"Will debit cards outstrip credit?" "People still pull out the plastic, but often they're not charging anything. That leaves banks scrambling to make up the revenue they've lost from their more-profitable credit cards." By BusinessWeek Raquel Garcia is serious about avoiding debt. The 18-year-old customer- service representative for U-Haul recently canceled her credit card. Now she gets her entire paycheck deposited onto a prepaid debit card, which she uses for all her purchases. Because she can access only what's in the account, Garcia no longer worries about breaking her budget. "I'm spending just what I need," she says. For consumers reeling from a series of economic body blows, debit cards are increasingly becoming the plastic of choice. Some use the cards, which pull money directly from a bank or other account, as a budgeting tool to limit spending. Others embrace them out of necessity as banks clamp down on credit. All told, debit purchases are expected to climb 13% in 2008, to $1.2 trillion, according to The Nilson Report, an industry newsletter -- compared with a 3% rise, to $1.9 trillion, for credit card transactions. At Visa, the No. 1 card company, debit spending could surpass credit this year. * Build credit without a credit card For the banks issuing the debit cards, the trend seems bittersweet. On the plus side, debit cards don't pose a threat to the banks' books like credit card accounts do (credit card losses are mounting as borrowers fall behind on payments). But the profits on debit cards aren't as plump because banks don't collect interest on them. Issuers largely make money from debit card fees, which pale next to those on credit cards. Retailers, for instance, fork over 1.6% of credit purchases to banks, three times the amount on debit transactions. But don't shed a tear for the banks just yet. Time and again they've shown an uncanny ability to adapt to a new profit landscape, and the debit card business appears no different. Consider the evolution of overdraft fees. It used to be that banks denied debit purchases when consumers didn't have enough money in their accounts. Now 14 of the 15 largest banks approve transactions but hit customers with a fee if they exceed the funds. It's not unlike getting charged for bouncing a check. A recent study by Bankrate.com found that overdraft fees now approach $29, up 3% in the past year. Those penalties are easier to trigger, too. In the past customers had up to a couple of days -- the time it takes for some debit transactions to clear -- to deposit cash. But now many banks hit them with fees as soon as purchases are made. "Banks have turned to this as a major source of revenue," says Jean Ann Fox, the director of financial services for advocacy group Consumer Federation of America. * The next frontier Regulatory headwinds haven't deterred the banks from ramping up their debit card businesses. Among the groups that offer the biggest potential for banks: people who earn more than $75,000 a year. According to MasterCard, they're the least active debit card users, usually turning instead to credit cards that offer frequent-flier miles and other rewards. To attract that crowd, financial firms are ramping up their loyalty programs. MasterCard's Savings program, launched in October, offers debit users discounts on luxury brands such as Armani and 7 For All Mankind as well as at retailers such as Home Depot and Target. San Antonio's Frost Bank recently released its Momentum card, which is connected to customers' checking or savings accounts. The bank pays customers a higher interest rate on the accounts -- up to 3.5% -- when they make more debit purchases. * The hottest new customer perks There's also a land grab for the so-called underbanked, the roughly 80 million people who don't have bank or credit card accounts. Dallas' Comerica Bank won the right this year to issue debit cards to the estimated 4 million Social Security recipients who don't have bank accounts. The government deposits the money onto a prepaid card. (Comerica doesn't charge overdraft fees on them.) Visa and MasterCard offer prepaid debit cards that companies use to pay employees. The aggressive push is paying off. These days, debit cards are as widespread as credit cards. At the upscale suburban Atlanta restaurant Aqua Blue, waitresses now bring diners a device that lets them swipe their debit card and enter their password to pay for meals. "Debit is becoming the payment card of choice for the American public," says Red Gillen of consulting company Celent. But for consumers like Garcia who want to break free from the high fees and penalties of credit cards, debit cards may not be the panacea they expected. Says consumer advocate Fox: "As with credit cards, consumers can't keep up with what the rules are." [This article was reported and written by Christopher Palmeri and Brian Burnsed for BusinessWeek.] http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/will-debit-cards-outstrip-credit.aspx?page=2 [Published Dec. 2, 2008]