Payment Trends: A Real Debit Downer

American Banker reported:

"Credit card use has been on the rise for several years, and new data from the Federal Reserve Board shows that the trend is accelerating. Last year, consumers used credit cards for 37.3 billion transactions, up 10.2% from 2015. That compares with 8.1% annual growth between 2012 and 2015. In contrast, growth in the use of debit cards slowed last year. The number of debit card transactions increased 6% last year from the year before, to 73.8 billion, compared with 7.2% growth between 2012 and 2015."

Hate to say I told you so...but I told you so. Three and a half years ago, to be exact.

Back in 2013, Motley Fool wrote:

"Great news: Americans are giving up on one of the most ruthless destroyers of wealth the numerically challenged have ever known: credit cards. We're just much more interested in debit cards than credit cards these days. Which is great, frankly. Consumers are left with stronger finances. The old style of American consumerism, one built on debt, may be coming to an end. Total household debt as a share of GDP has been declining for five years. Is this a new trend? An enduring one that won't revert back to the old, unsustainable ways? Let's hope so. Good riddance, credit cards."

Looking back, nothing could have been further from the truth, as consumer debt is poised to cross the $1 trillion level. In June 2014, in a report titled, The Coming Credit Card Boomlet, I predicted that:

"The number of credit card holders in the United States will exceed 175 million by 2018, growing by 6.6% from 2013. General-purpose credit cards issued will grow 6.2% in the same period, to 406.6 million. Why the credit card boomlet? Three factors will drive this growth: (1) credit card penetration among Young Gen Yers (21 to 26 years old), (2) adoption of credit cards by Next Gen Yers (16 to 20 years old), and (3) increased credit card supply as issuers continue to loosen their credit standards."

Looking ahead, the boomlet will last past 2018, for three reasons:

  1. Demographic trends. Millennials who are currently between the ages of 26 and 34 have driven the recent growth in credit card use. This group represents 12% of the population. Younger Millennials, currently between 19 and 25, comprise 9% of the population. Assuming similar credit card usage patterns--and there's no reason to not assume that--credit card growth will extend through the next five years.
  2. Tax reform. The recent tax changes eliminate the deduction for home equity loan and line of credit interest payments. While demand for these financial products have been on the decline since the financial crisis, changes in the tax code will likely shift consumers' financing activity further away fro HELOCs toward credit cards. With the increase in the standard deduction, tax reform will put more money in consumers' pockets--which won't stay there long.
  3. Economic growth. When times are good, Americans spend money. And times are getting better, if not already good. Retail sales were up 4.9% during the 2017 holiday season, the largest year-over-year gain since 2011, according to Mastercard’s SpendingPulse Report.

The credit boomlet and debit downer shouldn't come as a surprise. The demographic and economic trends driving consumers' use of credit (vs. debit) cards have been in place for a while now.

Ron Shevlin
Director of Research
Cornerstone Advisors