Debit or credit? Consumers spend like small firms

American consumers have started balancing credit card and debit card usage like mini money managers, according to a new annual analysis by MasterCard. And this implies an evolving role for banks as payments and credit solutions providers.

While consumer card usage preferences during the recession reflected their urgency to cut and control costs by avoiding credit and shifting to debit, MasterCard’s analysis highlights a shift. Prudence appears to have taken hold among consumers holding credit, debit, and prepaid cards, according to Nitin Sumangali, analyst with MasterCard Worldwide’s Global Insights group. Consumers exhibit “less fear and uncertainty,” according to Sumangali.

A key finding from Sumangali’s white paper, Road to Recovery: The Cautious Rise Of The U.S. Consumer:

“The shifts from credit cards to debit cards and back are evidence that American consumers are not replacing one payment tool for another, but responding to their individual situations with the best tools they have—borrowing when prudent, paying in full when appropriate, reducing levels of debt when able. In order to support consumers who are looking to move through an improving, but not always uniformly positive, economic landscape, financial services institutions must continue to position themselves as a partner—a trusted advisor who isn’t pushing a product, but is giving information and planning tools that allow people to understand where they are financially and how to best move forward.”

Choosing debt versus debit

According to public research cited by MasterCard in its paper, 2012 credit card usage grew by $172 billion year over year—an 8.4% rise. Meanwhile, usage of debit cards and prepaid cards rose by $129 billion, or 7% year over year. The credit card spending figure included a $7.7 billion increase that the company identifies as coming from debit and prepaid spending.

Sumangali rejected the idea that there was any “boomerang” effect in the payments traffic shifting.

“Consumer are really seeing their finances more like a small business these days,” the analyst explained. “People seem to have moved away from credit cards as a wish-fulfillment device.” Instead, he continued, they are balancing the use of ready cash accessed through debit devices with their credit card-based credit lines.

“People are saying that they want control over their finances,” said Sumangali. While the credit card serves as a means of arranging the timing of an expenditure, he added, it seems more businesslike than the “buy now and pay later” attitude of bygone days. In his paper, he likens the mental attitude to seeing all cards as cash flow management tools.

Sumangali thinks some lessons were learned in the recession, although he adds, “it’s still early days.”

Financial literacy aid builds bridges

Asked how banks could apply knowledge of the apparent shift in attitude, Sumangali said he sees the white paper’s findings as more evidence of the value of financial institutions extending a helping hand to consumers with various forms of financial literacy training.

“The only place that further consumer confidence can come from is through more financial knowledge,” he said.

From the card issuers’ perspective, Sumangali believes that increasingly the debit-credit decision is not an either-or matter.

“Debit cards and credit cards are not replacing one another,” the paper states, “but are complementary tools for consumers.

To a degree, the shifts indicated hinge on a change in consumers’ thinking about credit cards, coming out of this and earlier MasterCard research. The paper boils this philosophy down to this concept: helping consumers manage liquidity through payments.

The paper concludes with this thought:

“Consumers prize the ability to have access to their own liquid funds and, if need be, to borrow at the point of sale. In order to have the best opportunities to give consumers a 360-degree view of their finances in a single place, financial services institutions should aim to gather as much of their clients’ liquidity under one roof—an institution’s own. Having a full picture of a consumer’s financial situation—both deposits and credit card balances—allows financial institutions to better understand how their consumers shift spend in response to changing situations.”