Consumer use of payment cards is very much in flux, and contradictory trends are making it hard for issuers to react.
While the recession drove consumers to begin favoring debit cards over credit cards to manage cash-flow, in 2011 consumers shifted somewhat more of their total spending to credit cards from debit cards, according to a report MasterCard released June 21.
But the card-spending shift went both ways. Consumers last year shifted $3.7 billion in spending from debit cards to credit cards, while $2.6 billion in spending also shifted to debit cards from credit cards, Prasad Iyer, a MasterCard vice president, writes in "Smarter Spending and Savings: Evolution In U.S. Consumer Behavior."
The shift back toward credit card spending may be due to the effects of the Durbin amendment to the Dodd-Frank rule, which prompted the Fed to cut debit interchange rates beginning in October 2011 and caused many financial institutions to pare down or eliminate debit card rewards, Iyer suggests.
"A sizeable enough portion of consumers responded to the disappearance of some debit card reward programs by using their debit cards less," he says.
But such a hairpin turn in consumer behavior seems unlikely to account fully for the move back toward credit.
It is also likely that consumers are using payment cards more strategically to balance spending, debt, income and savings and their mixed use of different types of cards reflects the volatile economy, Iyer says.
The message for card issuers is that consumers' card-spending is far from monolithic.
"The back-and-forth movement between credit and debit means that cannibalization of credit by debit should be even less of a concern for issuers than it has been in previous years," Iyer notes. "Instead, the two-way flow should be viewed as an opportunity" for issuers to develop products based on consumers' increasingly complex needs.
Issuers may benefit from developing multi-application cards or providing different types of cards to the same household, enabling consumers to use payment cards according to different purchase types, Iyer said. The goal would be providing households with tools to handle various demands such as everyday necessities, discretionary items and immediate cash-flow.
Promoting person-to-person payments — especially in the mobile channel — could address consumers' needs for more diverse types of payments, Iyer writes.
"The P2P mobile opportunity is very important, as it will drive significant incremental payments volume," he says. "Additionally, using mobile devices for P2P payments will make consumers more comfortable using them, which may be the springboard for mobile payments adoption at the point of sale."
MasterCard research suggests P2P payments are most popular now for transferring funds to teenagers, nannies and other household help.
"Mobile technology can enable institutions to increase their share of total payments by addressing both small-value transactions between individuals and payments to service providers," Iyer writes.
Prepaid cards displaced close to $25 billion in spending on cash and checks in 2011, a trend that is destined to continue, MasterCard found.
"Viewing consumers by segments is essential to understanding their behavior," Iyer says, adding that profitability in "the new reality" requires that issuers design products around consumers' increasingly diverse — and changing — needs.
