Recently, a large financial institution (FI) introduced a new card product— the first combo credit/debit card in the U.S. This dual card product is touted as giving consumers more choices at the point of sale. If they want to pay for their purchase directly from their deposit account, the consumer simply selects the debit option and enters their PIN. If the consumer wants to charge their purchase against their line of credit, they select the credit option and sign to complete the transaction. The debit side of the card also allows the consumer to withdraw funds from an ATM. The credit side of the card comes with the standard fraud and liability protections offered by the major card networks. For online purchases, only the credit side of the card can be used. The debit and credit accounts behind the card are serviced and billed separately.
So what are the advantages of this new dual card product for consumers and for the FI? Well, for consumers the primary benefit seems to be convenience. The consumer gets to consolidate their credit and debit accounts at a single financial institution. As the consumer is freeing up an extra card slot in their wallet, the FI is picking up a greater share of that wallet. In one single product, the bank acquires two of the most heavily used financial products for every consumer. This is likely to lead to the institution becoming the primary bank for the consumer which increases customer loyalty and decreases the risk of attrition.
The main problem I see with this product is in the decision that every consumer using it will face when they are checking out—credit or debit? Over the past few years, consumers have been switching from credit cards to debit cards as their primary payment method. The simplest explanation for this seems to be that, in uncertain economic times, people don’t trust themselves with credit. Despite the advantages of credit (liability & fraud protection, building a credit history, better rewards programs); consumers are abandoning it in favor of debit. The main advantage of debit over credit is restraint. Debit cards restrain consumers from spending more money than they have and thus restrain them from burying themselves under a mountain of debt. Sure you can overdraft your checking account by a few hundred dollars if you are not careful, but credit cards enable consumers to spend their way right up to their maximum credit limit which is often thousands or tens of thousands more dollars than they have.
If we ignore the argument that you can use a credit card without abusing it and focus on the perception that today’s consumers have about credit, the psychology of this shift to debit becomes clear. Consumers are afraid of credit cards, or more accurately, they are afraid of what credit cards will cause them to do. This view of credit cards seems very similar to me to the view that the people of Middle Earth had about the One Ring in J. R. R. Tolkien’s epic The Lord of the Rings. It’s inherently dangerous. It will corrupt you, even if you use it with the best intentions. If you happen to come in possession of it, your best move is to destroy it immediately.
From this perspective, tying a debit card to a credit card is a little like wearing the One Ring on a chain around your neck. The temptation is always there. If today’s consumers really are applying for debit cards specifically to get away from credit cards, then a combined credit/debit card, convenient as it is, might not be as appealing to consumers as it sounds.