The Shift: Americans Pick Debit Over Credit

Credit spending is on the decline as ‘cautious consumers’ prefer to pay now as opposed to pay later, according to a new study released Wednesday.

Data obtained by Javelin Strategy & Research shows that credit card use in 2009 was at an all-time low since of 56%, down from 87% in 2007. Javelin first started polling data eight years ago. Additionally, last year, for the first time ever, the total payment volume for Visa (Stock Quote: V) debit cards surpassed that of credit cards, a trend that the financial industry research group expects to continue throughout 2010. According to Javelin, if this trend is allowed to continue unabated, credit card use will fall to 45% in 2010.

James Van Dyke, president of Javelin, attributes the decreased dependence on credit to the recession, with soaring unemployment rates and a decreased ability to pay off credit card debt making consumers reluctant to purchases items with money they don’t have.

“People did not turn to credit as a life preserver following the recession,” Van Dyke explained. “Instead, the average consumer started cutting back on their credit card usage.”

Unfortunately for credit card issuers, consumers able to spend didn’t use their plastic to do so. In lieu of maxing out their credit cards, consumers switched to other payments options like cash, checks (though check use is also on the decline overall) and, most notably, debit cards. Credit-card total payment volume at all four major card brands decreased last year, at rates between 7% and 17% while total debit card payment, increased 3%-7% depending on the card brand.  

However, Javelin also found that many consumers are increasingly using less traditional forms of payment, such as reloadable prepaid debit and gift cards, which enable users to put a specified amount of money on a plastic card that functions essentially like a traditional debit card without a bank account.

“People have more payment options than ever before,” Van Dyke says, explaining that the changes in the way we pay isn’t only being caused by customers’ newfound caution.  

New legislation has made it harder for high-risk consumers to obtain credit, he said. Under the Credit Card Accountability, Responsibility and Disclosure Act, companies are prohibited from issuing credit to anyone under 21 unless the applicant has a stable source of income or a willing co-signer.

The stipulation has forced many young people to pass on plastic, however, according to Van Dyke, the generational shift toward other forms of payment isn’t involuntary.

“The 30-day credit cycle doesn’t map to how young people’s brains are wired,” he said, likening the use of a debit or prepaid card to an immediate status update on Facebook. “They think about information having more value if it’s in real time.”

As such, young people are becoming increasingly reliant on both prepaid and traditional debit cards, which is problematic for issuers as stipulations under the recent financial reform requires the Federal Reserve to establish regulations that govern the  interchange rates and fees issuers charge merchants for debit card transactions.

According to the report, credit card companies “simply cannot afford” to allow current consumer payment trends to continue without facing a potentially serious revenue shortfall.

In an effort to bring business back, Van Dyke says that consumers can expect credit card issuers to change their marketing strategies.  For example, in an effort to resurrect premium credit card usage, providers may offer qualified customers additional rewards, heightened fraud protections and increased online payment offerings. Issuers may also lower annual fees and interest rates.
Additionally, Van Dyke says “we’ll continue to see innovative types of payment offerings,” meaning that issuers may increase the types of prepaid cards they offer unbanked or underbanked consumers in an effort to increase their customer base.

“We expect banks to offer more integrated and convenient services,” Van Dyke says. However, he maintains “credit cards will never have the dominance they once had.”

Javelin’s recently released data is based off of two separate online surveys: a random-sample panel of 5,211 respondents collected in March 2010 and a random-sample panel of 3,294 consumers collected in November 2009. Javelin also used data collected in a phone survey of 5,000 respondents conducted in November 2009.

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