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Banks drive switch from debit to credit cards?

by Peter Andrew

You've chosen your purchases, or you've finished your meal, or you've filled up with gas, and now it's time to pay. You open up your wallet, and scan the different plastic products you can choose to use. Which are you going to pick?

Credit card use trends up

The chances are notably higher now that you select a credit card rather than a debit card than they were a year or so ago. Credit card use is picking up again (see Fantastic plastic! Credit cards come storming back), though it's still not as popular as it was during the heady days before the Great Recession.

New research that covers credit card trends in May was published last week, and reinforces the message of other studies. The First Data SpendTrend® analysis shows that, compared with May 2010, the number of credit card transactions increased 6.5 percent that month, while the dollar value of those transactions jumped 8.8 percent.

Pump prices prevent people purchasing

These figures need to viewed in context. Growth in both debit and credit card spending slowed that month, according to Silvio Tavares, a senior vice president of First Data Information and Analytics Solutions, who went on to observe in a statement: "High gas prices and stubbornly high unemployment constrained growth in most merchant categories."

So high pump prices may be encouraging consumers to fill up less frequently, but to pay more each time they do. And they could be reducing the amount people have left over to pay for other purchases.

Credit card trends set?

Another report, also published last week by First Data, identifies how and when the popularity of credit cards returned:

Since the beginning of 2011, consumers have begun to spend using their credit cards again. First Data industry figures show that, in February 2011, credit card dollar volume year-over-year growth surpassed that of signature or PIN debit for the first time in over two years. This reverses a fundamental trend away from credit cards and towards signature and PIN debit…

Interestingly, the report goes on: "First Data Advisors believes that this return to credit is a permanent shift back towards greater credit usage…" There's a strange use of language here, because the study's authors make clear that they're not necessarily expecting a return to previous levels of credit card debt. So it's not credit use that they're describing in that quote; it's credit card use--without the debt.

Credit card companies and banks behind shift?

Yesterday, when the Digital Transactions website reported First Data's SpendTrend figures, it quoted a comment on the data from Goldman Sachs & Co., which described the shift from debit to credit cards as "issuer-driven":

We believe a pullback in issuer support for debit programs ahead of Durbin implementation shifted debit share to credit, as shown by still-improving credit/transaction volume growth despite declining U.S. revolving credit balances [credit card debt]. We believe the credit-mix shift also drove the up-tick in average ticket size, as credit tickets are often larger than debit.

In other words, Goldman Sachs reckons that banks and credit card companies are actively driving consumers away from debit cards in the hope of minimizing the impact of regulations that could see interchange fees dramatically cut. This topic was covered by this blog on June 6 in "Credit card companies likely winners in Senate battle this week."

So are banks and credit card companies manipulating their customers? Well, maybe. But the outcome for consumers of any such machinations are likely to be generally positive (see 7 ways in which credit cards beat debit cards). So any manipulation should prove generally benign.

Published 06/14/11 (Modified 04/20/12)

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