Wednesday, November 10, 2010
As the U.S. economy enters what most consider the third year of the most severe economic downturn any of us have ever experienced, it's becoming evident that consumer spending habits have changed in ways that may not be reversed.
The consulting firm Booz & Co. was among the first to point out this trend in February 2010, describing how a "new frugality" is becoming "entrenched consumer behavior" that is apt to become the new norm, even after the economy recovers.
"This more cautious approach to spending began even before the recession came into full swing but has since picked up speed," noted Andrew Clyde, a Partner with Booz, in discussing the trend, which was revealed by a survey Booz conducted in late 2009.
Now a new report from the Federal Reserve Bank of Boston's Consumer Payments Research Center suggests growing numbers of consumers are cutting up their credit cards, and that smaller numbers are even abandoning debit cards.
According to preliminary results of the CPRC's 2009 Survey of Consumer Payment Choice (SCPC), 16.5 percent of credit cardholders discarded their cards last year (voluntarily or because issuers closed their accounts), compared to 14 percent in 2008. Among checking account/debit cardholders, the discard rate was about 5 percent. (The data excludes cardholders who discarded one credit or debit card then opened a new account someplace else.)
"Our preliminary estimates show increases in the 2009 discard rates for all types of cards – credit, debit and prepaid," said Scott Shuh, Director and Economist at the CPRC. "Apparently, not all payment instruments fit every consumer."
The Boston Fed's CPRC is considered a foremost source of data on payment card trends. The SCPC is an exhaustive project that began in 2003 that regularly polls consumers on their use of various payment methods. Much of the data collected last year is still being crunched, but a full report on its 2009 survey (which canvassed twice as many consumers as the 2008 survey did) is expected to be available on the Center's website soon, Shuh said.
The CPRC data is the latest in a string of metrics that show fewer consumers using credit cards. Javelin Strategy & Research, for example, predicts credit card usage will drop to below 50 percent this year. That's down from 87 percent in 2007 and 56 percent last year. (See "Cash still standing its ground," The Green Sheet, Sept. 27, 2010, issue 10:09:02).
The shift away from credit cards may also be a generational trend. Fiserv Inc., a company that provides transaction processing for small to mid-sized banks, reported this summer that a survey it commissioned revealed that consumers under the age of 30 use debit cards on average 14.1 times a month and credit cards an average of 5.3 times each month. This also may be due to the high rate of unemployment – 37 percent for Americans between the ages of 18 and 29 – revealed in a survey earlier this year by the Pew Research Center.
The implications of all this for holiday spending are not as dire as one might think, however. On behalf of Western Union Payments, Javelin Strategy & Research surveyed consumers about their upcoming holiday shopping plans and found 94 percent of U.S. consumers will spend the same or less this year on holiday gifts as they did in 2009.
According to Western Union's data, the way forward for the majority of Americans is not necessarily less, but certainly smarter, shopping. Here are some highlights:
For further highlights from this survey, please see ISOMetrics (page 77 in this issue's print version), The Green Sheet, Nov. 22, 2010, issue 10:11:02.
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