Banking

Economic conditions, new regulations, and technological innovation are shaping the consumer credit and payments landscape, said Federal Reserve Governor Elizabeth Duke in a December 2 speech. Speaking at a conference hosted by the Federal Reserve Bank of Philadelphia, she also discussed recent shifts in consumers' payment preferences.

Changes in consumer credit driven by many factors
One significant change in consumer credit has been the decline in revolving credit outstanding, most of which is held as credit card debt, Duke said. The amount of revolving credit outstanding has fallen 15 percent since the collapse of Lehman Brothers in 2008. "Although our economy has experienced other long episodes in which revolving credit growth has slowed, we have never seen such a prolonged period of outright decline," she said. There are numerous reasons for the decline, including higher cardholder defaults, tighter credit, and less consumer willingness to take on debt.

Consumers' reluctance to take on additional debt may also be driving another trend—the rapid growth of debit card transactions. "The recent period of economic weakness appears to have caused some consumers to shift away from credit cards not only as a source of credit, but also as a method of payment," Duke noted.

Duke said that even before the economic slowdown that began in 2007, payment card use was on the increase. Between 2000 and 2008, the number of debit card payments grew 17 percent, with the value of those transactions increasing 15 percent, she said. Meanwhile, credit card transactions grew at a significantly slower pace: 2 percent a year in number and about 5 percent per year in value.

New regulations, technology also affecting credit and payments
New regulations are also affecting the consumer credit and payments landscape, Duke said, but it is difficult to separate the effects of the new rules from those driven by economic conditions. Additionally, the Fed will soon issue proposed regulations affecting debit card overdrafts and interchange fees, which could in turn affect the pricing of checking accounts. These changes could prompt banks and consumers to seek alternatives to traditional checking accounts, such as prepaid cards.

However, "payments using prepaid cards or other devices may be governed by different regulations and interchange fee restrictions," Duke said. "It will be important for regulators to monitor, over time, the effect of differences in regulation and pricing restrictions to ensure that consumers are adequately protected regardless of their payment method preferences."

December 15, 2010