Eager for growth after the recession’s chilling effect on borrowing, the acquiring industry may feel relieved to see Discover Financial Services reporting an uptick in credit card purchase volume for its fiscal fourth quarter.
But underlying credit card trends remain worrisome, as consumers in general continue to show restraint in using credit cards, and the fastest-growing group of potential customers–young adults–remains wedded to debit.
Discover today said purchase volume for the quarter ended Nov. 30 rose 7.8%, to $25 billion compared with $23.2 billion a year ago.
That may serve as a positive sign for ISOs and agents hoping to achieve similar results during the crucial fourth quarter, but issuers feel less certain about the industry’s future. Fueling that doubt, the generation now coming of age is using debit for everyday purchases and probably never will rely on credit as much as their parents did, one expert says. And that has far-reaching implications.
“I’m not sure the pace of credit card borrowing we saw before the recession will ever return, partly because of this new ‘debit generation’ that is emerging,” Ken Paterson, director of credit advisory services at Maynard, Mass.-based Mercator Advisory Group, tells ISO&Agent Weekly.
A variety of factors are behind the shift.
The recession “dampened people’s appetite” for borrowing on credit cards, Paterson suggests. “Consumers were overwhelmed by their debt, and they adopted a new, cautious attitude that seems to be a long-term effect.”
Although revolving consumer debt rose slightly in October, as a whole it has declined steadily over the past two years as issuers charged off billions in bad card loans and tightened lending standards, Federal Reserve data show. Moreover, many consumers successfully whittled their outstanding balances.
Younger consumers also show a decided preference for debit that is unlikely to change, according to a study Mercator conducted earlier this year with Columbus, Ga.-based Total System Services Inc., or TSYS.
“We found that consumers have a great deal of loyalty to debit cards and the control it provides over daily finances,” Paterson says. “Many people, especially younger adults, have set their patterns around using debit, and broader availability of credit and tempting them with credit card rewards programs is not going to make them change their habits.”
For its study, Mercator surveyed 1,000 consumers ages 18 and older during the first half of this year through a combination of online questionnaires and in-person interviews and focus groups.
In focus-group discussions, Mercator found that adults younger than 35 overwhelmingly prefer debit cards to credit cards or cash, Paterson says.
However, ISOs and agents still stand to profit from offering credit card processing, he notes. But credit cards in the near term likely will remain products for older, more-affluent consumers, and profits increasingly will be tough to achieve in the more competitive, post-recession economy, Mercator’s research suggests.
Tougher regulations restricting the ability of card issuers to raise interest rates and fees resulting from Fed rules that went into effect last year following the 2009 passage of the Credit Card Accountability, Responsibility and Disclosure Act also continue to put pressure on profits.
“It is a more constrained marketplace, and we still very much are in a deleveraging cycle where consumers are unloading credit card debt, which is going to make it tough,” Paterson says.
