Are Credit Cards On the Decline?

The short answer is absolutely not! Credit cards are more popular than ever. But perhaps they deserve a different name.

Over the past 20 years Ipsos has been tracking the way Canadians use credit cards, paying close attention to long term trends, and noting both the evolution and the revolution of the market. There are some important changes and challenges in the credit card market and we offer some insights into the behaviours, needs and expectations of credit card customers.

Credit cards as we know them were introduced to the general public in the mid-1900s. They allowed consumers to make purchases at different businesses and locations, and provided access to a revolving line of credit. Before that, earlier versions developed at the beginning of the 1900s could only be used at limited locations, and balances had to be paid off monthly.

Over time credit cards gained wider acceptance, both among businesses and consumers. In the early days access to credit was a key value proposition, and the majority of credit card holders took advantage of that benefit. As credit cards evolved they developed a wide range of other benefits, including purchase protection, insurance, travel benefits, and of course, rewards.

Nowadays, most Canadians have a credit card that offers rewards. In fact, eight-out-of-ten cardholders have a credit card tied to a rewards program. While there is a wide variety of different types of rewards programs available with credit cards, they all share the same general model - the more you spend with your credit card, the more rewards you earn. This has huge implications for the way credit cards are used, and the relevance of credit versus other card benefits.

As a form of payment, credit cards are more popular than ever, surpassing cash and debit for many Canadians. But for accessing credit, they have been on the decline for many years. In fact, we would need to look back more than a decade to find a majority of credit card holders using them for long-term borrowing. Since that time most cardholders say they pay off monthly balances, and the group using them for longer-term credit has been getting smaller every year in Canada.

Credit vs. Spending

We've seen credit cards evolve from a product mainly used for access to credit and occasional large purchases, to a preferred method of payment for everyday spending. A driving force behind the evolution in the way Canadians use credit cards is the development of their rewards programs. Increasingly, Canadians seek to use credit cards for a greater range of purchases in order to accumulate rewards and reap the benefits.

One impact of credit cards' rise as a method of payment is revealed below as a corresponding downward trend for the percentage of credit card holders who claim to carry an outstanding balance from month to month - or "revolving". At first glance the inverse relationship between spending and revolving may appear counterintuitive, but from a financial perspective it makes perfect sense. The more cardholders seek to use their cards for spending, the more they are inclined to reduce or eliminate unpaid balances in order to generate free space for more spending, and avoid paying interest.

In addition to the trend over time, the inverse relationship between spending and revolving is apparent in other ways. For example, when we look at heavy credit card users versus light users, we see that heavy users are much less likely to carry a balance on their cards. They use them for day-to-day spending, not for borrowing. Revolvers (those who use cards for borrowing), on the other hand, are much more likely to use credit cards occasionally for large purchases, and then put them away until balances are paid down.

Credit Cards vs. Cash vs. Debit

What does the increase in credit card spending mean for other forms of payment? With most purchases, Canadians make a decision about which form of payment to use. The vast majority of Canadians have a credit card, in fact most have two. In addition, most have at least one debit card and everyone has access to cash. The methods of payment that Canadians carry in their wallets haven't changed in recent years, what's changed is how they use them.

Remember when cash was king? It wasn't that long ago. Until about 10 years ago, cash was the number one method of payment for everyday spending, but it's been on the decline ever since then. We track the proportion of spending credit card holders place on different methods of payment. About ten years ago cash was surpassed by debit cards for share of monthly spending, and then about five years ago it dropped below credit cards.

The rise in credit card use for regular purchases has been consistent for many years, and in recent years it has accelerated. About two years ago, for the first time since Ipsos began tracking the market, the proportion of personal spending placed on credit cards outpaced both cash and debit.

Balance Revenue vs. Spending Revenue

As credit cards continue to develop and evolve as a method of payment, they become more valuable to those who use them - paying off in the form of rewards. But the related decrease in revolving balances has a downside to the credit card industry in the form of limiting revenue opportunity from interest. This can be offset, to an extent, with the annual credit card fees attached to some cards. Indeed, the use of credit cards that carry fees has increased steadily over recent years. This trend reflects a push from credit card issuers to promote cards that carry fees, and the willingness of cardholders to pay fees as long as they are justified with benefits and rewards.

Another channel for increasing credit card revenue is to swim with the current, so to speak, and generate revenue from the trend that is growing over time - credit card spending. Credit card issuers do this by charging merchants for each purchase transaction made with a credit card (interchange fees), in return for services that support the transaction. Interchange fees are higher for transactions conducted with a premium credit card. Premium cards and their associated benefits are in turn attractive to heavy credit card users, and like credit cards with fees, premium card use is on the rise.

What's Next for Credit Cards?

Credit card rewards programs are as important as ever, but in and of themselves their ability to encourage use is limited by the value they represent to the cardholder. Historically, while notionally attractive and generally beneficial, many cardholders have found rewards programs to be confusing, difficult to use, and lacking in relevance. Our research shows that to encourage adoption and use, the most successful rewards programs are the ones that seem most relevant to the cardholder, and clearly connect to their practical utility for saving money. This, in turn, encourages spending for `everyday' purchases across a greater range of categories, as the more one spends, the more one is paid back.

The relatively recent emergence and success of the cashback credit card bodes well for the success of this type of product and position. It represents the clearest, simplest, most intuitive conceptualization of a payment method that pays you back. It might come as no surprise then, that for the past decade, cashback cards are the single fastest growing type of card on the market, with plenty of room yet to grow.

But what about other types of rewards? What about other credit card benefits? Should all credit cards be "cashback" cards? The answer is clearly no. There are many segments of cardholders who appreciate other types of rewards, as well as other card benefits. If the history of credit cards has taught us anything, it's that credit cards are an evolving product. There are opportunities to develop the product in ways that meet consumer needs, and shape the way credit cards are used. The lesson in the success of cashback cards, however, is to make the value proposition for any card benefit, whether it be rewards, insurance, warranties, travel services, etc., as relevant, easy to understand, and compelling as possible.

About this Study

In 2013, Ipsos offers the Personal Cardholder Study (PCS) for the 20th consecutive year. It continues to be the leading source of information for Canada's card issuing companies and their partners.

Based on over 12,500 online interviews per year including both cardholders and non-cardholders, the 2013 PCS provides a holistic view of the payment landscape, including debit and cash. Topics covered include card penetration and use, market share, loyalty and satisfaction, rewards analysis, and emerging trends.

About Ipsos

Ipsos Reid is Canada's market intelligence leader, the country's leading provider of public opinion research, and research partner for loyalty and forecasting and modelling insights. Staffed with seasoned research consultants with extensive industry-specific backgrounds, Ipsos Reid offers syndicated information or custom solutions across key sectors of the Canadian economy, including consumer packaged goods, financial services, automotive, retail, health and technology & telecommunications. Ipsos Reid is an Ipsos company, a leading global survey-based market research group. To learn more, visit www.ipsos.ca.