Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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June 7, 2021
Share of Credit Card Revolvers Drops in the Pandemic Year
How do you view your credit card? As a convenient way to make purchases and earn rewards? As a financing tool to spread out the cost of large purchases? As a way to get over rough patches? About half of U.S. consumers with a credit card use it as a means of payment and pay the full balance due every month. The other half use credit cards as a financing tool.
New data releases from the Survey of Household Economics and Decisionmaking (SHED) and the Survey of Consumer Payment Choice (SCPC) show that eight in 10 U.S. adults had a credit card in 2020 and, of those, about half carried an unpaid balance at some point during the prior 12 months.
In addition, both surveys found that credit card debt declined from 2019 to 2020. SHED reports that fewer card holders carried a balance, and card borrowers reduced their outstanding balances. Similarly, the SCPC found that that 51.3 percent of card holders carried a balance sometime in the preceding 12 months—the lowest share since 2015. In addition, 51.8 percent of these revolvers reported their balances to be lower than a year ago.
A paper from the Federal Reserve Board of Governors attributes the decline in balances to a sharp decline in credit card transactions at the start of the COVID-19 pandemic in March and April 2020 and also notes a decline in the origination of new credit card accounts at that time. And a New York Fed survey found that about one-third of the value of the first round of stimulus payments under the CARES Act was used to pay down debt.
The SHED survey report indicates that while many borrowers overall reduced their debt, people who were laid off at some point in the past year increased their credit card debt (39 percent compared to 24 percent of those not laid off). This aligns with other research findings that, as the SHED report puts it, “financial challenges in 2020 were uneven.” The New York Fed survey, for example, found that high-income households saved proportionately more of their stimulus payments: 40.8 percent for household income greater than $75,000 compared to 31.2 percent for household income $40,000 or less.
The drop in revolvers could have implications for the use of credit cards going forward, because credit card revolvers are more likely than convenience users to have and use debit cards instead of credit cards, although many other factors—including general economic conditions—will come into play.
June 1, 2021
The Generational Divide in Online Shopping during the COVID Pandemic
Like me, you probably have seen many headlines citing the impact of the COVID-19 pandemic on people in various demographic segments. Take, for example, age:
- "COVID-19 hurts working mothers"
- "Millenials slammed by second financial crisis"
- "COVID pushes out women and boomers"
- "Pandemic accelerates retirements"
As you can see from these headlines, no generation is unscathed.
How did people of different ages behave during COVID? Preliminary data from the 2020 Survey of Consumer Payment Choice appear to show that in 2020, millennials increased their uptake of new payments habits while boomers were slower to do so.
- Millennials increased their share of online purchases as a percentage of all purchases by a greater margin than boomers. Boomers’ share of purchases online went from 4 percent in 2019 to 6 percent in 2020. For millennials, online purchases jumped to 21 percent from 13 percent.
- Millennials continued to expand their enthusiastic reception of payment apps, including Venmo and Zelle.
Of course, many factors, not just COVID, are in play here. These could be a few:
- Millennials are moving into their prime earning years. For example, they became more likely to have a credit card in 2020. Two-thirds of millennials had a credit card in 2019, and almost 8 in 10 did in 2020.
- Boomers may be stuck in their habits. Payments choice, like many other consumer behaviors, is a habit and generally slow to change.
You can examine differences in consumer behavior by age using the interactive charts for the 2020 Survey of Consumer Payment Choice at atlantafed.org.
April 19, 2021
Criminals Also Like Convenience
The phrase "The customer is always right" was coined by London department store retailer Harry Gordon Selfridge in 1909 to encourage his employees to provide customers with exceptional customer service. Ever since, retailers across all industries have been trying to achieve the positive customer experience—and possibly a competitive advantage—that Selfridge was striving for by offering a variety of customer-oriented policies and services. One such service that gained popularity a couple of years ago is buy-online-pick-up-in-store, often shortened to BOPIS. The COVID pandemic has led to a modification of BOPIS: BOPAC, short for buy-online-pick up-at-curbside. Merchants are offering these options so they can provide a "frictionless transaction"—in other words, they want to reduce the actions customers have to take to obtain their products. This less-contact process also happens to address the CDC’s COVID health recommendations of minimizing contact with others.
Unfortunately, fraudsters have latched onto BOPIS and BOPAC because they’re a means to secure their ill-gotten gains faster and at a lower risk of confrontation once they have stolen the payment credentials of a legitimate cardholder. According to a report published last fall , BOPIS fraud increased 55 percent from the first half of 2019 to the first half of 2020. While merchants in the BOPIS model can ask customers for identification, many do not, for a couple of reasons. First, the person picking up the goods may not be the cardholder, as often happens in the home improvement and landscaping business. Some retailers have addressed this by requiring the cardholder during checkout to give the name of the pick-up person. Second, requesting identification adds a step to the process and therefore adds friction.
A major financial services company published a best practices guide a year ago that contains recommendations on how merchants can reduce their fraud risk for BOPIS/BOPAC transactions. These recommendations include manually reviewing orders of high-value or targeted merchandise and using video cameras in the pick-up areas.
As stores and shopping centers begin to open more and with longer hours, it will be interesting to see if customers return to browse and shop in the aisles or the convenience of BOPIS/BOPAC will continue to drive ecommerce traffic. What do you think?
March 8, 2021
Now in the U.S.: Buy Now, Pay Later
Our Take on Payments blog has seen numerous posts over the last year about how the COVID-19 pandemic has altered consumers' payment habits. A combination payment/credit product, buy now, pay later (BNPL) appears to have gained widespread adoption independent of the pandemic. In its simplest form, BNPL allows the consumer to make a purchase and spread payments over a period of time. Unlike the traditional layaway process, where the buyer gets the product after he or she has made all the payments, with BNPL, the consumer gets the purchase at the time of the initial payment. There are numerous variations of BNPL that can generally be segmented according to the payment schedule timeframe and whether the consumer is being charged interest.
This concept is not new. When I was a payments consultant doing work in various Latin American countries 25 years ago, retailers commonly offered this installment payment product as an alternative to a traditional credit card, for which many of its customers couldn't qualify. In the United States, a variety of providers such as dentists and orthodontists have offered the product to help patients pay for expensive dental work. Auto shops have offered BNPL to help customers pay for a set of tires or extensive repairs.
But what is different and what has led to its increased popularity in the United States is how fintechs have partnered with merchants to offer BNPL as an integrated part of shopping on merchants' websites. A December 2020 survey of approximately one thousand adults in the United States indicated that just over 40 percent of them had used a BNPL service. The survey also found that the product was most popular with Gen Z and younger millennials, and female consumers were a little more likely to use the service, although this slant appears to be the result of an initial push by fashion and cosmetic retailers. The use of debit instead of credit cards as the payment source is also a major change in ecommerce payment habits.
As with any credit-like product, BNPL has pros and cons. Critics of the product categorize it as a way for consumers to buy things they can't afford. The December 2020 survey found that more than a third (38 percent) of the people using the service fell behind on their payments at least once. Of those with a late payment, 72 percent indicated it made their credit score drop. Furthermore, some providers perform hard credit checks to determine if the customer should be approved for the offer, which can also lower the consumer's credit score. For those products with four or fewer payments, the product is largely unregulated. However, its growing popularity is gaining regulators' attention, both here in the United States and in other countries. As with any product, consumers should clearly understand any associated fees or penalties, as well as dispute rights in the event the product is defective.
Proponents of the product say it helps a consumer on a budget to make larger-dollar purchases and position it as a preferred alternative to a credit card, which can have a higher interest rate. A July 2020 study of the market found that more than three-quarters of the customers using the BNPL service had the funds available to pay for the full purchase.
A recent Consumer Reports article makes the following recommendations for consumers considering using a BNPL product:
- Evaluate your spending limits and determine if the purchase is a "want" or a "need."
- Understand the terms and conditions of the service, especially with regards to dispute rights and procedures and fees and other charges.
- To avoid missing or having a late payment, set up automatic payments or alerts to remind you of an upcoming payment deadline.
- Determine if this is the best credit product for your purchase.
While BNPL ecommerce products are still in their early days in the U.S. market, all indications point to dramatic growth in the years ahead. As always, we would like to hear your perspective on this product and its impact on consumers' payment habits.