In the Consumer’s Eyes: Credit Card vs Debit Card
It is hard to imagine that the introduction of credit cards goes all the way back to 1950, well before the invention of laser, computers and many other technological advances. In fact, the first laser, (whose successors are the main tools for reading credit card information) was developed in 1960 and people had to wait another 14 years to witness the first barcode scanner. Later in 1966, debit cards were piloted by the Bank of Delaware and several years after that other banks started implementing them.
There are literally hundreds of articles, blog posts and multimedia presentations that compare the pros and cons of credit vs debit cards. The conventional wisdom is that using credit cards is a wiser choice. NerdWallet and CBS list more purchasing power, rewards, credit history building, the possibility of paying later, purchase protection and fraud detection as the advantages of using a credit card vs debit card.
For security and fraud prevention reasons, CreditCards does not recommend using debit cards online, for large purchases, at restaurants, travel, hotels and gas stations. According to WiseBread, the Electronic Transfer Act provides some protection for debit cards, but if you don’t notify your bank within 6 days there is none.
On the other hand, using a debit card can help avoid over-spending. In fact, accumulating debt is one of the main downsides of credit cards. As investigated by the National Bureau of Economic Research and New York Times, a third of credit card borrowers pay only the monthly minimum payments. Debit cards cannot damage your credit history because there are no interest and late payment charges.
To see how consumers use their credit and debit cards, let’s take a look at the most recent Payment Report by the Federal Reserve.
2016 Federal Reserve Payment Report
Figure 1 shows the growth rate of different payment methods, including ACH (Automated Clearing House) and checks, since 2000. Although the chart shows other payment methods, in this report we will only focus on credit and debit cards.
According to this report, in 2015:
- Credit and debit cards account for 2/3 of non-cash payments processed.
- Prepaid and non-prepaid debit cards account for 69.5 billion transactions with a value of $2.56 trillion. Credit cards account for 33.8 billion transactions, with a value of $3.16 trillion.
- The number of payments with non-prepaid debit cards accounted for nearly 60% of card payments. Non-prepaid debit cards also made up over 40% of all core non-cash payments.
- The average ticket size for non-prepaid debit cards is $38 and for credit cards, it is approximately $93. This indicates consumers use credit cards for larger payments, as recommended by experts.
- The number of credit card payments was approximately half the number of debit card payments, although the value of credit card payments was nearly 25% greater.
While there are many reasons for consumers to use a credit card vs debit card, merchants have one good reason to encourage otherwise. Credit card processing fees. Because debit card transactions travel directly to the customer’s bank account they avoid the credit card processing networks. Compared to credit cards, this makes processing a debit card simpler and consequently cheaper. In VMS words:
Generally speaking, PIN-based debit card transactions will end up being cheaper for your business in the long run. When a PIN-based debit card transaction takes place, instead of traveling through the payment networks required to process a transaction as credit, the transaction, along with the customer-entered PIN number, travels directly to the customer’s bank account. That account is checked for availability of funds and, if there’s enough to cover the requested payment, the account is immediately debited and the funds are scheduled for deposit into your business’s bank account within 24-48 hours.
Credit cards distinguish themselves from debits by providing a variety of services that debit cards simply do not offer. However, these services come with higher fees associated with credit cards. When you pay by a debit card, the merchant does not have to pay a fee to the credit card networks (like Visa or MasterCard), issuing banks, payment processors, merchant account providers and payment gateways. ValuePenguin calculates this fee as between 1.43% and 3.5% of the total transaction amount. Add to this other costs, such as monthly subscription fees to the Merchant Services Provider and equipment costs. As a result, the credit card fees that merchants pay can turn the purchasing experience into a win-lose game for customer-merchants. As a result, many merchants give customers the credit card vs debit card option in order to avoid credit card fees.
Of course, one may argue that the increase in the number of customers that credit cards bring in offsets their higher fees. However, we need to account for a more vital parameter: decline rates.
The Cost of Declined Transactions
To account for the true cost of declined orders, one should take into account customer acquisition cost, customer lifetime value, and impact of declined or blocked orders. Riskified estimates that lowering false positive transactions leads to a sales revenue increase of anywhere from 3% to 30%.
Based on Ethoca’s report, 1.9 billion card-not-present purchases, worth $146 billion, are declined annually. According to the same report, in 2016, false declines in the United States (legitimate declined transactions) were worth $264 million. Declines increase the likelihood of customers shopping from another store or even changing their primary card. The problem becomes more significant when you consider the estimated lifetime value of a customer is between $4,000-$48,000. According to PayPros, lowering or eliminating declined transactions leads to an increase in cash flow, better customer relations, and lower card processing fees.
While fraudulent transactions or lack of funds comprise a big chunk of declines, the problem of false declines by issuing banks is worth further investigation. In particular, we are interested in addressing the following questions. What are the differences in decline rates of credit and debit cards among card brands like Visa and MasterCard, issuing banks, and currencies?
Credit Card vs Debit Card Decline Rates: Overview
Considering the fact that processing a debit transaction is different from a credit transaction, are there significant differences in decline rates between the two? And can this difference justify using credit over debit, despite lower transaction fees for debit compared to credit cards?
We used Spreedly data to analyze 8 million payment methods used in more than 22 million transactions in 2016. All payment methods are issued in the United States. And there is an almost equal distribution in the payment methods between credit and debit cards. We compare the performance of a credit card vs debit card by investigating:
- Decline rates for different brands’ credit and debit cards
- The decline rates for different issuing banks
- Decline rates in different currencies, and
- The best card brand/issuing bank combinations
Before starting the analysis, we should note that a declined transaction is associated with a gateway_processing_failure error message in Spreedly’s database. However, this error does not discriminate between the different causes of the decline. It can fail for several reasons. These include payment gateway response issues, fraud prevention, or false declines by payment gateway issuing banks, to name a few. Despite this, analyzing this error across different card brands and banks can still provide general insight into how different card companies, banks, and even payment gateways handle debits and credit cards.
Figure 2 shows the share of top credit and debit card brands in our database. Visa is dominant in both categories. The percentage of MasterCard’s market share is almost identical for both categories. Discover’s small contribution in Debit Cards makes sense as they only started offering debit cards 10 years ago. And while 14% of the credit cards belong to American Express (Amex), there are too few Amex debit cards to contribute to the pie chart (left).
Our data shows that 9% of debit and 5% of credit cards in this study have been declined at least once. Considering the equal number of debit and credit cards (around 4 million each) in this study, this difference is noteworthy.
Let’s dig deeper and see how card brands’ declines differ from one another.
1. Card Brands
The comparative study of decline rates for card brands provides insights into which brands take more effective measures for processing transactions. Figure 3 shows credit and debit decline ratio (ratio of declined over total transactions) for Amex, Discover, MasterCard, and Visa.
From Figure 3 it is clear that credit card companies do a consistent job of keeping the decline rates low. However, the debit declines vary from one brand to another. Visa debit declines are twice as high as their credit declines. The 3% difference for MasterCard is considerable too. The case of Discover is interesting since the card brand and the issuing bank for Discover cards are the same. This could be a factor in why Discover has similar decline rates for both credits and debits. This finding is not conclusive though, due to the small number of Discover debit transactions. And finally, Amex credit declines are at an acceptable rate. Its debit cards, however, have an unusually high decline rate. Is it due to the breakup with Costco? We don’t know!
The total number of transactions differ from credit to debit cards, and from one brand to another. In order to make a better judgment, we introduce a ratio of total credit to total debit transactions in each brand. This ratio for all four cards is as follows:
- Visa = 0.69
- MasterCard = 0.97
- Discover = 1.76
- Amex = 91.5
That is, for every 1 debit card transaction on Visa they do 0.69 credit transactions. Also, with respect to the number of transactions, Visa >> MasterCard >> Discover >> Amex. This, in turn, doesn’t allow the low declines of Discover to mislead us since they have a much smaller number of transactions processed compared to the other brands.
One also should note that considering the much higher transaction numbers for Visa, it performs better compared to its closest competitor, MasterCard.
2. Issuing Banks
The issuing banks have their own fraud protections in place and play a vital role in approving or declining transactions. In this section, we evaluate the performance of the issuers, disregarding the card brand. We want to observe whether there is a meaningful difference in their credit card vs debit card success rates. The analysis is performed for the issuers with at least 100,000 credit and debit card transactions.
Figure 4 shows the bar plot of debit (dark blue) and credit (orange) declines for the top 5 banks, according to the criteria explained above. It is interesting that all the issuers have a better success rate with a credit card vs debit card. The decline rate for credit varies between 4.5% and 7.5%. At the same time, debit declines vary between 7% for Bank of America to 12% for Chase. In fact, the worst credit card decline rates outperform the lowest debit card decline rates.
Bank of America tops both categories with a ~4% and a ~7% debit decline rate. At 1%, Wells Fargo represents the smallest difference between credit and debit decline rates.
What about credit card vs debit card performance when traveling abroad or purchasing in currencies other than the United States Dollar (USD)? Is using credit cards for foreign transactions good advice? To answer this question we consider currencies with more than 10,000 transactions and compare their decline rates for credit card vs debit card transactions (Figure 5). We can use USD as a measure to compare the decline rate of other currencies.
Euro (EUR) performs better compared to the other currencies in credit card transactions. On the other hand, the Canadian Dollar (CAD) scores better for debit transactions. British Pound (GBP) performs comparatively vs EUR and CAD.
Moving from North America and Europe to Central and Latin America, the decline rate experiences an increase for both credit and debit card transactions. However, in all six currencies below (USD included), credit card decline rates remain lower than debit cards. Purchase protection policies for debit cards are different from those for credit cards. Generally speaking, transactions via credit cards are better protected. With regard to decline rates, for both merchants and customers, our data also shows that using credit cards for a successful foreign transaction is a wise idea.
4. Best Card Brand/Issuing Bank Combinations
The issuing banks can work with multiple card brands. At the time of this article, Chase and Bank of America work with both Visa and MasterCard; Wells Fargo and USAA issue Visa and American Express Cards. Hence, after individually investigating the best card brands and banks with the lowest decline rates, it is interesting to study what combination of card brands and issuing banks provide the best (lowest) decline rates.
Here we filter the combinations of card brands/banks for which more than 100,000 transaction records exist. We do this for both credit and debit cards in our database. Due to the small number of Discover and Amex debit transactions, they are left out in this section.
Figure 6 shows the result of our analysis. Dark blue and orange circles represent debits and credits, respectively. The numerical percentages are equal to the decline ratio for that card brand/issuing bank.
All the brand/bank combinations in Figure 6 have a better success rate in processing a credit card vs debit card. (The larger circles corresponds to higher decline rates.)
For credit cards, Citi/MasterCard has the best brand/bank combo with only 3.8% decline rate.
For debit cards, Visa/Bank of America ranks first with 6.6% failure.
Among the issuing banks, Bank of America is the only one that handles both Visa and MasterCard exceptionally well.
From the consumer’s point-of-view, there are many pros and cons to using a credit card vs debit card. From the merchant’s perspective, two important factors should be considered: the cost of processing fees vs decline rates. On the one hand, the higher cost of processing credit cards might motivate merchants to encourage their customers to use other payment methods, such as a debit card. On the other hand, one needs to account for the true cost of a declined transaction: losing a customer. Since this rate is not the same for credit and debit cards the merchant should consider a payment method with the highest upside and lowest downside.
The processing fees for the payment cards are determined by organizations involved in processing the transactions: the cards brands, issuing banks, payment gateways, etc. However, there are very few data-backed studies that investigate the influence of different parameters, like the issuing bank and currency, on decline rates of a credit card vs debit card.
To answer these questions we analyzed about 8 million credit and debit cards and more than 22 million transaction records. All cards in the study were issued in the US. We discussed whether credit cards are worth their processing fees. We also categorized the credit card vs debit card decline rates based on the card’s brands, the card’s issuing bank, and the transaction currency. In each category, we found that the credit card success rate is much higher than debit cards.
We showed that the issuing banks’ performance differs in how they handle transactions. We also identified the top banks with the lowest declines. To the best of our knowledge, this is the first time that BIN (bank identification number) database and transactional data are used to the compare the performance of card issuers on such a scale.
Investigating the payments made by US-issued cards in foreign currencies revealed that both credit and debit cards experience an increase in their declines compared to transactions in USD. And except MXN, credit cards are safer and more successful in transacting money in foreign currencies.
We hope that this study sheds light on the crucial topic of decline rates in the payment card industry. And that it helps merchants make more-informed decisions when it comes to choosing the right payment methods.
(Note: All data visualization in the article is by Dane Wesolko.)
We capture a tremendous amount of payment performance data here at Spreedly. We work with over 100 payment gateway providers and third party API endpoints worldwide. As such, data that we have access to is qualitatively different than that available to most payment providers. Visit Spreedly Open Data to check out our effort to share payment data and information with you.