Switching From Credit to Debit: A Long-Term Trend Gets a Boost from the Recession

Research Examines Migration of Payment Volume
from Credit to

Boston, MA – December 3, 2009 — In the ongoing evolution of payment behavior, consumers vote with their wallets every day, and their long term, growing adoption of debit is well established. But what happens when the worst recession in decades suddenly hits, accompanied by major disruptions in the flow of consumer credit?

The short story is that there are some serious warning signals afoot for credit card issuers, and that at minimum credit card outstandings may be very slow to rebound during the economic recovery. At worst, many consumers may have “unfriended” credit permanently. However issuers are not powerless; Mercator Advisory Group identifies real strategic value in rewards programs.

The Switching From Credit To Debit: A Long-Term Trend Gets A Boost From The Recession report examines some of past studies and consumer trends related to the apparent migration of payment volume from credit to debit, and introduces a new analysis of Mercator Advisory Group’s Primary Data Series consumer survey data highlighting the magnitude and drivers of switching behavior among dual credit/debit cardholders.

Highlights of the report include the following:

Declining credit card payment volumes and consumer credit card outstandings show consumers on a new and lower trajectory of credit card use.

Studies earlier this decade highlighted the likelihood for consumers to switch to debit in the face of anticipated financial stress.

Mercator’s survey data from May/June 2009 affirms a widespread and voluntary shift toward debit use among consumers, especially those dual credit/debit cardholders with an immediate ability to switch.

Switching behavior among these dual cardholders appears to be demographically widespread.

Survey data from Mercator and other studies affirm value for both credit and debit rewards programs in influencing continued credit use and/or switching to debit.

One of the most neglected words in the coverage of consumers’ changing use of credit is ‘voluntary.’ That is because so much of recession’s history has been involuntary to the consumer: pared credit lines, cancelled credit accounts, denied applications, reduced household earnings, and job losses.” Ken Paterson, VP for Research Operations at Mercator Advisory Group and the author of the report comments. “But ascribing all of the downturn in credit card spending and outstandings to these involuntary factors would be short-sighted; what may have started as an involuntary action can turn to a voluntary consumer reaction in the form of a switch to debit. Our consumer survey respondents indicate that they’ve made changes away from credit and expect to maintain them.”

One of the 15 Exhibits included in this report

The report is 29 pages long and contains 15 exhibits

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Mercator Advisory Group is the leading, independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world’s largest payment issuers, acquirers, processors, and associations to leading technology providers.