Young adults in the ’Debit Age’ are skewing towards alternative and direct banking

Let’s start with a statistic that, for traditional banks, looks quite troubling; according to survey analysis conducted for Packaged Facts’ January 2014 Debit Cards in the U.S., 5th Edition, the percentage of 18-24 year olds having a “checking account at a bank, savings and loan, credit union, or brokerage firm” has plummeted by almost 30% during 2010-2013.

What’s happening here?

Clearly, traditional banks are losing checking account customers. And it’s not just customers larger banks may have deemed unprofitable. In fact, our trended survey data clearly supports the contention that people of all stripes (lower income, higher income, but especially young consumers) may be migrating away from traditional checking accounts.

The recession is surely partly to blame, and young consumers have taken some major lumps, from higher than average unemployment rates and delayed household formation. But among these younger consumers, debit plays a very significant role, as they have eschewed credit in favor of debit and other more conservative financial tools: the percentage of engaged debit purchasers (debit purchase in past month) increased 15% during 2010-2013, and the percentage of strongly engaged debit purchasers (2+ debit purchase in past month) has grown 14%.

Signs should point to prepaid cards, but our survey results suggest that during 2010-2013 debit engagement among 18-24s has actually risen at a faster pace than prepaid card usage (major new prepaid programs launched by Chase, American Express and Green Dot, among others, are only now getting underway, so more pronounced usage growth among 18-24 year olds may be just around the corner).

The mix of higher debit usage and lower checking usage also points to emerging direct banking and alternative payments options, such as PayPal, which pose an increasing threat to established bricks-and-mortar players. Some young consumers may not even view these accounts as “checking” accounts, because consumers growing into adulthood during the “Debit Age” simply don’t need them as much.

In any case, the direct banking competition is combining checking and debit in a highly competitive manner. A quick look at Discover’s Cashback Checking product tells the story:

• The account is free, and there is no minimum balance (paper checks are also free).
• For Discover, the debit card takes front and center stage, basking in the sun of rewards potential that at most major banks no longer exists: Cashback Checking accounts pay customers 10 cents for every debit card purchase, online bill payment and check they write.

A new reality

We believe that the new reality brought about by alternative and direct banking, may usher at least a minor rewards renaissance. Bank debit cards, which young consumers are actually relying more upon, can play a significant role in wooing and retaining this very important group of consumers, who may otherwise choose to forge and build financial relationships with emerging nonbank competition.

Revenue to go around?

In the end, it’s about revenue. But all of the talk around debit card fee caps drowns out a simple reality: debit card usage continues to grow, and thanks to that growth, we see debit interchange revenue surpassing pre-regulation levels again as soon as 2015 (assuming that no changes in the new regulatory status quo are forthcoming). Short term pain-long term gain.