tribal sharing Sutton Bank as the issuer. There’s likely a ton of room in this space, but I think that there are significant challenges for each company to differentiate itself. I also think Tribal Credit is a terrible name. In addition to the weird overtones of indigenous people or an “us-vs-them” mentality, Native American Tribal lending is a real and complicated regulatory space. I don’t think Tribal is working with any Tribes, but I wouldn’t want to be confusing the regulators on this point.

In addition to corporate credit cards, a number of startups are pushing forward in the small business and freelancer neobank space. Companies here are focused on helping SMBs, freelancers, or non-profit organizations have better, more customized banking solutions. These startups are using the same infrastructure as consumer neobanks to provide an improved experience as a fintech. In talking with some of the entrepreneurs, you can see strong adoption and fundraising activity. I expect we’ll see meaningful growth announced in this space by the end of the year.

Nothing is Really Private

Privacy.com announced a new partnership with 1Password. Founded in 2014, Privacy.com is a virtual debit card solution that enables consumers to create on-demand card numbers for buying products and services. Consumers can create one-time or subscription cards that mask their real card number from online providers. Privacy built their own processor to enable this functionality and recently started a developer product enabling other companies to use their API-driven infrastructure to issue cards.

This new partnership surprised me, as it’s hard to straddle being both a consumer provider and an infrastructure provider. Privacy is positioning this as a demonstration of their API, but as a consumer this looks more like a way to connect two separate tools to save me some copying and pasting.

In the long run, I believe that most consumer credit and debit card solutions will enable users to create on-demand virtual numbers for security and/or to limit spending. This feature isn’t new at all. Discover and MBNA (subsequently acquired by Bank of America) had versions of this in the early 2000s. These were positioned more around shopping safely, rather than protecting privacy. Due to lack of use and cost of infrastructure, both products were closed in the past few years. Discover’s product lasted 14 years! (I used them frequently on websites that made me nervous).

Final, a credit card startup from 2014, built a consumer product designed specifically around this problem. They were able to issue the product, but lost steam, and the company was shut down in 2017. Some of the team went on to work for Goldman Sachs on the Apple Card, which does allow consumers to regenerate their virtual card number on the fly, although it does not store many virtual cards.

When I worked at Green Dot, we offered a product called WebSecret. This was a virtual prepaid card number you could purchase at retail with cash (I think it was $5.95) and load up to $500. Then you could spend the card down wherever, but you could never reload it. You never received a physical card. This was pretty privacy oriented – Green Dot did not do identity verification for this product. For security and money-laundering reasons, this product no longer exists. I am sure some nefarious things were done with WebSecret cards, but mostly I think people just used it to acquire pornography.

When you set up a Privacy.com account you need to verify your identity and connect your account to a funding source such as a bank account or credit card. While your credit card statement may not say where you are purchasing things, it’s just a matter of connecting the dots. Similarly, while the merchant doesn’t have your bank debit card number, they still have a Privacy.com number and can charge that card.

There is a clear security benefit here, but the privacy aspect is probably better viewed as just enforcing a layer of obfuscation between merchant and bank account. My guess is that Privacy.com users are using the product just like WebSecret. There is no real privacy in financial services, unless you use cash.

100,000 Miles!

Capital One put out an interesting new card offer last week for its Venture Miles Rewards Card. Consumers can earn 100,000 bonus miles when they spend $20,000 on purchases in the first 12 months from account opening. (If they a cardholder doesn’t reach that spend threshold, they can earn 50,000 miles if they spend $3,000 on purchases in the first 3 months.) Most card offers take the form of the latter 50,000 point bonus. The longer-term, higher-spend bonus is a new take on driving spend away from credit card churners to encourage longer-term adoption. The spend rate on the second 50,000 points bonus is much lower (~3 points per dollar spent vs. 16 per dollar for the big offer). Either way, the signup bonus is a large multiplier for a card that otherwise earns 2 points per dollar on all purchases. The card carries a $95 annual fee. This is a really strong offer and comes at an interesting time given the economic cycle.

CardsFTW

Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder and CEO at Vertical Finance, a challenger credit card startup. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com.