Younger consumers herald new era of credit

- By Collaborative Media & Publishing
The popularity of credit cards is waning, particularly among younger consumers, who are favouring new hybrid digital payment services.

Australian consumers have cancelled a staggering 5.36 million cards since mid-2017 according to Reserve Bank of Australia (RBA) data[1].

"I remember the days when a Gold card or the Platinum card was a status symbol – that isn't the case anymore," says BPAY General Manager Product, Scheme and Business Development, Keith Brown. “I think the attachment to physical cards has also gone,” adds Brown.

The rising capabilities of smartphones combined with the advent of new FinTech payment apps are a key driver. Digital wallets can store a range of virtual cards without the inconvenience of carrying the physical items.

However, the reasons behind the decline of consumer credit cards runs even deeper.

The trend away from credit cards and towards debit has been accelerating since the global financial crisis (GFC) struck in 2008-09, according to Grant Halverson, the chief executive of banking and payments firm McLean Roche Consulting.

"Younger people, not just in Australia but globally, have seen what's happened to their parents getting into debt with credit cards. Living through the GFC as a kid or hearing about it has certainly influenced their views on credit, and not to mention they are also the most highly indebted group relative to their parents," says Halverson.

Brown points out that even today credit card interest rates also remain relatively high despite the RBA cutting official rates to a record low of 0.1%, while the application process is stringent for younger people who may only have casual or part-time work.

With Gen Z increasingly making payments with their own cash rather than debt, payment services have had to adapt and follow their customer base.

The rise of Buy Now Pay Later (BNPL)

Perhaps not surprisingly, buy-now, pay-later (BNPL) services are taking a growing slice of the former credit card market. Approval is usually immediate and the services are easy to use through smartphone apps linked to a debit card.

A recent study by Roy Morgan found young Australians aged under 35 accounted for more than half (55.9%) of all BNPL users[2]. Australians aged 50 and older accounted for just 14.2%.

While the use of the new service is still relatively low, with 9.4% of the population using a BNPL in 2019, it continues to rise, up from 6.8% the year before[3].

There are eight BNPL companies now listed on the ASX with at least another eight companies operating in the sector. In August 2020, PayPal launched its own BNPL scheme and almost immediately became the largest BNPL platform in the USA, according to Halverson.

BNPL companies are not regulated under the National Credit Act, which means customers can avoid a credit check, although new regulations in the UK may foreshadow a change in Australia.

Some credit card providers are reshaping their offerings to fight back. CBA and NAB have launched no-interest credit cards that charge a monthly fee – an offering not dissimilar to interest-free BNPL services that charge late fees when repayments aren't made on time.

FinTech and open banking is reshaping payments

A recent addition to the payment sphere that has influenced young people is the New Payments Platform (NPP) and its first real-time overlay service: Osko, which is run by BPAY Group.

The number of Osko payments rose 78% year-on-year to 52.8 million in December 2020, valued at $59.1 billion, according to RBA data.

"It is a real threat to credit and debit cards because it is digital, instant and it works in the mobile world. So, if you and your friends are out to dinner and you want to split the tab, you can send money instantly, even if you're with different banks," Halverson says.

Real-time payments are also propelling new alternatives to traditional debt that often leads to problems, such as payday lenders. These lenders tend to target vulnerable people who need relatively low levels of funding immediately and charge high interest rates.

The National Manager of the Salvation Army's Moneycare Program, Tony Devlin, told a Senate committee on credit and financial hardship that 15 to 20-year-olds made up 20% of people using payday loans over the last decade[4].

"The amount of debt that was outstanding tripled over that same period," he said.

However, new businesses enabled by real-time payment technology are offering alternatives. Earnd relies on the NPP and Osko to help people access their salary as they earn it, rather than when their employer chooses to pay it.

Open banking also promises to make traditional relationships with debt more streamlined and, in some cases, more sustainable.

Split Payments chief executive officer, Kristofer Rogers, said one collection company (which he didn't name), but has thousands of Millennial clients, is using open banking to check their account balance to ensure repayments don't send their account into arrears.

"That's basically saying to this debtor… don't worry, this is fair, this is ethical," he said in late-2019 at a press briefing[5]. "You have a debt but repay it on your terms and, in fact, tweak it when you want, have a honeymoon, so long as your payments are coming through on terms that suit us as well," added Rogers.

Open banking could potentially bring together data from banks, telcos, and utilities, allowing consumers to analyse their expenditure far more precisely than ever before. Established companies or new FinTech players could then use that analysis to offer consumers better deals.

The younger generation have shown they are quick to adopt new offerings – and just as quick to drop those that no longer suit their needs.
 
[2] Rapid growth in use of ‘Buy-Now-Pay-Later’ digital payments – such as Afterpay, zipPay and zipMoney. (2020, December 04). Retrieved from http://www.roymorgan.com/findings/8191-buy-now-pay-later-september-2019-201911040100
[3] Rapid growth in use of ‘Buy-Now-Pay-Later’ digital payments – such as Afterpay, zipPay and zipMoney. (2020, December 04). Retrieved from http://www.roymorgan.com/findings/8191-buy-now-pay-later-september-2019-201911040100
[4] Report – Parliament of Australia. (2020, December 04). Retrieved from https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Creditfinancialservices/Report
[5] What is Open Banking? - Split Payments - Open Banking API. (2019, November 26). Retrieved from https://www.splitpayments.com.au/what-is-open-banking-2

Published by BPAY Pty Ltd (ABN 69 079 137 518) email: marketing@bpay.com.au. The BPAY Scheme is managed by BPAY Pty Limited.  When you use BPAY payment products, the BPAY Scheme is paid fees relating to processing costs and BPAY Scheme membership.  Contact your financial institution to see if it offers BPAY payment products and to get the Product Disclosure Statement.  Any financial product advice provided by BPAY Pty Limited in relation to BPAY payment products is general advice only and has been prepared without taking into account your objectives, financial situation or needs.  Before acting on such advice, you should review the Product Disclosure Statement and consider whether BPAY payment products are appropriate for your personal circumstances.

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