Shoppers Choosing Cash Over Credit
There’s a view held by many that the effects of the recession
will last for many years into the economic recovery. The rationale goes that
recent tough times have sobered consumers who now have a better appreciation
of what’s important and are only willing to spend on items that meet their
new definition of value.
Among the lessons tough times have brought is the importance of reining
in debt. For many, that means using credit cards less frequently or not
at all.
According to a study by BIGresearch
for the National Retail Federation, the number of consumers who will use
credit cards to buy holiday gifts this year will be 28.3 percent, compared
to 31.5 percent in 2008.
Silvio Tavares, senior vice president of industry
relations for First Data Corp., told The Wall Street Journal, “Consumers
are preferring to use their PIN debit card as compared to credit or even
cash.”
“Some people are just maxed out on their cards,” Gerri Detweiler, a personal-finance
adviser with Credit.com Inc., told the Journal.
Discussion Questions:
Does a three percent downward shift in credit card usage from last year to
this represent a big shift in consumer purchasing behavior? What are the
implications for retailers should consumers reduce credit card usage?
As long as the consumers keep buying, it’s good for the retailers because of lower fees. For the consumer though, with most good cards now paying from 2% to 5% in cash rebates for using the card, as long as you opt to pay it off every month, consumers can save by using credit.
This study is consistent with all the other evidence that consumers (like businesses) are digging their way out of excessive debt. And the vast majority of shoppers can no longer use their home equity as virtual “ATM machines” if they behaved that way in the first place. This is a trend that is not likely to reverse itself anytime soon, and it’s healthy over the long haul.
However, retailers need to respond in a couple of different ways:
1. Find ways to encourage shopping in your store (instead of the competitor’s) through old-fashioned focus on merchandise content, compelling value and effective branding.
2. At least use your proprietary credit card program (if you have one) to drive sales and loyalty programs, if consumers are reluctant to use their bank cards.
3. Make sure you are catering to “shoppers on a budget,” whether you offer opening-price goods or more aspirational merchandise.
The stores that have adapted fastest to the “new reality” of less credit and tighter household budgets appear to be the market-share winners today and in the near future.
There are two forces at work here. First force is the credit card companies’ new policies. They have reduced consumers’ line of credit and increased their interest rates. With interest rates 25% and above, items now cost much more when purchased on a credit card. Unless the retailer discounts are greater than the interest rate, consumers will find another way to buy. I predict the percent purchased using credit cards to continue declining.
The credit card companies have shot themselves in the foot. The second force is the consumer. They will be reducing debt for years to come. They have redefined their needs and wants. Baby boomers having lost billions will simply buy less. All this will continue until we have high inflation. Inflated dollars will be used first to pay off old debt. Then if consumers believe inflation will continue, they will go on a shopping binge.
I simply don’t subscribe to this notion that this recession has forever more changed the way consumers will spend. We’ve been through many recessions before (and some way worse) that haven’t had any lasting effects on consumers. However, the media, as always, loves to take the negative stance, so is all over this story.
For retailers, it would seem to be good news if consumers used debit or cash more than credit cards. The resulting savings from having to pay fewer fees flows straight to the bottom line. And with credit card fees and interchange rates continuing to climb, this would be a dream scenario for merchants if it were to come true.
There is no doubt that consumers are recalibrating, focusing more on value as well as values. On the value side, if consumers perceive themselves as richer because they are not paying the associated credit card fees and monthly interest charges, then the switch could be potentially positive. Similarly, if consumers use more cash during the holidays, this may also have a positive impact post-holidays as they will have less credit card debt and therefore may buy something on credit that the may have postponed in years past.
On the other hand, the switch to more cash purchases may reflect a shift to buying only when the consumer has cash available and this would have some negative impact, especially as it relates to impulse purchases. Likewise, it would reinforce the perception that changing consumer values are reflecting the age old directive to “live within one’s means.”
The buying spree of the last 20 years or more was driven on consumer credit. The U.S. economy is 70% based on consumer spending. There is no longer a place for the consumer to go to generate purchasing power in excess of their income. There is no light to suggest that the economy will recover quickly without consumer spending.
The 3 percentage point downward shift is actually a downward shift of 10%. That is pretty significant and there will be more down before there is up.
There’s little doubt that the recent policies of credit card issuers–raising rates and cutting limits–have had a chilling effect on credit card purchasing. This is by design. It seems that card companies have elected to squeeze every drop of blood they can from their cardholders before they become subject to limiting legislation.
The spreads seem astronomical to me, what with Fed rates hovering near 1% and credit card interest rates hiked to 25% or above for many Americans. Tack on the interchange fees charged to merchants on every transaction and you have a license to print money. There oughta be a law…
No wonder we are using our credit cards a little less. Pay-as-you-go remains as a wiser alternative for many employed Americans, while the unemployed have little choice in the matter.
If consumers don’t continue to avoid credit transactions because of their own financial situation, watching this Frontline video on the credit card and banking industry in general will get them to stop. The video does a great job of explaining the new business model for “free” credit and checking. Basically the goal is to recoup the lost membership fees through backend fees that range from high interest rates to high overdraft charges (and in my case the bank has recently started charging $5 a month for me to download my transactions). The thing that is so frustrating is that banks are getting the deposits for practically nothing, with savings accounts and CDs paying low single digit interest rates.
Maybe the credit card business has finally killed the golden goose.
Reduced credit card use is undoubtedly good for the national economy. But one of the reasons for it–usury on the part of credit card issuers–is disheartening, at best. Let’s hope that Americans just say no to 30% interest rates, and buy only those things that they can afford.
Yes, it is significant. It signals that Americans are drifting toward a “pay as you go” model of shopping which has profound implications for the future of U.S. retail.
For retailers, customers who use cash are a dream:
– 0 transaction fees
– 0 possibility of a chargeback
– 0 possibility of credit card fraud
– money’s in the bank at the end of the day
– all I have to do is train my cashier to be able to spot bad counterfeit bills
I suspect this reduced usage is an indicator of a wider spending slowdown (meaning those reductions in CC purchases were NOT offset by an increase of cash transactions). Retailers could turn this around though and offer some sort of bonus of a small percentage off when paying cash.
No. It represents 29% interest rates and higher minimum payments. It is a well known “secret” that most major credit card issuers, in advance of the onset of new regulation, have raised rates on almost all types of consumer credit accounts. The practice has been documented to impact not just poor credit risk accounts, late accounts, or slow pay accounts. Even customers with excellent payment history have been impacted.
At 29.99% interest, it’s a lot harder to finance a lifestyle beyond your means. People are inherently rational at the margin, and we’re there in most cases.
This is a simple thing. Credit is expensive right now. Shoppers with the available cash will use it instead. When interest rates were one third of the current level, it was much easier to spend slightly beyond means and pay down over time. At almost 30%, this is no longer a rational decision.
I think as we see the increase in rates from the credit card providers, it has had an impact on the manner in which people pay for their products.
Banks need to be careful that they do not risk the engagement levels of their cardholders, it also opens up the alternative payment mechanisms that once were viewed to be very, very far off. They may actually work now.
This decrease in card usage is a short-term function that will have little, if any, impact on consumer shopping behavior in the long term. American consumerism is alive and well and will continue to thrive regardless of how purchases are made. More importantly, availability of credit is clearly less now than in years past, yet we are only seeing a 3.5% decrease in credit card usage. Perhaps the real question is how will card usage grow in 2010 as we see a rise in jobs/employment, and credit starts to become more available.
I am split on this, but in any case, I believe the results will be the same. My rational side says that this ‘reduction’ we’ve experienced is the new normal. Retail spending is just going to be at this ‘new’ level. Obviously, there’s a lot behind that rationale in that we’re painfully shifting to a service/creative economy (see: Richard Florida’s work) from a manufacturing economy and a lot of people are going to be left out in the cold for quite some time.
But the cynical side of me says that the American consumer is completely and utterly addicted to spending and will soon be back…but back buying new and exciting products vs. same old, same old.
In either case, U.S. retail is in for a pretty significant change. Which, to me, is a very good thing.