Debit or Credit? Shifting Payment Methods Represent Opportunity for Banks
New data is pointing to a changing attitude toward credit these days, especially among the Generation Y. Also known as “Millennials” with birth dates between the early 1980s and the early 2000s, this group has a different attitude toward payment methods — and successful financial institutions are taking notice of the shift.
Namely, the Generation Y population is far less likely to take on debt, especially revolving debt such as credit cards and lines of credit. Whenever possible, they would much rather pay outright for what they need. They carry credit cards strictly for convenience, not as a way to extend their buying power — a big shift from recent history, when Americans saw nothing wrong with accumulating serious levels of debt.
Debit versus credit
Credit availability has significantly eased up since the financial crash of several years ago, but consumers aren’t taking nearly as much advantage of the credit available to them, preferring instead to pay in-the-moment. Debit cards and secured cards as preferred payment methods are overtaking the use of traditional credit cards. In many cases, younger consumers are still living with parents and still may be sharing a credit card account with them. This trend, in turn, can make it difficult to risk-score for younger consumers as they tend to have limited credit use compared to their parents.
Rewards over rates
Since this new paradigm of credit card use diminishes the importance of the interest rate, consumers are selecting cards based on the rewards they offer. Discounts, coupons and rewards points are a critical way to promote bank cards and affinity cards (i.e., store cards such as Macy’s or Home Depot).
Consumer loyalty has given way to comparison-shopping — consumers are on the lookout for the card that offers the best perks. With consumers more willing to switch cards to get a better deal, banks need to be savvier about the rewards they offer, and the way they promote those rewards.
The trend away from credit offers an opening for banks to design new products that will appeal more to the Generation Y population, creating an opportunity for increased fee income as well as a “stickier” banking relationship that will lead to more transactions and lending opportunities as this generation matures. Small and medium banks, in particular, will have to be innovative in order to compete with larger banks and offer more robust rewards in order to attract the most profitable customers.
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