Debit or Credit: Either, Both, Neither, or How Much? Ben Rogers
ideas grow here
Filene Research Institute
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Luis G. Dopico
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Deeply embedded in the credit union tradition is an ongoing search for better ways to understand and serve credit union members. Open inquiry, the free flow of ideas, and debate are essential parts of the true democratic process. The Filene Research Institute is a 501(c)(3) not-for-profit research organization dedicated to scientific and thoughtful analysis about issues affecting the future of consumer finance. Through independent research and innovation programs, the Institute examines issues vital to the future of credit unions. Ideas grow through thoughtful and scientific analysis of top-priority consumer, public policy, and credit union competitive issues. Researchers are given considerable latitude in their exploration and studies of these high-priority issues. Traditionally, the Filene Research Institute focuses on long-term research questions that can take months or years to research and publish. Occasionally Filene also publishes Research or Innovation briefs. These briefs allow Filene to present important, time-sensitive, notorious, and unbiased topics to the credit union system. Oftentimes these briefs present an opportunity to distribute original research or innovation findings from Filene researchers or Fellows. We hope the “brief ” format meets your need to obtain actionable and objective information in a timely manner.
Copyright © 2010 by Filene Research Institute. All rights reserved. ISBN 978-1-932795-95-0 Printed in U.S.A.
About the Authors
Ben Rogers Ben Rogers is the research director of the Filene Research Institute, where he manages and edits a large pipeline of economic, behavioral, and policy research related to the consumer finance industry. He previously served as director of the Institute’s CU Tomorrow project, as editor of the CEO Report, and as chairman of the National Directors’ Convention. Ben has been cited in the Wall Street Journal, American Banker, the Credit Union Times, and the Credit Union Journal. He earned a master’s degree from Northwestern University and a BA from Brigham Young University. Luis G. Dopico, PhD Luis G. Dopico is a consultant for Macrometrix of Alamo, California, and other credit union organizations. His ongoing research focuses on capital regulation, deposit insurance, charter conversions, economies of scale, and mergers and acquisitions in cooperative and stock-owned depository institutions, as well as macroeconomic conditions, housing, and consumer markets. His past research has addressed bank stock prices, interstate banking, bank regulation across countries, collateralized debt markets, and exchange rates. He has performed research for the Credit Union National Association, the National Association for Business Economics, Moody’s, Mellon Capital Management, PricewaterhouseCoopers of Argentina, the Small Business Administration, the Federal Reserve, and many individual credit unions. His research has been published in the Corporate Finance Review, the International Review of Finance, the Journal of International Financial Markets, Institutions and Money, and Essays in Economic and Business History. He earned a BA in economics and mathematics from the University of Southern Mississippi and a PhD in economics from Auburn University, Alabama.
Acknowledgments Add Title Here!
A special thanks to CO-OP Financial Services for its generous support of this study and future studies on debit and creditâ€”helping you keep pace with the latest technology and trends.
Executive Summary and Commentary
By Ben Rogers, Research Director
The king is dead. Long live the king. If cash is the currency king, then its death has been predicted in vain for years. Its brother the check, while in long decline, also stubbornly refuses to relinquish a powerful place in family finances. But the past two decades have seen a rapid rise in credit and debit card use, which is the focus of this report. The new payment mix is more about market share than about which payment dominates or will dominate. Credit unions care deeply about whether consumers use debit and credit cards. Cards tie consumers to their financial institution and are among the few revenue centers credit unions can influence.
What Is the Research About? This report uses data from the Consumer Finance Monthly (CFM) survey to figure out just who uses which payment methods. In a market that is forever adjusting to new consumer preferences and behavior, the payment habits of consumers are important for credit unions. The variety of data available in the CFM survey allows the researchers to segregate intensive and casual users of each method by factors like income, net worth, ethnicity, education, and age. With the detailed data in hand, the report can highlight opportunities for credit unions and forecast with some near-term certainty which groups will demand which payment options in coming years.
What Did the Research Reveal? In addition to the findings that cash is still essential and check usage is slowly shrinking, this focus on debit and credit usage shows that: • Debit cards have been used by over half of U.S. households for barely a decade, and there is no evidence that a peak in debit usage is imminent. • Intensive credit card users have both higher incomes and higher debt levels than those with neither card and those with only debit cards. They also have higher household net worth and a higher net worth to income ratio. • Intensive debit card users are generally younger. Debit-only users decrease by age, from 29% of 18–29-year-olds to just 7% of those over 70. Conversely, credit-only users increase by age, from 29% of 18–29-year-olds to 49% of those over 70. • The fraction of households using electronic billing, like many other recent technologies outside the payment arena, has grown much faster than those for earlier technological innovations,
growing apace from near obscurity to near ubiquity—4% of households in 1995 to 53% in 2007.
What Are the Credit Union Implications? Debit cards are in use in 71% of American households, but only 19% of consumer households use them as a primary payment method. This research indicates that as income and net worth rise, so does credit card usage. This may be the vestige of a system of loose credit and attractive credit card rewards. But if the new credit card rules substantially limit the rewards companies offer to cardholders, debit usage could catch up. If not, the economic advantages of nonrevolving credit card use could keep credit cards at the top of the payment heap for middle- to high-income consumers. Credit cards are a mature product, entrenched but unlikely to surge ever again. Conversely, debit cards could still see significant usage gains, especially if financial institutions and network providers can convince customers to use them for categories like furnishings, personal care, and medical care—all items for which debit use is currently scant. It’s also possible that a new generation of younger users, shocked by the stress of the Great Recession, will prefer debit cards for their intrinsic check on overspending. This report confirms previous Filene research—Debit vs. Credit: How People Choose to Pay—that illuminates the often irrational ways that consumers choose payment methods. But what may be perfectly rational reasons for using a credit card (interest-free loans for nonrevolvers and generous rewards) may not account for those who use debit to control spending or avoid the danger of revolving debt. New overdraft regulations could also make debit simpler and more attractive for everyday users. Also, as ever-more sophisticated and niche payment systems emerge (virtual currencies, social payments, ACH iterations), credit unions will need to pay attention to consumer demands and trends. It’s entirely possible that 10 years from now, our cell phone–transacting children will stare blankly as we talk about choosing between credit and debit cards. Rather than predicting the imminent demise of this or that payment method, though, this research encourages credit unions to recognize that a complex mix of payments—each attuned to the context and convenience of the purchase—is here to stay. Long live the king.
Introduction The payment methods that consumers use have changed much during the last half century. Over the last few decades, consumers have switched from relying mainly on paper-based or “traditional” payment methods such as cash and checks to an ever-growing array of electronic-based or “sophisticated” payment methods including credit cards, debit cards, automated withdrawals from deposit accounts, and e-billing, with more options on the horizon ranging from smart cards to cell phones. In some ways, the pace of change has been frenetic. In other ways, however, adoption of sophisticated payment methods While growth in debit card use has begun to slow down, many has much further to go. Some debit card users are at most casual users, and there is no eviconsumers adopt new technolodence that a peak in debit card use is imminent. gies eagerly, largely abandoning the old, while others adopt new technologies tentatively at best. Surveys show that most consumers mix and match payment methods. They use sophisticated payment methods for some purchases (Internet shopping, dining, utilities, etc.) and traditional payment methods for other purchases (smallvalue transactions, rental payments, insurance premiums, taxes, etc.). A large fraction of consumers continue to use traditional payment methods for most of their transactions. In this research brief, we first present some of the long-term trends in the evolution of payment methods that may be glimpsed from aggregate national data in 1990–2009. Checks, credit cards, debit cards, and e-billing are clear examples of products at different stages in their adoption cycles. Checks have long been in decline, but they still account for a large fraction of transactions and have only recently been surpassed by other payment methods. Credit cards are a mature product that has been used by over half of U.S. households for over two decades. While credit cards may or may not have entered a period of long-term decline similar to that of checks, credit card use in the future is unlikely to experience fast growth. In contrast, debit cards have been used by over half of U.S. households for barely a decade. While growth in debit card use has begun to slow down, many debit card users are at most casual users, and there is no evidence that a peak in debit card use is imminent. Although earlier innovations in payment methods took decades to be accepted and adopted by consumers, the process of adoption seems to be speeding up, with e-billing having switched from near obscurity to near ubiquity in just a few years. Next, we use household-level data from the CFM survey to explore in detail the extent to which payment methods differ from the national averages across individual households and across various 1
socioeconomic groups. As the fractions of households using credit cards and debit cards have surpassed one-half and have continued to grow, comparing holders of one card with nonholders is becoming meaningless. The average holder of either card is increasingly becoming the average U.S. Debit cards appear as a stepping stone, used particularly by the consumer. Thus, in this brief, young and those with middle incomes as opposed to those with we identify casual and intenlower incomes. Those with some college education use debit sive users of various payment cards more often than those with a high school education or less. methods and classify consumers into four large, clearly defined groups: (1) those who are not intensive users of credit cards or debit cards, (2) intensive users of only debit cards, (3) intensive users of only credit cards, and (4) intensive users of both types of cards. We find remarkable differences across all four groups of consumers. Those using neither card intensively have the lowest levels of education and income and, likely with limited access to financial institutions, have the least debt. Across many socioeconomic measures, debit cards appear as a stepping stone, used particularly by the young as they set out in their independent financial lives, by those with middle incomes as opposed to those with lower incomes, and by those with some college education as opposed to those with a high school education or less. As a stepping stone, however, use of debit cards falls in three areas: (1) with age, (2) from those with middle incomes to those with higher incomes, and (3) from those with some college education to those with four-year degrees and graduate studies. Intensive users of only credit cards have higher incomes and debt levels than those with neither card and those with only debit cards. While intensive users of both types of cards report the highest incomes, they also report worse measures of financial security (more debt, lower net worth, higher debt to income ratios, and lower net worth to income ratios) than intensive users of only credit cards. The use of sophisticated payment methods is likely to continue to increase, if nothing else, as younger consumers, who are more likely to adopt new technologies, age and replace earlier generations. We also find that while debit card use has grown by leaps and bounds, the fraction of households that are intensive users of only debit cards is remarkably low (19% in 2009), leaving ample room for further growth. However, some of the recent growth in the use of debit cards may be only temporary. Debit card use has been growing fastest among the socioeconomic groups most likely affected by the ongoing economic crisis (i.e., those with lower incomes and the young). As the economy recovers, and as today’s younger debit users grow older, many may follow their elders and adopt credit cards. As younger consumers become more financially secure and more financially 2
informed, many may be lured by credit cards’ reward programs and the interest-free loans available to those not carrying balances.
Market Analysis of Payment Methods: General Trends in the Last Two Decades The payment methods that consumers use have changed much during the last half century. The pace of innovation has been relentless with new payment methods reaching near ubiquity nearly every decade. While quantifying the number of transactions paid with cash is difficult, by the 1970s checks were replacing cash as a payment method for retail transactions. By the 1980s, credit cards were commonplace. By the 1990s, ATM cards and debit cards were widely used (Humphrey 2004).1 And by the 2000s, new payment methods such as e-billing were becoming widespread. Current and future payment methods, including stored balances in smart cards and cell phones, may also become widespread in the United States and in other countries. Figure 1 presents a snapshot of the evolution of the use of credit cards, debit cards, and e-billing during the last two decades. The three payment methods are at different stages in their adoption cycles. Credit cards have long been a mature product. Fast growth during the 1970s and 1980s brought the fraction of households with credit cards to over half by 1989. Thus, during the 1990s, further growth slowed down substantially, with credit card use reaching a
Figure 1: Percentage of Households Using Credit Cards, Debit Cards, and e-Billing, 1989–2007 80
Percentage of households
Debit cards e-billing
Source: Federal Reserve’s Survey of Consumer Finances via Bell, Hogarth, and Robbins (2009).
plateau at over two-thirds of households. During the 2000s, the fraction of households using credit cards began to decline, albeit very slowly. Mass adoption of debit cards lagged that for credit cards by many years, with the fraction of households using debit cards remaining as low as 20% as late as 1995. Since then, the fraction of households using debit cards has grown quickly, even surpassing that for credit cards.2 While the fraction of households using debit cards cannot, by definition, exceed 100%, there is no evidence that a peak in debit card use is imminent. The fraction of households using e-billing, like many other recent technologies outside the payment arena, has grown much faster than the fractions of households employing earlier technological innovations, growing from near obscurity to near ubiquity in just a few years. While the pace of change in payment methods has, in some ways, been frenetic, in other ways, adoption of sophisticated payment methods has much further to go. Surveys show that traditional payment methods continue to play at least a key role for many, if not most, consumers. Cash and checks also play a dominant role for a surprisingly large fraction of consumers. Figure 2 presents the annual evolution of the number of checks written and the number of debit card and credit card transactions, each per U.S. resident during 1990–2009. The figure shows that after having switched from cash to checks throughout the twentieth century, in the last two decades
Figure 2: Number of Checks Written and Number of Debit Card and Credit Card Transactions, per Year per U.S. Resident, 1990–2009 200 Number of transactions per year per U.S. resident
175 Checks 150 125 100 Credit cards
25 0 1990
Note: The numbers of checks in 2007–2009 are projections based on the trend in 1995–2006.
Source: Hayashi, Sullivan, and Weiner (2006), Payments Source (2009), Quinn and Roberds (2008).
U.S. consumers, along with businesses and governments, are massively reducing the number of checks they write.3 However, at about 100Â checks written per person per year, the number still remains quite high. Many routine transactions that once used checks now use ACH transfers between accounts in depository institutions (e.g., payrolls, mortgage payments, and utilities). Many discretionary transactions have been shifting, first to credit cards and somewhat later to debit cards. In particular, the number of credit card transactions per U.S. resident has grown from fewer than 20 in 1990 to more than 80 by the mid-2000s, or from once every three weeks to once every four days. The number of debit card transactions per U.S. resident has grown even faster, from 1 in 1990 to 118 in 2009, or from once every year to once every three days. While transactions using both types of cards have massively expanded over the last two decades, the evolution of the two types of A small minority of consumers (5.8% in a recent survey) report cards in recent years stands in preferring debit cards as a psychological control mechanism sharp contrast. Growth in the that makes impulse spending and incurring debt less likely. number of credit card transactions has peaked, likely implying that the credit card market may be reaching maturity, if not saturation.4 In contrast, not only has the number of debit card transactions surpassed that for credit cards, but also the growth rate of debit card transactions is still remarkably fast at about 10% per year.5 A growing academic literature is beginning to analyze why consumers choose various payment methods (see, for instance, King and King 2005; Borzekowski, Kiser, and Ahmed 2006; Lee, AbdulRahman, and Kim 2007; Zinman 2009). The various payment methods available combine characteristics that make them more or less attractive or accessible to consumers in various circumstances. Some of the reasons why consumers choose debit cards or credit cards are still poorly understood or are only beginning to be understood. Some scholars have wondered why rational consumers who have access to credit cards would use debit cards at all (King and King 2005, 22). After all, for users not carrying balances, credit cards provide interest-free loans and various other rewards. While some consumers choose debit cards because they cannot obtain credit cards, others shun credit cards following bad experiences with debt. However, few consumers (5.8% in a recent survey) report preferring debit cards as a psychological control mechanism that makes impulse spending and incurring debt less likely. Other consumers combine credit cards and debit cards somewhat strategically. For instance, consumers carrying credit card balances often switch subsequent spending to debit cards (King and King 2005, 32; Borzekowski, 5
Kiser, and Ahmed 2006, 2; Lee, Abdul-Rahman, and Kim 2007, 73–74; Zinman 2009).
CFM Survey Analysis: Debit or Credit: Either, Both, Neither, or How Much? The section on market analysis of payment methods presented some details on the historical evolution of nationwide average data. While informative, such data do not show the extent to which many vary from the average. Some households might use each of checks, debit cards, credit cards, and other payment methods more than the average, and others might Seventy percent of households report using credit cards, and use each less, if at all. While 71% report using debit cards. credit card use has been studied more thoroughly, until recently only a few studies explored in much detail the use of debit cards across individual consumers. Moreover, until recently, most consumer surveys barely focused on debit cards, including at most one question on the topic, such as, Does your family use a debit card?6 With such data limitations, the early literature on the use of debit cards concentrated on whether the average demographic and financial characteristics of debit card users differed substantially from those not using debit cards. This approach had at least three shortcomings: • It blended together as non-debit users (1) consumers with little involvement with financial institutions who did not have checking accounts and (2) consumers with deep involvement with financial institutions who, for instance, used credit cards but did not use debit cards. • It blended together (1) those who used only debit cards and (2) those who used both debit cards and credit cards. • It blended together as debit users (1) those who owned debit cards but rarely used them and (2) those who used their cards extensively. Differentiating across subgroups of debit card users is becoming more and more relevant because as debit card use becomes more widespread, describing debit card users increasingly means describing the average consumer. To overcome these shortcomings, we use the detailed questions on payment methods that the CFM survey asked more than 8,000 individual respondents during 2007–2009.7 The CFM survey yielded responses on the total fraction of households using various payment methods that were similar to those reported in other surveys. As the market analysis of payment method section shows, the Federal Reserve’s 2007 Survey of Consumer Finances reports that 70% of 6
households used credit cards and 71% used debit cards. However, the CFM survey also asks respondents which of 15 payment methods (cash, checks, debit cards, credit cards, e-billing, etc.) they use in 16 purchase categories (utilities, housing, groceries, etc.). While respondents could report using multiple payment methods for each purchase category, most respondents reported using a small number of them (see Figure 3). We used the answers from respondents to classify them as intensive or casual users of various payment methods. We defined as intensive users those who reported using a payment method for at least one purchase category. We defined as casual users those who reported using a payment method but did not specify having used it for any purchase category. Reporting data on all users (i.e., including casual ones) of the more popular payment methods increasingly involves reporting values that are becoming closer and closer to those of the
Figure 3: Percentage of Respondents Using Various Payment Methods across Purchase Categories (computed across 2007–2009) Traditional payment methods (1) 1. Utilities
Other payment methods (4)
Using only one method (5)
Debit cards (2)
Credit cards (3)
Using more than one method (6) 5.4
6. Alcohol and tobacco
8. Personal care*
9. Car payments
11. Car maintenance
12. Medical care
13. OTC medications
17. Unweighted average
18. All categories
19. Average number of categories for which users used each payment method
* Personal care includes, for instance, haircuts. Source: CFM (2010).
overall population. In this brief, we largely focus on intensive users to abstract from casual users and concentrate on the characteristics of those who use a payment method regularly. Figure 3 presents in detail the percentage of respondents using various payment methods (shown in columns 1–4) across various purchase categories (shown in rows 1–16). We grouped the 15 payment methods into four broad groups: (1) traditional payment methods, including cash, checks, and money orders, (2) debit cards, (3) credit cards, including VISA, MasterCard, American Express, store credit cards, and gas credit cards, and (4) other payment methods, including, among others, automated withdrawals from deposit accounts and e-billing. For each payment method, we present the percentage of buyers who reported using only that payment method for a purchase category (in subcolumns labeled “only”). We also present the percentage of buyers who reported using that payment method among others (in subcolumns labeled “mix”). For instance, 69.0% of respondents paying utility bills reported using only traditional payment methods. A further 4.8% used traditional as well as other payment methods. Column 5 presents the percentage of buyers who used only one of the various payment methods (i.e., the sum across the various “only” columns) for that purchase category. For instance, 94.6% of respondents paying utility bills used only one type of payment method (alternatively, as shown in column 6, 5.4% used more than one payment method). Respondents appear to have very strong preferences for which payment method to use for each purchase category.8 The average percentage of users using only one payment method per purchase category is very high (91.5%, see row 17), and the category with the highest percentage of respondents using more than one payment method (apparel) also has a rather low value (15.2%). While respondents did not report mixing payment methods within each purchase category, many used different payment methods across purchase categories. A small, but somewhat sizable, fraction of respondents reported using only traditional methods across all purchase categories (14.5%, see row 18). The fractions of respondents reporting using only debit cards (0.1%), only credit cards (0.1%), or only other payment methods (0.2%) across all purchase categories were very low. Thus, the overwhelming majority of respondents (85.2%) reported mixing payment methods across purchase categories. Respondents also vary widely in their use of payment methods. Almost all respondents reported using traditional methods for at least some purchase categories (98.0% = 14.5% who used only traditional methods + 83.5% “mixers”). The fraction of respondents using 8
traditional methods was consistently high across purchase categories, averaging 67.4% (= 59.6% + 7.8%) and ranging from a low of 49.6% for gasoline (= 40.6% + 9.0%) to a high of 82.3% for taxes (= 78.7% + 3.6%). Respondents who used traditional methods used them across a large number of purchase categories (9.4 on average, see row 19). About a third of respondents reported using debit cards for at least some purchase categories (33.2% = 0.1% + 33.1%). Across categories, the percentage of debit users averaged 12.1% (= 8.5% + 3.6%), ranging from a low of 2.0% for tax payments (= 1.3% + 0.7%) to a high of 22.2% for groceries (= 16.2% + 6.0%). Respondents who used debit cards used them for a far smaller number of categories (5.2 on average) than those using traditional methods. Over half of respondents reported using credit cards for at least some purchase categories (54.8% = 0.1% + 54.7%). Across categories, the percentage of credit card users averaged 18.0% (= 13.7% + 4.3%), ranging from a low of 0.6% for housing payments (= 0.3% + 0.3%) to a high of 38.3% for apparel (= 27.6% + 10.7%). While many more respondents reported using credit cards than debit cards, credit cards were used for a slightly smaller number of purchase categories (4.6 on average). These results imply that while the total fractions of households that reported using credit cards and debit cards are similar (70% and 71%, respectively), many appear to be casual users. The much larger fractions of intensive users for credit cards (54.8%) than for debit cards (33.2%) are consistent with the finding that credit cards have become a mature product. In contrast, the untapped market remaining for debit cards appears much larger than that for credit The 17.1% using only debit cards reported lower income than cards. that for all respondents. The 38.9% using only credit cards Almost two-thirds of responreported income substantially above that for all respondents. dents reported using other The 15.9% using both types of cards reported the highest payment methods (e.g., autoincome of all four groups. mated withdrawals from deposit accounts or e-billing) for at least some purchase categories (58.6% = 0.2% + 58.4%). Across categories, the percentage using other payment methods averaged 11.5% (=Â 9.7% + 1.8%), ranging from a low of 1.4% for alcohol and tobacco (= 1.1% + 0.3%) to a high of 30.9% for housing (= 28.8% + 2.1%). While many respondents sometimes used other payment methods, they did not report using them often (2.6 on average).9 While few respondents used a single payment method across all purchase categories, many respondents tended to prefer one payment method (e.g., debit cards) while others tended to prefer another 9
(e.g., credit cards). To elucidate meaningful differences across various sets of users of payment methods, we classified respondents into four groups: (1) those who used neither debit cards nor credit cards intensively, (2) those who used debit cards intensively but did not use credit cards intensively, (3) those who used credit cards intensively but did not use debit cards intensively, and (4) those who used both debit cards and credit cards intensively. For simplicity, we henceforth refer to the four groups as “using neither card,” “using only debit cards,” “using only credit cards,” and “using both types of cards.” Figure 4 shows that each of four groups contains a large fraction of U.S. households, but none a majority, and that the four groups display quite different income, debt, and net worth patterns. The 28.2% of respondents who used neither card (and thus likely relied on traditional methods) reported far lower average incomes ($42,603, see panel A) than all respondents ($71,074).10 The 17.1% using only debit cards reported income ($62,267) somewhat lower than that for all respondents. The 38.9% using only credit cards reported income ($85,776) substantially above that for all respondents. The 15.9% using both types of cards reported the highest income of all four groups ($92,827). While those using both types of cards reported higher incomes, they are not necessarily more financially secure. Respondents with more
Figure 4: Income, Debt, and Net Worth across Payment Methods: Debit, Credit, Neither, or Both (computed across intensive users for 2007–2009) Neither card (1) % of all respondents
Debit cards only (2)
Credit cards only (3)
Both types of cards (4)
All respondents (5)
A. Annual household income ($) Average
B. Household debt ($)
C. Household net worth ($)
D. Household debt per income (%) Average
E. Household net worth per income (%) Average
Source: CFM (2010).
income also reported more debt. Thus, respondents using neither card reported far lower average debt volumes ($30,440) than those using only debit cards ($75,341), those using only credit cards ($81,943), and those using both types of cards ($117,855).11 Since respondents with more income can often manage more debt, we explored several additional measures of financial security including household net worth (panel C), household debt per income (panelÂ D), and household net worth per income (panel E). Upon considering these additional measures, the picture becomes somewhat more complex. Respondents using only credit cards appear to be the most financially secure across a variety of measures. They have higher household net worth and a higher net worth to income ratio ($623,638 and 727%) than those with neither card ($226,525 and 532%), those with only debit cards ($279,011 and 448%), and those with both types of cards ($506,909 and 546%). They also have a lower debtto-income ratio (96%) than those with both types of cards (127%). These results are broadly consistent with earlier studies that find that consumers who carry balances on their credit cards often switch further spending to debit cards (Lee, Abdul-Rahman, and Kim 2007). Further, while users of only debit cards have a lower debt to income ratio (121%) than those using both types of cards (127%), they have a higher ratio than users of only credit cards (96%). (FigureÂ 5 highlights selected data on net worth and the net worth to income ratio across consumer groups in a graphical form.)
Figure 5: Net Worth ($ thousands) and Net Worth to Income Ratio (%) across Payment Methods: Debit, Credit, Neither, or Both (computed across intensive users for 2007â€“2009) $700 $600 $500
727% $624 532% 448%
0% Neither card
Debit card only
Net worth ($ thousands) Source: CFM (2010).
Credit card only
Net worth to income ratio (%)
CFM Survey Analysis: Payment Methods across Socioeconomic Groups In this section, we explore the use of payment methods across various socioeconomic groups. Figure 6 presents the percentage of respondents using neither card (column 1), using only debit cards (column 2), using only credit cards (column 3), and using both types of cards (column 4) across groups classified by income (panel A), formal education (panel B), age (panel C), and race and ethnicity (panel D).12 Column 5 presents the percentage of respondents in each group. For instance, 53% of respondents reported incomes under $50,000 (i.e., about the national median income in other
Figure 6: Percentage of Users of Payment Methods across Socioeconomic Groups (computed across intensive users for 2007–2009) Neither card (1)
Debit cards only (2)
Credit cards only (3)
Both types of cards (4)
% of all respondents (5)
A. Annual household income ($) $0–$24K
Less than high school
Some graduate studies
B. Formal education
C. Age 18–29
D. Race and ethnicity White, non-Hispanic
* The “other” category contains too few observations to further disaggregate it meaningfully into racial and ethnic groups with fewer observations. Source: CFM (2010).
surveys), and 39% reported formal education levels of college or above. Some demographic groups were more or less likely to participate in the CFM survey. For instance, only 5% of respondents reported being ages 18–29, while 26% reported ages 50–59. Panel A shows that card use varies greatly with income. Among lower-income respondents (those with incomes under $25,000), almost half use neither card (45%). The fraction of respondents using neither card is substantially smaller among higher-income groups, reaching 26% for middle- to low-income respondents (those with incomes between $25,000 and $50,000), and about 10% for higher-income groups. While the fraction of respondents using cards is concomitantly larger among higher-income groups, the pattern of increased use varies substantially across types of cards. The fraction of respondents using only credit cards rises substantially from 30% among low-income groups to about half among higher-income groups. The fraction of those using both types of cards similarly rises from 9% to about one-quarter. In contrast, using only debit cards seems to be “average” in two ways. First, the fraction of respondents using only debit cards varies far less across income groups than those for the other three groups of consumers. Second, using only debit cards is most common among middle-income respondents (about one-fifth for those with incomes between $25,000 and $100,000) and lower among both lower-income respondents (16%) and higherincome respondents (under 15%). Highlighting the broad link between formal education and income, the results for formal education (panel B) largely mimic those for income (panel A), with larger fractions of respondents not using cards among groups with lower levels of formal education. However, the gap across educational levels (from 65% for those with less than high school to 13% for While 29% of 18–29-year-olds use only debit cards, only 7% those with graduate studies) of respondents in their 70s do so. appears substantially larger than that across income levels (from 45% to 10%). The fraction of respondents using only credit cards rises substantially across educational levels from 16% to over half. The fraction of those using both types of cards similarly rises from 5% to about one-fifth. The fraction of respondents using only debit cards also varies far less across educational groups than those for the other payment methods. Similarly, using only debit cards is most common among the median educational group (respondents with some college education, but less than four years). (Figure 7 highlights selected data on payment methods across educational groups in a graphical form.)
Figure 7: Percentage of Users of Selected Payment Methods across Educational Groups (computed across intensive users for 2007–2009)
Percentage of users
42 36 30
13 0 Less than high school
Some graduate studies
Credit card only
Neither card Source: CFM (2010).
Panel C in Figure 6 explores card use across age groups. Our findings likely provide a small glimpse into future trends in payment methods. The fraction of respondents using neither card is substantially smaller among younger ones (26% among those 18–29 years old) than among older ones (38% among those in their 70s), likely highlighting increased comfort with more technology-intensive payment methods among younger generations. While the fraction of respondents using neither card is still quite large among the young, the fraction out of the overall population can be expected to continue to fall simply as today’s younger generations age.13
Percentage of users
However, predicting trends in use across types of cards based on current card use across age groups is more complex. Younger respondents use debit cards far more than older ones. While 29% of 18–29-year-olds use only debit cards, only 7% of respondents in their 70s do so. Older respondents use credit cards more than younger ones. While 29% of 18–29-year-olds use only credit cards, 49% of respondents in their 70s do so. If today’s younger consumFigure 8: Percentage of Users of Selected Payment Methods ers largely maintain their use patacross Age Groups (computed across intensive users for terns as they age, the fraction of 2007–2009) consumers using only debit cards will grow substantially at the expense of both consumers using 60 neither card and those using only 49 credit cards. (Figure 8 highlights 43 selected data on payment meth40 37 34 ods across age groups in a graphi31 29 29 25 cal form.) 20
Age Debit card only
Credit card only
Source: CFM (2010).
However, consumers’ choices about which type of card to use may also change as they age. As consumers grow older and become more financially secure and informed, some may switch from debit cards to credit cards to benefit from reward programs
and interest-free loans that credit cards provide to those not carrying balances. For instance, Meyer and Dopico (2009) highlighted how while older respondents use credit cards more often, they also use them more â€œresponsibly,â€? with, for instance, far higher fractions not carrying balances and not becoming delinquent. Panel D in FigureÂ 6 explores card use across races and ethnicities. The most remarkable differences are those between non-Hispanic whites and African Americans using neither card (26% and 47%, respectively) and using only credit cards (41% and 23%). A large part of these differences can be explained by differences in average income and educational attainment across the two groups. Thus, the gaps are substantially narrower between college-educated nonHispanic whites and college-educated African Americans: respectively 15% and 27% for those using neither card and respectively 49% and 36% for those using only credit cards. In contrast, the differences in card use among non-Hispanic whites, Hispanics, and those of other races are far smaller (for instance, the fraction of nonusers in the three groups are 26%, 29%, and 29%, respectively). As with other cases throughout this brief, the fraction of respondents using only debit cards exhibits the least variation across races and ethnicities. The range of fractions of users of only debit cards is rather narrow, ranging from 16% for respondents of other races to 17% for non-Hispanic whites, 18% for African Americans, and 20% for Hispanics.
Is Part of the Recent Spurt in Debit Card Use Temporary? Payment methods can experience fast growth for many years, only to slow down, peak, and embark in long and slow, but inexorable, declines. Cash and checks are far along in their declines, and credit cards are unlikely to experience fast growth ever again. Growth in the number of debit card transactions per year has already slowed down from a very fast average annual rate of 40% during the 1990s to a still fast but far more sedate rate of about 10% per year in the late 2000s. This slowdown is only normal, reflecting a shift from infancy to youth and eventually to full maturity. However, in the short term, there is no evidence that debit card use is about to peak. Far from it; since the fraction of households that are intensive users of debit cards is still low, debit card use may continue to climb for years. However, part of the growth in debit card use during the ongoing economic crisis could be temporary. While debit card use has grown across a broad variety of socioeconomic groups, much of this growth has been most pronounced among groups particularly affected by macroeconomic upheavals: the young and those with lower incomes. 15
Figure 9: Percentage of Respondents Using Only Debit Cards across Selected Age Groups in 2007–2009 35 31.0
Percentage of respondents
25 20.9 19.2
5 2007 Respondents in their 30s
Respondents in their 60s
Source: CFM (2010).
Figure 10: Percentage of Respondents Using Only Debit Cards across Selected Income Groups in 2007–2009 30 26.7
Percentage of respondents
25 22.2 20
15.2 15 15.2 10
5 2007 Respondents with incomes $25K–$49K
2008 Respondents with incomes $100K+
Source: CFM (2010).
Figures 9 and 10 present the evolution of the fraction of respondents using only debit cards in 2007–2009 for all households and across selected age and income groups. The fraction of households using only debit cards has grown markedly over a short period of time, from 15% in 2007 to 19% in 2009. However, Figure 9 shows that the fraction increased far more among younger respondents (e.g., among those in their 30s, the fraction jumped from 21% to 31%) than among older ones (jumping from 13% to 16% among those in their 60s). Figure 10 shows that the fraction of households that use only debit cards similarly increased far more among low- to middle-income respondents (jumping from 20% to 27% among those with incomes between $25,000 and $50,000) than among those with higher incomes (barely increasing from 12% to 14% among those with incomes of $100,000 or higher). The ongoing economic crisis and resulting regulatory reforms (e.g., the CARD Act of 2009, see Meyer and Dopico ) have prompted credit card users and issuers to, respectively, restrain their use and promotion of that product. Thus, part of the recent increase in debit card use could be temporary. While growth rates of the number of credit card transactions and of related dollar volumes are unlikely to ever come close to matching those for less mature payment methods, when the economy recovers, many consumers (in particular as their incomes grow as they age) may switch to credit cards, lured by rewards programs and interest-free loans for those not carrying balances.
Strategic Implications for Credit Unions In the decades ahead, electronic payment methods will almost undoubtedly account for ever-larger fractions of consumer, business, and government transactions. However, traditional payment methods continue to account for a substantial fraction of transactions and appear unlikely to wither away completely in the foreseeable future. Also, while sophisticated payment methods as a group will grow, it is difficult to forecast how each payment method will fare. Many questions remain unanswered. Is the recent weakness in credit cards the beginning of an inexorable decline, similar to the ongoing declines for cash and checks? Or, is the recent weakness in credit cards linked to the ongoing economic crisis and, thus, perhaps temporary? Will debit cards and credit cards coexist somewhat indefinitely, with debit cards as a stepping-stone product for the young and credit cards for those secure enough Credit unions that already offer credit and debit need to connot to carry balances? Will both stantly explore new payment methods in order to keep up with credit cards and debit cards member demands. be replaced by other payment methods, just as they are now replacing cash and checks? Or, will credit cards and debit cards retain a key role, just as cash and checks continue to do so? Credit union members, like other consumers, value having a variety of payment methods at their disposal. Cash and checks are unlikely to wither away completely anytime soon, and thus credit union members continue to value convenient ATM access from their own branches and from allied ATM networks. Credit cards and debit cards provide valued convenience and are likely to remain key payment methods far into the foreseeable future. Credit union members value their credit unions but, correctly, feel that credit unions need to earn their loyalty through sustained member value and customer service. Otherwise, credit union members are more than willing to use various financial institutions for different purposesâ€”for instance, using a credit card from a non credit union if it offers better terms, such as lower interest rates, a higher line of credit, a more attractive rewards program, or more effective dispute resolution. Smaller credit unions that do not offer their members more sophisticated payment methods (such as debit cards and credit cards) or that do not promote checking accounts need to seriously consider offering these services if they want to remain relevant to their members. If providing these services requires up-front costs that seem too large, these credit unions need to explore options through existing CUSOs or through developing new CUSOs in partnership with other credit unions and credit union organizations. 17
Larger credit unions that already offer credit cards and debit cards need to explore and develop payment methods that are becoming or may become second nature to future generations of their members. These future payment methods include e-billing, partnering with payment methods such as PayPal, stored-value smart cards, contactless cards, mobile payments, and other emerging technologies. Some of these innovations may not catch on. Yet others may become commonplace in the future. The uncertainties involved in what payment methods will outshine others in the future likely mean that many individual credit unions will benefit from sharing the risks in such investments through CUSOs. The uncertainties also mean, of course, that individual credit unions will eventually need to stand ready to provide additional funding to expand the provision of the payment methods that consumers come to favor. In the meantime, all credit unions can use the findings provided in this brief to help tailor their marketing. While every consumer is an individual, credit unions may benefit from being aware of several general patterns. Independently of their marketing, credit unions are likely to find that further growth in the number of credit card transactions will be slow To be effective, depository institutions cannot limit further and that further growth in the promotional efforts at issuing more cards. number of debit card transactions, while faster, will likely continue to slow down over coming years. Despite their differences, many consumers increasingly view and use credit cards and debit cards as near substitutes. For instance, many consumers use credit cards when they do not carry balances, benefiting from various reward programs and interest-free loans. When they carry a balance on one credit card, many consumers stop charging on that credit card and use their debit card (or other credit cards) as a payment method. Moreover, while debit cards have grown much faster than credit cards during the ongoing economic crisis, consumers who are financially secure and informed are likely to remain key users of credit cards. As the U.S. economy recovers, and as today’s younger consumers age, some of the recent growth in debit cards may prove to be temporary. Past efforts to promote cards have already turned the overwhelming majority of households into intensive users of credit cards and casual users of debit cards. To be effective, depository institutions cannot limit further promotional efforts at issuing more cards. To be effective, depository institutions must turn today’s casual users into tomorrow’s intensive ones. Such efforts could include (1) individual card issuers promoting the use of cards in purchase categories where their use remains rare and (2) card operators (VISA, MasterCard, 18
CUSOs, etc.) convincing more businesses (e.g., many small retailers and most non-retailers) to accept debit cards and credit cards. Earlier, FigureÂ 3 identified the purchase categories in which consumers use debit cards most often (groceries, dining, alcohol, apparel, gas, car services, OTC medicines, and entertainment), those in which consumers rarely use debit cards (utilities, housing, car payments, taxes, and insurance), and a few categories in between (furnishings, personal care, and medical care). However, promoting the use of debit cards in purchase categories where its use is currently rare will likely encounter some challenges. While the financial liability for theft or loss of debit cards may now be small, some consumers may be concerned about the time and effort involved in canceling cards whose information has been stolen and reversing the resulting erroneous expenses. Thus, many advise consumers to avoid using debit cards in situations where the card is not kept in sight throughout the transaction. A recent credit union article cautioned against using debit cards in the following situations: â€œonline, for big-ticket items, when a deposit is required, at restaurants, if you are a new customer, when you buy now and take delivery later, for recurring payments, for future travel, at gas stations and hotels, and when the ATM looks off â€? (CUNA 2010). If these concerns become prevalent, the use of debit cards would be far less likely to grow for the several purchase categories for which its use is now rare. In categories like utilities, housing, car payments, taxes, and insurance, consumers seem to be leapfrogging from traditional payments straight to electronic payments. Thus, efforts to promote debit cards may hold the most promise in the purchase categories where its use is not the most common yet, but where businesses have already installed debit card readers (e.g., furnishings, personal care, and medical care).
1. The fraction of U.S. households using ATM cards grew from 35% in 1995 to 57% in 2001 (Bell, Hogarth, and Robbins 2009). 2. Different surveys yield generally comparable results but inevitably different answers. For instance, the Federal Reserve’s 2007 Survey of Consumer Finances (SCF) reports use of credit cards and debit cards, respectively, at 70% and 71% of households (Bell, Hogarth, and Robbins 2009). In contrast, the Federal Reserve Bank of Boston’s 2008 Survey of Consumer Payment Choice reports use of credit cards and debit cards, respectively, at 78% and 80% of consumers (Foster et al. 2010). Different definitions and methodologies prevent straightforward combining of results across different surveys and different years. In Figure 1, we focus on the SCF results since they provide long-term series computed using relatively stable methodologies. 3. Data on the number of transactions paid with cash over time are essentially nonexistent, but various scholars report growing indirect evidence of reduced use of cash (Humphrey 2004; Gerdes and Walton 2005, 181). 4. Borzekowski, Kiser, and Ahmed (2006, 2) reported that ATM withdrawals have also been slowing down in recent years. 5. The dollar volume of credit card transactions ($1.76 trillion [T]) was still larger than that for debit card transactions ($1.63T) in 2009. However, the dollar volume of credit card transactions shrunk by 9% while that for debit cards grew by 8% (HSN Consultants 2010). 6. Borzekowski, Kiser, and Ahmed (2006) studied the use of debit cards, employing one of the first detailed surveys that asked multiple questions on debit cards. 7. While the CFM was launched in 2005, it added a detailed set of questions on payment methods in 2007. 8. While many consumers likely engage in at most only one transaction per month for some purchase categories (housing, taxes, insurance, etc.), other categories likely involve several purchases per month (utilities, groceries, dining, etc.). 9. We found the highest fractions of casual users among the more recent, sophisticated payment methods. While 26.2% of respondents are intensive users of automated withdrawals (i.e., they identified what purchase category they had used the payment method for), another 32.7% are casual users (i.e., they did not identify a purchase category for the payment method). For e-bill payments, 22.9% are intensive users and 24.3% are casual 21
users. In contrast, for cash 85.0% are intensive users and 12.1% are casual users. For checks, 82.5% are intensive users and 6.8% are casual users. 10. We report both averages and medians since outlier observations in survey data can often cause averages and medians to lead to somewhat different implications. In this case, the patterns of results are broadly similar for averages and medians. 11. Respondents to the CFM survey tend to be older than the overall population and thus tend to shift some medians disproportionately (e.g., many older respondents have little debt outstanding and tend to use traditional payment methods more, thus resulting in a median debt of zero among those using neither debit nor credit cards). In the survey analysis section (beginning on page 12), we address this issue further by presenting data separately across age groups. 12. The academic literature commonly studies choices of payment methods across various socioeconomic and financial groups classified, for instance, by income, age, formal education, race and ethnicity, gender, marital status, views about debt, credit history, etc. Many of the findings we report here are broadly similar to those reported elsewhere. Many of the results have also been consistent over time. See, for instance, Borzekowski, Kiser, and Ahmed (2006), Kennickell and Kwast (1997), King and King (2005), Lee, Abdul-Rahman, and Kim (2007), and Zinman (2009). 13. King and King (2005, 33) identify age as the most important determinant of whether households use more technologically complex payment methods. However, Lee, Abdul-Rahman, and Kim (2007) report that as debit card usage is growing across all generations, the impact of age is likely becoming less important.
Bell, Catherine J., Jeanne M. Hogarth, and Eric Robbins. 2009. “U.S. Households’ Access to and Use of Electronic Banking, 1989–2007.” Federal Reserve Bulletin 95(July): A99–A121. www.federalreserve.gov/pubs/bulletin/2009/pdf/ OnlineBanking09.pdf. Borzekowski, Ron, Elizabeth K. Kiser, and Shaista Ahmed. 2006. “Consumers’ Use of Debit Cards: Patterns, Preferences and Price Response.” Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC. www.federalreserve.gov/pubs/ feds/2006/200616/200616pap.pdf. Consumer Finance Monthly (CFM). 2010. Filene Research Institute and the Ohio State University’s 2009 Consumer Finance Monthly. CUNA News Now. 2010. “CreditCards.com Lists 10 Places Not to Use a Debit Card.” March 18. www.cuna.org/newsnow/10/ system031710-7.html. Foster, Kevin, Erik Meijer, Scott Schuch, and Michael A. Zabek. 2010. “The 2008 Survey of Consumer Payment Choice.” Federal Reserve Bank of Boston, Public Policy Discussion Papers No. 09–10. www.bos.frb.org/economic/ppdp/2009/ppdp0910.pdf. Gerdes, Geoffrey R., and Jack K. Walton. 2005. “Trends in the Use of Payment Instruments in the United States.” Federal Reserve Bulletin (Spring): 180–201. www.federalreserve.gov/pubs/bulletin/2005/ spring05_payment.pdf. Hayashi, Fumiko, Richard Sullivan, and Stuart E. Weiner. 2006. “A Guide to the ATM and Debit Card Industry: 2006 Update.” Federal Reserve Bank of Kansas City. www.kc.frb.org/publicat/psr/ BksJournArticles/ATMDebitupdate.pdf. HSN Consultants. 2010. The Nilson Report (943). Humphrey, David B. 2004. “Replacement of Cash by Cards in U.S. Consumer Payments.” Journal of Economics and Business 56(3): 211–225. Kennickell, Arthur B., and Myron L. Kwast. 1997. “Who Uses Electronic Banking? Results from the 1995 Survey of Consumer Finances.” Federal Reserve System, Finance and Economics Discussion Paper Series: 1997/35. www.federalreserve.gov/pubs/ feds/1997/199735/199735pap.pdf.
King, Amanda Swift, and John T. King. 2005. “The Decision between Debit and Credit: Finance Charge, Float, and Fear.” Financial Services Review 14: 21–36. Lee, Jinkook, Fahzy Abdul-Rahman, and Hyungsoo Kim. 2007. “Debit Card Usage: An Examination of Its Impact on Household Debt.” Financial Services Review 16: 73–87. Meyer, Mark C., and Luis G. Dopico. 2009. Credit Card Availability, Interest Rates, and Usage in 2005–2009. Madison, WI: Filene Research Institute. Payments Source. 2009. “2010 EFT Data Book.” ATM & DebIt News 10(42): 1–25. Quinn, Stephen, and William Roberds. 2008. “The Evolution of the Check as a Means of Payment: A Historical Survey.” Federal Reserve of Atlanta Economic Review 93(4): 1–28. www.frbatlanta.org/ filelegacydocs/er08no4_QuinnRoberds.pdf. Zinman, Jonathan. 2009. “Debit or Credit?” Journal of Banking and Finance 33(2): 358–366.
Debit or Credit: Either, Both, Neither, or How Much? Ben Rogers
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Filene Research Institute
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Luis G. Dopico
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