Will Consumers’ Shift Away from Credit Cards Outlast the Recession?

Consumers have cut back their usage of credit cards in the past year, often on their own volition but also because suddenly risk-averse credit card issuers have closed millions of credit card accounts or reduced credit lines in their attempts to strengthen recession-racked balance sheets. Now the emerging question is whether credit cards will ever regain their former pre-eminent place in U.S. electronic payments as debit cards continue to gain transaction share. Americans are talking the talk of using credit cards more sparingly than they did in the past, according to Mercator Advisory Group Inc. vice president of research operations Ken Paterson. According to results from a Mercator mid-year survey of 1,012 consumers, cardholders who have both credit and debit cards are switching their transaction behavior from credit and toward debit “to avoid running up their revolving balances,” Paterson tells Digital Transactions News. The survey polled consumers who carry general-purpose revolving credit cards, debit cards, private-label cards, and charge cards that require full payment every month. Some 47% of respondents carried both credit and debit cards. Fifty percent of all cardholders agreed with the statement that they try to pay for more purchases with debit or prepaid cards to avoid borrowing on their credit cards, and 86% thought that such a change was likely to be permanent. Such feelings were even stronger among consumers who carry both credit and debit cards. Some 61% of those cardholders agreed that they were using debit or prepaid cards more to avoid revolving on their credit cards, and 90% thought that the change was permanent. Mercator's survey results mirror data collected by the payment card networks and the Federal Reserve. Visa Inc. and MasterCard Inc. both are seeing declines in credit card transaction volumes, dollars charged on credit cards, and credit cards in issue, according to their most recent quarterly reports. And the Fed's latest consumer-credit report shows Americans cut back their revolving credit balances, the vast majority of which are on credit cards, at an annualized rate of 9.3% in October. Americans still had $888.1 billion in revolving debt in October, but that was down 7% from $957.3 billion at the end of 2008. This switch away from credit and toward debit, which was well under way before the recession hit, is important for merchant acquirers and independent sales organizations because credit card acceptance was the original product they sold to merchants. Credit cards are generally perceived as the most profitable electronic payment product because of their stronger association with higher-ticket discretionary spending than debit cards. A permanent shift toward debit might force acquirers and ISOs to adjust product mixes and pricing, possibly reducing industry margins. But whether consumers actually walk the walk and, once the economy rebounds, keep their usage of credit cards below pre-recession levels “is the big issue,” says Paterson. “That's really hard to forecast.” He likens the situation to the one the automobile industry faced last year when sales of gas-guzzling sport-utility vehicles plunged in the face of rising gas prices. In the past, Americans resumed buying big cars after fuel prices moved down from their peaks. While the economy is showing signs of recovery, which bodes well for credit cards, demographics are working against them even though they have stronger chargeback protections and richer rewards than debit cards. Younger consumers show at least a modest preference for debit cards, according to Mercator data. Debit card ownership tied or exceeded credit card ownership in the 18-to-24, 25-to-34, and 35-to-44 age groups segmented by Mercator. And thanks to high unemployment rates and new federal regulations on credit card lending, young adults may not be getting credit cards as soon as their slightly older peers did, Paterson says. “The challenge for the credit card industry is bringing back some generations that either never made it to credit usage or may have gotten off track, especially in the past couple of years,” he says. Paterson says his research shows that the presence of rewards on a credit card is the most predictive among several independent variables he tested to forecast no shift of spending away from credit and toward debit. He cautions, however, that the overall results still leave much of cardholder behavior unexplained. Some merchant-acquiring executives told Digital Transactions magazine for its upcoming January 2010 cover story about the future of the credit card that Americans would resume spending heavily on credit cards once consumer confidence revives and if government stays out of the way. “My sneaking suspicion is that they will go back to their old habits,” says Paul R. Garcia, chairman and chief executive of the big processor Global Payments Inc.