Econ Edge: The Economic Week
Dec. 6, 2004 — -- Inflation looms large this Friday, as the government releases November's Producer Price Index numbers. October's report showed a 1.7 percent increase and shocked the markets. But inflation is taking a back seat for many Americans as the holiday buying season heats up. On Tuesday, we'll find out if we have added to the record $2 trillion in consumer borrowing in the lead-up to the end of the year.
Wayne Best, Visa USA's senior vice president of strategic and economic analysis, answered some of our questions about the credit market and economy.
ABC: What is driving Americans' increasing reliance on credit?
Best: Without question, credit cards have been a key building block for American consumers and businesses since being introduced in the 1950s. By allowing a broad cross section of consumers the opportunity to finance their purchases, credit cards have been an enormous positive force for the U.S. economy.
However, the most significant trend that we've seen in this industry over the past 10 years has been the mainstreaming of the debit card and a clear consumer movement toward using a mix of payment options, depending on the type of purchases that they want to make. Gone are the days that electronic payments are the exclusive domain of credit. Instead we're now seeing consumers who have grown to expect -- if not demand -- the convenience, utility and security of electronic payments, whether making credit purchases or accessing "ready funds" in their checking account.
In 2003, Visa debit sales volume grew to $386 billion, reflecting a compound annual growth rate of more than 35 percent since 1996. More recently, data from "Black Friday," the day after Thanksgiving and the official start of the holiday season, shows that debit accounted for 43 percent of all spending on the Visa system (a 22 percent increase vs. 2003). By any measure, that's a staggering shift in spending patterns -- made all the more significant by the impressive consistency of the upward trend.
ABC: Super-retailer Wal-Mart says it was disappointed with traffic over the Thanksgiving weekend. What does Visa's data indicate for spending during the holiday retail season?
Best: I cannot comment on the performance of a specific retailer; however, I can say, based on the consumer spending data we have tracked since Nov. 1, that we are cautiously optimistic that this will be a good holiday season for retailers. Although some retailers have come out with less-than stellar-sales numbers in recent days, data from the Visa system shows that consumers began their holiday shopping in early November and have continued to visit the mall and their local retailers.
I would argue, however, that the significance of "Black Friday" has been blown out of proportion in terms of predicting the overall success of retailers during this crucial time of year. Looking at daily Visa sales volumes during the 2003 holiday season, the Friday after Thanksgiving ranked just 11th, while the top 10 shopping days were all much closer to Christmas.
Ultimately, this tells us that U.S. consumers are often procrastinating or waiting for the best deals they can find. So while some retailers might be disappointed by early results, we know the best days of this holiday shopping season are still ahead.
ABC: Debit card use in the United States has increased dramatically during the past decade. Is it possible that plastic might overtake paper (cash & checks) as the most popular payment method in the next 10 years? What impact would that have on the economy?
Best: It's not a question of "if" plastic will overtake cash and checks; it's a question of "when." Consider that just 10 years ago, payment cards, including debit, credit and prepaid cards, represented 18 cents of every dollar spent by consumers in the U.S. Fast-forward to today, where payment cards now represent more than 31 cents of every dollar spent. That's a remarkable growth trajectory and one that we anticipate will accelerate in the near term. In fact, some industry experts predict that card-based payment systems will overtake cash and check by the year 2007.
Why are we witnessing a rapid migration to plastic? Because consumers and businesses have come to expect the array of benefits that payment cards offer, such as convenience, security protections like zero-liability, rewards and budgeting capabilities. Cardholders also are putting a premium on convenience and speed. In short, when it comes to payments, consumers want a currency as mobile and as global as they are. Paper money simply can't keep up.
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