What Card Payment Usage is Telling Us

According to MasterCard’s presentation at the Goldman Sachs US Financial Services Conference on Dec 8, retail sales are showing positive signs – relative to card payment usage. They cited November as the third consecutive month of growth since July, 2008. They attributed the growth to changes in consumer attitudes. Consumers are focusing more on quality and value, have more control over finances and have become more frugal, which is a shift back to traditional roots of credit card use. When the first card payment usage, Diners Club, was introduced in 1950, members had to pay off their balances each month. There was no such thing as revolving credit. Today, consumers are still using credit, but more responsibly.

MasterCard also presented on the change in debit and credit card volume and transactions. According to their research, both debit and credit card usage declined from Q3 2008 to Q4 2008. Debit card usage has since increased, almost to the Q3 2008 level, while credit card usage has remained close to flat. Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat; cash usage declined 12-14%; and check usage declined as much as 5%. (Retail categories included supermarket/grocery, department store, sit-down dining, gas/gas station and drug store.)

“Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat”

This movement from credit to debit could be closely related to the closure of credit lines. The Equifax Credit Trends Report (September 2009), indicated that bankcard issuers are continuing to close accounts and reduce credit lines. It might be assumed that credit lines are being closed mostly due to the increased in card issuer charge-offs (loans the companies do not expect to be repaid on), as well as to the lack of usage on some accounts. The Dec 16 charge-offs report included:

JPMorgan (JPM) charge-offs increased to 8.81% from 8.02%.
Capital One (COF) charge-offs increased to 9.6% from 9.04%.
Bank of America (BAC) saw a slight decrease to 13% from 13.22%.
Discover Financial (DFS) saw an increase to 8.9% from 8.5%.
American Express (AXP) saw a slight decline to 7.6% from 7.8%.

According to the Equifax report, new accounts, opened between July, 2008 and July, 2009 were 54 percent lower. “American consumers are making the most fundamental change in the way they handle their finances we have seen in a decade,” said Dann Adams, president of Equifax’s U.S. Consumer Information System. “They are conserving cash and reducing debt across the board. We haven’t seen savings rates this high since shortly after the third quarter of 2001 – just after 9-11 – when they were at 3.25 percent.”

While consumers may be losing credit lines, they are not going back to checks and cash. These bank activities have created a push towards debit cards, since consumers today prefer cards to cash and checks. Card payment usage among consumers are either check debit cards (tied to their bank accounts) or switching to open loop, reloadable prepaid cards. The latter card type is especially increasing in popularity amongst teens, college students and the unbanked segment.

All reports on bank card usage make it pretty clear that card payment usage is not declining and shows no signs of disappearing. With checks soon becoming a payment method of the past, payment cards usage will increase even more. The most recent action comes from the UK Payments Council, the body for setting payment strategy in Britain. Comprised of Britain’s leading banks, the council agreed on Dec 16 to set a target date of October 31, 2018 for closing the check clearing system. UK supermarkets, high street retailers and petrol stations have stopped accepting checks, but they are still a popular form of payment among elderly people, many of whom find the idea of using automated cash machines intimidating. “The next generation probably won’t even have a checkbook,” said Addy Frederick, a spokeswoman at the payments council. Checks have all but disappeared in high-tech countries like Sweden and Norway and their use is under review in Ireland, South Africa and Australia, Frederick at the council said.

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