We have witnessed impressive innovation in the financial technology (FinTech) industry in recent years across all fronts, including credit cards, debit cards, and reward cards.
For consumers, these innovations give better control over their spending, but what is even more intriguing from a creditor's point of view is the interplay between psychology and consumer credit behaviour.
Back in the day, when you were standing at a till counting out notes and coins to pay, it hit you that you were parting with hard-earned money. However, now if you simply tap with a card, phone or smartwatch, you don’t really feel the pain of spending in the same way. So psychologically, it’s easier to pay digitally than with cash. Does this make it easier to lose control of your spending and get into debt more easily?
Furthermore, we see consumers behave differently in the US than in the UK when it comes to card usage and what drives credit choices.
The US Credit and Debit Card Landscape
In the United States, it's a common site to see individuals carrying many different cards in their wallets, typically around four to five. Practically, it would make sense to have just one debit card linked to a bank account and one credit card with a generous credit limit, but the reality is that financial services are not just about utility; they also have an emotional side.
Consumers in the US tend to psychologically segment how they use their cards. Debit cards are mainly used for everyday expenses like groceries, pharmacy purchases, and fuel. On the other hand, credit cards are reserved for higher-value transactions. The Income Divide Reflects How Consumers View their Wallets
Over the past decade, there has been a surge in the use of rewards cards, particularly cashback cards. This surge has led to a divide in the market. Consumers with lower incomes and credit scores have become more debit-dominant, effectively replacing cash (though checks are still used fairly often in the US).
In contrast, affluent consumers have gathered even more cards, and they actively seek to maximise the benefits associated with each card.
The UK Consumer's View on Credit Cards
In the UK, the distinction between debit and credit card usage is less pronounced compared to the US
, creating a different dynamic in the financial landscape. This is partly due to retailers, including major supermarkets, actively promoting credit card use for everyday spending, incentivising customers through reward schemes.
Also, the look-and-feel of payments are very similar between debit and credit cards in the UK, making it difficult for people to recall which card they used for which purchase.
Additionally, there's a growing trend of using digital payment methods like smartwatches and smartphones for transactions in the UK
, blurring the line between traditional plastic cards and other digital payments. Whether this shift empowers individuals or leads to increased debt is a matter of personal perspective.
The Influence of Financial Institutions
In the US, many banks focus on capturing customers' checking accounts with debit cards, while only a handful of large credit card issuers are engaging in fierce competition to innovate their credit card products to attract customers. As a result, US consumers are generally more aware of the payment method they are using, whether it's debit or credit.
This awareness contrasts with the UK and other parts of Europe, where the line between debit and credit payments is less clear, and consumers may not pay as much attention to the form of payment they’re using.
The Attraction of Buy Now Pay Later Services
Buy Now Pay Later (BNPL) offers have seen notable growth in the past five years, and it’s interesting to look at the psychology and drivers behind this boom. The concept of point-of-sale financing, which is essentially what BNPL is, has existed for a long time. However, the key driver of its rapid expansion in the US can be attributed to the Great Recession's impact, particularly on younger consumers.
These young consumers developed a strong aversion to traditional credit cards with long repayment terms as they saw first hand the devastating consequences of credit card debt when people lost their jobs during the recession.
In the US, young people also bear a heavy burden of student loan debt, making them even more cautious about credit
and the issue of credit weighs heavily on them.
Initially, BNPL experimented with higher-value items like electronics, jewellery, and high-end clothing, but it gained traction among younger consumers due to the flexibility it offered in setting short payment terms.
What finance institutions learnt was that young consumers preferred the ability to pay off their debt within a few months, granting them a sense of control over their finances. This control over the duration of debt repayment was psychologically appealing.
In the UK, the drivers for BNPL have evolved and changed over the past eight to nine years. Previously, credit was attractive with financial institutions competing with each other over the length of payment terms, with some offering up to 48 months of interest-free financing. This trend shifted with the Covid pandemic when people reduced their unsecured debt levels and turned to debit cards instead to manage their spending.
However, the recent driver for BNPL in the UK has been the cost-of-living crisis, forcing an increasing number of people to turn to BNPL out of necessity rather than choice
. Despite the shifting drivers, BNPL has persisted through economic ups and downs.
"The Buy Now, Pay Later phenomenon, it is very sticky... it seems to be a behaviour that in some way feels natural to the general population." Dan Blagojevic (Optima Partners)
Fundamentally, consumers differentiate between BNPL and credit cards, viewing them as distinct payment instruments.
Younger people understand that they will need to use self-discipline with credit cards whereas BNPL is more intrinsically controlled. So, from a financial management standpoint, consumers are less likely to get into trouble with BNPL than with credit cards and unsecured credit.
Control Over Finances: A Psychological Motivator
"For consumers, money is tight, control is important." Sean O’Toole (FinTech and SaaS Advisor)
Control over finances is a strong psychological motivator in consumer behaviour and there are different levels of emotional impact from the different payment methods.
Paying with cash or with a debit card, where you see the money leaving your account immediately, can cause physical and psychological discomfort. In contrast, credit card payments, which delay the financial impact until a later date, often feel less immediate and painful. Paying with a credit card is paying with ‘tomorrow’s money’ so it doesn’t hit you as hard emotionally. This psychological aspect has influenced payment trends in the US
, especially in the aftermath of the Great Recession. Americans have increasingly turned to debit cards due to tighter finances and debit card usage has grown noticeably compared to credit cards, with debit card share at well over 50%.
The Role of Fintech: A Focus on Technology vs. Consumer Behaviour
Technology has traditionally taken precedence in the FinTech revolution, with many companies being founded and led by engineers and techies. While innovation has happened on the tech and infrastructure fronts, such as backend systems and payment processing, there has been relatively less innovation on the front end, where consumer-facing marketing and psychology play a key role
"In the UK what's happening is that the FinTech disruptors built banking around technology, not technology around banking. So that's fundamentally a different approach. " Dan Blagojevic (Optima Partners)
There needs to be a balance in FinTech between technology-driven innovation and understanding consumer psychology. This is important for maintaining a customer-centric approach, especially as companies scale.
This blog is derived from a Credit Shift podcast hosted by Paul Sweeney (Webio) and Dan Blagojevic (Optima Partners) where they talk to Sean O’Toole (FinTech and SaaS Advisor). Listen to this episode of Credit Shift.
More from the podcast: Access to Financial Services - The Unserved and The Invisible