Banks and financial institutions are constantly innovating their payment product offerings to meet new industry regulations and provide advanced solutions for customers. Yet even amongst the surge of updated technology over the last decade, debit cards have steadfastly remained one of the most used payment methods. For context, an estimated 83% of Americans now own a debit card and, since 2020, total debit card volume has surpassed total credit card volume.

In this guide, we take a closer look into the debit card ecosystem. We explain what debit cards are, the types of debit cards that exist, and why debit cards are important in the payments landscape.

What is a debit card?

A debit card is a form of payment card that’s connected to a demand deposit account (DDA), more commonly known as a traditional checking or savings account.

When cardholders make a transaction with a debit card, they’re directly spending money that they have in their connected account, and can only spend or withdraw up to the balance of this account. In contrast when cardholders make a purchase with a credit card, they are borrowing money from the bank and the money isn’t deducted from their accounts until users pay their billing statements.

Debit card overview

Here’s an overview of the key elements within the debit card ecosystem:

Demand Deposit Accounts (DDA)

A Demand Deposit Account is a type of bank account that offers cardholders access to their money without requiring advanced notice or fees to access. Checking accounts and savings accounts are the two most popular types of DDAs and are useful for managing everyday spending, bills, and cash withdrawals. All linked debit cards are connected to a checking account that cardholders can add money to and pull funds from.

Issuing Banks

Banks issue the debit card to the user and are responsible for authorizing the transactions. When a consumer makes a purchase, the transaction first travels through an acquiring bank — the financial institution that enables the merchant to accept card payments — and then to the issuing bank who verifies the transaction and approves it. Specifically, issuing banks are the bank names that commonly appear on credit and debit cards, such as Chase, Wells Fargo, or Bank of America.

The authorization process happens very quickly behind the scenes. In a few seconds, the issuing bank determines if the account of the debit card is valid and whether the purchase amount is within the available balance of the connected account.

Debit BINs

All debit cards are issued on a BIN, or bank identification number, to increase merchant acceptance, speed of card validation, and fraud protection.

BINs can be identified by the first 6-8 digits on a debit card. In just a few digits, a card BIN tells the retailer the cardholder’s name, address, and phone number, the type of card it is, the location and geography of the transaction, and whether the address provided by the cardholder matches the one on file. More importantly, it identifies the issuing bank and who should receive the authorization at the end of the transaction process. In the case of potential fraud, merchants and cardholders can quickly trace the transaction back to the issuing bank and compare transaction history with cardholder data.

What are the main types of debit cards?

All debit cards are connected to a checking account and only permit cardholders to spend up to the available funds that are deposited in that account. We review four main types of debit cards and their benefits below:

Standard debit cards

Standard debit cards are tied to a checking account and allow all cardholders to make online purchase, in-person purchases, and withdrawals from ATMs. When users make purchases with a debit card, the money is automatically deducted from their checking account.

Debit cards are widely accepted at retailers around the world, making them one of most convenient payment methods.  To complete a purchase, debit cardholders must enter a PIN (personal identification number) at checkout. This additional step helps mitigate identity theft and fraud should the debit card become lost or stolen. Debit cards can also alleviate any apprehension that comes with carrying around a lot of cash, and prevent users from overspending since debit card purchases are deducted from the cardholders’ account right away.

Standard debit cards don’t allow cardholders to establish a credit history or improve their credit scores. And while there are no interest fees, there are typically penalty fees if users spend more than the available amount in their connected account.

ATM-only cards

While ATM-only cards are also attached to a checking account, they can only be used to withdraw cash from ATMs and can’t be used to purchase anything in-person or online. Similar to standard debit cards, they require a PIN in order to withdraw money.

Because ATM-only cards are limited in their capabilities, if a fraudster gets a hold of one of these cards, they won’t be able to abuse the card by making unwarranted purchases. Fraudsters would also need to know the PIN to withdraw any cash.

Prepaid cards

Prepaid cards allow cardholders to make purchases and withdraw cash from ATMs. However, unlike standard debit cards, prepaid cards have funds stored on the cards themselves instead of in a connected bank account. In fact, prepaid cards can be purchased from retailers like grocery stores and drugstores, and cardholders can add money to them and begin spending at any time.

Consumers are able to obtain prepaid cards without having a bank account or banking history, widening their consumer accessibility. These cards are a good fit for consumers looking for a gift card option or for unbanked or underbanked users who don’t use traditional financial services. For example, Green Dot’s core business model revolves around prepaid card offerings that allow their users to shop and pay bills without being tied to bank.

Virtual debit cards

Virtual debit cards operate in the exact same way as standard debit cards, except that there is no physical card, so virtual cards can’t be swiped in-store or used to make cash withdrawals. However, virtual debit cards can still be used to make purchases beyond online purchases. For instance, cardholders can use virtual card numbers in offline environments such in instances sharing a card number over the phone.

With more customizable transaction settings than physical cards, virtual debit cards can make online shopping faster and more convenient. Some virtual card options also have enhanced privacy and security benefits designated to keep users’ online payments safe.

Why are debit cards important in the payments industry?

Of all the different types of payment methods, debit cards are currently the most used consumer payment type. What are the reasons behind debit cards’ recent growth?

First, shifting spending patterns during the pandemic drove a rise in debit card volumes. During the pandemic, payments shifted toward everyday categories where debit cards are more commonly used like groceries, pharmacy, and food delivery. In contrast, spending dropped in sectors where credit cards are more commonly used, such as travel and live entertainment. As a result of these shifting spending patterns, spend on debit cards increased by 8% while spend on credit cards decreased by 9%.

Increased discretionary spending during the pandemic also propelled debit card usage. Many loan providers were able to provide relief programs during this time, and with those expenses on halt, debit cardholders had more flexibility to make larger investment purchases. Several unemployment payments and stimulus checks were also distributed through prepaid debit cards, further driving overall consumer debit spend in recent years.

Second, the increase of contactless payments and mobile wallet transactions accelerated debit card usage. The number of tap-and-go debit transactions increased 6x in 2020, and nearly all card issuers began to provide contactless-enabled debit cards to address evolving consumer buying behaviors. We should expect to see these numbers rise as more and more developers create new embedded mobile wallet offerings for their products.

Along with mobile payments, P2P (peer-to-peer) transactions grew by almost 60% in 2020. Many P2P accounts are funded with debit cards, and as P2P merchant acceptance and volume grows, so too does debit volume. It’s also interesting to note that 90% of the revenue was driven by the top four P2P providers in the industry: Cash App, Venmo, Zelle, and PayPal.

How do cardholders keep their debit cards secure?

Credit card users are generally protected by the Fair Credit Billing Act (FCBA), whereas debit card transactions are protected under the Electronic Funds Transfer Act (EFTA).

The FCBA was created to protect credit card consumers from unfair credit billing practices and allow cardholders to dispute unauthorized charges. Under FBCA, the maximum liability for unauthorized charges on a credit card is $50 if certain conditions are met regardless of when the charges are reported. On the other hand, under EFTA, debit cardholders must report lost or stolen cards within 60 days. After this, debit cardholders cannot recover any lost funds.

The main difference between credit and debit card fraud is how the cardholder may be impacted upon charge. With a credit card, when fraudulent charges are made, no money is actually lost before the charge is processed. Credit cardholders can report the fraud immediately, get a credit on their statements, and in most cases, recover all of the stolen funds. With a debit card, the bank account balance is directly affected from the moment the fraudulent transaction occurs. Until stopped, these fraudulent transactions will remove available funds in the checking account, so legitimate charges thereafter may get declined or cause overdraft fees.

Because of these variances, debit cardholders need to be extra vigilant about where they expose their card information. While usage for debit cards has increased in the last few years, so has debit card fraud and other forms cybercrime. Accordingly, we recommend all users who are already using a debit card to get a virtual debit card or use a virtual card provider for online purchases. Virtual debit cards and virtual card providers offer all the same benefits and use cases as standard debit cards when shopping online. However, virtual cards can provide enhanced features that keep users’ money and personal information secure and go above and beyond data privacy features offered by traditional debit cards.

An example of a secure virtual card provider is Privacy. Users can connect their existing debit card or bank account to Privacy and generate secure virtual payment cards for all of their online shopping needs. Rather than exposing the same credit or debit card number everywhere online, users create Privacy Cards that each have unique 16-digit numbers and other security features. These virtual cards can be used at many online merchants to mask real card details.

Privacy Cards allow users to choose between Merchant-Locked Card or Single-Use Card options. Merchant-Locked cards “lock” to the first merchant where the cards are used, and can only be used at that designated merchant. In the case of a data breach, the card info can’t be used at any other merchant. Single-Use cards automatically close two minutes after a user’s first charge is completed on that card. These are perfect for one-off purchases or when shopping with first-time vendors whose safety and credibility may be unknown.

What is the future of debit cards?

Even with the surge of innovative fintech products and payment providers over recent years, debit cards continue to be a fundamental payment choice for consumers. Debit cards provide increased accessibility and convenience for consumers across a variety of lifestyles and spending behaviors.

We continue to see innovation in the payments ecosystem that will further increase debit card volumes. Recently, the New York Subway announced that it will be officially moving to a new contactless payment method called OMNY by 2024. With OMNY, users can use their own contactless credit or debit card, digital wallet, or a reloadable prepaid OMNY card to pay for commutes. This is a significant shift away from the historical MTA card swiping system that’s been tightly embedded into the city’s culture for the last 30 years.

Whether cardholders choose to pay with credit cards, debit cards, or alternative forms of payment methods, security should always be top of mind. With virtual debit cards and virtual card services, users can still maximize the convenience and benefits of traditional debit cards, while leveraging innovative, built-in security features to keep online payments even more safe.