Credit Cards’ Silent War of Attrition on Debit

The number of credit card transactions in Canada exceeded the number of debit purchase transactions by 5 million transactions in 2018. Debit card purchase transactions have dominated, by volume, since 1998 – until now. Total debit card purchase values in Canada have been lower than total credit card purchase values since the introduction of debit cards in Canada, amounting to 41% of credit card purchases in 2018. But this is the first time in 20 years that there has been a reversal in transaction volumes. The difference in transaction volumes was only 0.1% in 2018, a miniscule difference, so why is this significant?

A Short History

Bank issued credit cards have been used in Canada since 1968. In 1977, the first year for which the Canadian Bankers Association has credit card transaction statistics, there were 8.2 million credit cards in circulation and credit card purchases amounted to $3.6 billion, just 0.6% of credit card purchase values in 2018. In 1977 credit card purchases represented 3.1% of personal consumption expenditure. The average purchase transaction value in that year was $30.38. By 1994, the value of credit card transactions had grown to $58.8 bn – more than 13% of personal consumption expenditure – on the back of 830.4 million credit card purchase transactions. By 2018, the value of credit card purchases was almost $600 bn – a monumental growth by a factor of more than 10 over the prior 25 years. The number of credit card purchase transactions had increased to 6.047 bn (Canadian Payments Forecast, 2019). 

Debit cards have had a much shorter history in Canada. Interac was established in 1984 as an association representing five major Canadian financial institutions, with a view to providing a national network for Shared Cash Dispensing (SCD) – essentially ATM withdrawals. The number of participating financial institutions grew rapidly as the SCD service gained traction.

The Interac Direct Payment (IDP) service – a national point-of-sale debit payment service – was piloted in Ottawa in 1990 and rolled out nationally in 1994. In 1993 the value of sales processed through the Interac Direct Payments network amounted to $3.2 bn, jumping to $8.3 bn in the first year of rollout. The average transaction value, based on our own estimates, was $45.03 in 1994, or about 64% of the average credit card purchase transaction value at the time. By 1998, the total value of debit card purchases were a little more than 50% of the total credit card purchase value, but the number of debit card transactions exceeded the number of credit card transactions by more than 25% - a substantial reversal from the previous year when there were fewer debit transactions than credit transactions.

The rapid growth of debit transactions was a monumental feat since the debit acceptance network had to be built out in concert with the national rollout of the payment service. Many of the larger department stores held out on the acceptance of debit because of the complexities of integration with their point-of-sale systems, but eventually succumbed to consumer pressure. In 2018, 6.042 bn debit card purchase transactions were processed, representing a purchase value of $243 bn (Canadian Payments Forecast, 2019).

The rise of debit has been meteoric. During the early days of debit many Canadians – usually more affluent consumers – could not understand the appeal of debit compared with credit. They did not comprehend why anyone would make purchases by electronically moving money directly out of their bank account for payments rather than using a credit card, which offered them rewards and an interest free grace period on a loan to purchase. But the Canadian consumer had spoken, and they embraced debit payments with enthusiasm. As a result, Canada had one of the highest per capita rates of debit usage in the world, a position which it still holds.



The chart above shows the number of payments transactions by year, showing the crossover points in 1998 and then the reversal twenty years later. The typical ‘S’-curve of adoption is evident in the first few years of the launch of the IDP service. From about 2000 on the debit transaction increases appear to be more linear than exponential.

Credit card purchase transactions, on the other hand, may have been quickly displaced by debit in the early years of debit, but appear to remain on an exponential growth trajectory.

What’s going on?

With the clear popularity of debit card payments, what has happened to cause this reversal? There are several factors that have influenced the dynamic between debit and credit card payments over the years.

Electronification, and more recently the digitalization, of payments. In 1993, debit and credit card payments between them accounted for 13% of personal consumption expenditure. By the end of 2019 this proportion will have increased by a factor of five. This drove both credit and debit card purchases, as well as many other electronic payment options, displacing cash to some extent, but mostly cheques.

Changing transaction values. Debit transaction values have been on a very slow downward trend since the inception of debit payments in Canada, indicating that its role in the payments space has been fairly stable. Credit card purchase transaction values, on the other hand, increased rapidly until 2007, but have been decreasing almost as rapidly since then (Canadian Payments Forecast, 2019). 



Traditionally, credit card and debit card purchase transactions have occupied different transaction value regimes. Debit cards have dominated the $50 transaction value regime (roughly spanning the $25 to $75 range) for many years, while credit card purchases were typically in the $100+ regime. Cash has typically occupied the $15 value regime (from small transaction values of a few cents to about $50). Debit’s modestly declining transaction values demonstrate an encroachment on the regime dominated by cash. This is evident in the modestly declining number of cash purchase transactions (Canadian Payments Forecast, 2019). In part debit’s encroachment on cash has been given impetus by the adoption of contactless payments. However, contactless payments are increasingly influencing credit card payments too. The $100 payment limit on most contactless transactions has motivated some credit card users to make smaller purchases so that no PIN entry is required and the transaction can be completed quickly.

The growth of e-commerce. Online purchase payments have long been dominated by credit cards in Canada, even in the face of services such as PayPal and Interac Online. Online commerce represents only about 7% of retail sales (Canadian Payments Forecast, 2019), which is fairly small in the scheme of all payments occurring in Canada, but there has been a significant shift in shopping behaviour resulting in renewed and vigorous growth in the online commerce space. As more and more shopping takes place online, transaction values for these purchases also decline since they become part of the consumer’s everyday shopping habits, especially in an era of reduced shipping costs and quicker shipping times. With credit cards being the most popular payment alternative, the growth in online shopping boosts credit card transactions, and particularly in situations where a debit alternative is not available.

Credit card rewards are an important driver of the increased use of credit cards for everyday payments. Credit cards have traditionally been used for special purchases – typically higher value items, where the access to credit may represent an important component of the decision to purchase. This is unlikely to go away as an important driver of credit card purchases. However, credit cards are increasingly seen as being acceptable for everyday payments, and have recently overtaken debit card payments as the preferred method of everyday payments, based on our findings in our Canadian Consumer Payments Survey, 2019. Consumers are increasingly taking advantage of the fact that they can get additional benefits, through rewards or cashback, by using their credit cards for making everyday payments. The entry of credit cards into the mainstream as an everyday payment instrument has breached an important barrier in many consumers’ minds. 

What of the future?

The main trends outlined above will undoubtedly continue to influence the future. However, there are some developments underway that are likely to give them impetus.

In-store mobile payments are still embryonic in Canada, but there are clear signs that traction is increasing (Canadian Payments Forecast, 2019). At present debit payments using Interac Flash represent a small fraction of mobile payments, with credit cards dominating. Debit is likely to become a popular in-store mobile payment instrument as consumer awareness and familiarity increases. Growth potential is high, but both credit and debit mobile payments will benefit from consumer uptake.

The way that mobile payments is implemented is also evolving. Two key dynamics are at play. The first is that order ahead type purchases are becoming increasingly popular in the space where mobile payments are likely to gain early traction. This changes the payment from a proximity payment (typically, but not necessarily, contactless) to a remote payment. Remote payments have the potential to displace proximity payments in many other areas as well.

The second dynamic, which is related to the one highlighted above, is that payments are becoming invisible in certain settings. While subscription payments would fall under this banner, Uber is a prime non-virtual example, where a request for transport is placed on a mobile device and everything related to payment is taken care of in the back end, while the service is delivered seamlessly to the customer. Once again this represents a remote payment. In a world where remote payments are currently dominated by credit cards, this bodes well for the continued high growth of credit card transactions.

One possible goal for Interac would be to, at the very least, maintain its share of the payments pie, especially in its relatively new-found role as a for-profit competitor in the payments space in Canada. This is likely to be challenging. There is no doubt that debit payments can and will find a place in the sun in this new world of payments, but even this may see a shift from Interac debit payments to Visa and MasterCard debit payments in many settings in Canada.

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