Threat Of Debit Fees Drives Rise In Credit Card Use
Monday, November 07, 2011
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By Ray Birch

BROOKFIELD, Wis.-Bank debit card pricing is not only driving consumers to alternate providers, it's also creating more credit card users.

The latest data from Visa show credit card growth is on the rise, and card processors attribute the increase to punitive bank pricing, adding that the new credit card users are behaving as more as transactors, not revolvers.

For its fiscal fourth quarter Visa reported that spending on Visa-branded credit cards in the U.S. grew faster than debit cards for the first time since at least 2005. Visa reported U.S. credit card purchases climbed 10% to $228 billion, compared with a 6.4% increase in the same period last year. Spending on debit cards in the U.S. advanced 8.1% to $288 billion, slower than the 20% growth Visa reported for last year's fiscal fourth quarter.

Card processors who spoke with Credit Union Journal about the shift to credit were quick to cite banks' debit and checking fees, and financial institutions promoting credit over debit in the face of shrinking debit interchange. Fiserv Card Services added that the move is coming due in large part to an improving economy.

"We see a huge opportunity for credit," offered Nancy White, VP credit solutions with Fiserv who agreed that the bank moves brought about by the Durbin rules are adding to the credit advantage. "People can debate this until the cows come home, but we see the U.S. economy as improving. All the economic indicators are there except unemployment and housing."

But White is among many who do not see the new wave of credit card users as revolvers. "The debit card customer who is fed up with fees is saying, 'We'll show you. I'll put everything on my credit card, get my rewards too, and pay off my balance at the end of month.'"

White is uncertain whether credit unions are on top of the shift, and expects a more noticeable change in consumer card behavior will be apparent in the first quarter of next year. "I think people will go through the holiday season status quo."

What CUs need to be aware of, insisted White, is the need to offer an attractive, full line of debit and credit products with rewards. "Small business offerings, too."

But White cautioned credit unions to be cautious and to pay attention to managing credit risk. "Many credit unions are moving to risk-based pricing. It is important now to pay attention to having good credit underwriting and a good fraud protection program. Do both and the profitability of your credit card portfolio can zoom."

More Transactors

Jeff Russell agreed that as credit unions focus heavily now on debit to win over new members, they should be careful not to miss the growing credit card opportunity. But the senior advisor for The Members Group in Des Moines, Iowa, also cautioned that a great deal of the new credit card business will be from transactors.

"In the portfolio we own, we are seeing more transactors. We are still seeing a fair amount of revolvers. But industrywide last year, for the first time on record, balances dropped as much in January as they increased in December," said Russell. "That means most people who spent money during the holidays paid it off-an amazing trend. As long as I have been in the business I have seen holiday balances usually paid off through at least February and March."

Caroline Lane, SVP, business development and marketing for CO-OP Financial Services in Rancho Cucamonga, Calif., also sees the movement toward credit coming largely from transactors. "I have not yet seen any data for or against that, but it is what I am hearing."

Lane said she also knows that a number of credit unions are aware of this shift and are schooling members about the wise use of credit. "I have heard from 60% to 70% of all the credit unions I have talked with in the last 90 days that they are doing some sort of member education about making smart decisions regarding credit and debit. We know the downside of not being disciplined to pay off your monthly credit card balance. Some people intend to do that, but just don't make it."

A Growing Economy

Bill Hardekopf, CEO of in Birmingham, Ala., views most of the credit growth as coming from the improving economy. "I don't think it's a reaction to the debit card fees. I do think people are feeling a little better about the economy and when that happens, people tend to charge more on their credit card account. I think that is what we are seeing, especially with people with good to excellent credit scores."

Hardekopf, too, credits attractive bank credit card offerings as the big FIs seek higher interchange and credit card balances. "Banks are offering more rewards on credit cards so we reach for our credit card, rather than the debit card. That is the incentive the issuer is giving us-especially those with good to excellent credit because they represent less of a risk to the issuer."

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