The fate of credit cards lies in the hands of young & conscientious

30 Sep, 2020 . 4 minutes

The use of credit cards fell after millennials and other budget-conscious customers cut their reliance following the pandemic. Despite this, experts believe credit cards can remain dominant – but with fundamental changes.

A survey from Toronto-Dominion Bank found that 23% of millennials didn’t own a credit card in March last year. This may be partly due to their ineligibility for credit submissions. But apparently, millennials are more reluctant to apply for credit card ownership than Generation Z’s. These behavioral discrepancies should not be overlooked by credit card issuers. According to TransUnion, millennials owed on their cards a third less than the average Gen Z cardholder last year – which was about $2,000. Also, 34% only of millennials at age 24 held credit cards in 2012 while 41% of Gen Z already had credit cards at the same age a year ago.

TransUnion also revealed that, between the ages of 18 and 24 years, 39% only of millennials had a prime or higher credit score. This situation became complicated when they started working while paying off student loans during the crisis. The situation is getting worse as those loans could reach the size of a mortgage despite their relatively low ability to pay off credit-card debt. It exposes the financial reality of millennials where their cost of living sometimes exceeds their income. Given the millennials’ economic squeeze, many saw it would be problematic for credit card providers to cater conscientious customers like millennials without significant innovation. The penetration into the millennial market is only to get harder after the COVID-19.

Prime Time For Alternative Options

During the wage fallout during lockdown, the Federal Reserve Bank of New York reported a decrease in household debt during 2Q20. American credit card balances also recorded a $76 billion decline. The Mercator Advisory Group said in a report that credit cards experienced a decrease of 22.5% year over year. Meanwhile, with the purchase spending volume in 2Q20, credit has seen a 21.1% drop. Visa and MasterCard also recorded a 53.6% share of purchase volume down to 44.7% during 4Q19 to 2Q20.

The limited income makes credit cards with higher interest rates even less attractive than other payment methods. Customers are avoiding credit cards as they don’t need another financial weight on their backs during the economic crisis. This should push credit cards to use different retainer strategies rather than relying on rewards. Deloitte has found that nearly three-quarters of consumers surveyed who prefer credit cards over other instruments have become accustomed to generous rewards. Cash-strapped customers, who account for the majority of statistics, will turn to more flexible payment choices during the pandemic and uncertain conditions. Mercator Advisory Group saw an increase of interest in contactless payments installed by merchants. Growing financial technology offers options of more convenient and frictionless preferred payment methods. Fintech companies like Klarna, Affirm and Afterpay with their instalment payment plans, encourage millennials to leave their credit cards. For instance, research by Ascent said 39% of American consumers between 18 and 54 have used BNPL service to avoid paying credit card interest.

 Changing Stance Is Credit Card Last Stand

Apart from the fair reception from the Gen Z’s and a small proportion of millennials, experts are certain credit cards still have a lot of work to do to recapture long term sustainability and profitability. There are many innovations credit card providers should integrate to regain conscientious customers like the millennials. Hence, tailoring solutions with digital wallets and contactless specialists will heighten the chance for market growth. Visa, for instance, has issued more than 100 million credit cards with built-in contactless ability and aims to issue 300 million more.

The move makes sense especially when Visa witnessed a 150% surge of contactless payment option in the U.S. since March last year. Visa contactless card or digital wallet users in the U.S. have jumped to 31 million in March from 25 million in November 2019. "There's been a huge uptick in the past four or five months as you might imagine. People liked using it, now it's, you have to touch less contactless to still make a payment," said Don Bush of Chargebacks 911 to ABC 7 Chicago. Tappit, which provides contactless wristbands and apps connected to credit cards for sport and music events, was reported by The New York Times reported in July to sign long-term deals worth £20 million. Tapping into new business with embedded technology could buoy any financial partnership to brand market hype and drive more customer spending, according to Tappit’s chief executive Jason Thomas.

“Some partners who were slightly fearful of going cashless have now decided this is an opportunity to do so,” he said to The New York Times. Another option is to redefine the foundation, like X1 Credit Card by Thrive that aims to disrupt the credit score system. The Visa-backed stainless card offers higher limits based on income instead of credit score. “We reimagined the credit card from the ground up to have smarter limits, intelligent features, modern rewards and a new look,” said Deepak Rao as co-founder of Thrive, the company behind student loan solution app ThriveCash, to TechCrunch.

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