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This Holiday Shopping Season Will See More Debit, Less Credit

With just days to go before Black Friday, the busiest shopping day of the year, consumers are showing signs that they are going to be more cautious with their spending, right down to the payment instruments they use.

Accenture released its annual Holiday Shopping Survey and found that Americans are hungry for discounts (which they won't likely find) and that they are curtailing spending on hot, must-have items this year.

Beyond this, however, indications are that they will shun credit cards in favor of debit cards and cash. Forty-four percent of consumers said they would use all cash/debit to do their holiday shopping, while only 12 percent said they would use all credit. A further 22 percent said they might make some credit card purchases but that the majority would be with cash/debit cards.

These findings seem to be in keeping with the growing trend toward using debit for transactions. And with the recession, it's about more than convenience—debit makes it simpler for people to control their spending. The significance of this shift hasn't been lost to banks.

Ted Landis a senior executive with Accenture in Phoenix who leads the firm's North American payment practice, says financial institutions are already addressing these changing customer payment preferences through more debit-related loyalty and reward programs, co-branding and better debt-management offerings.

"With 'chip' technology continuing to support PIN-authorized debit transactions over signature-authorized transactions, consumer security and confidence is likely to improve [with regard to debit]," Landis told BS&T. "And, as consumer preferences for debit evolve, opportunities to introduce new credit products that are based on debit will emerge, such as secured credit via checking/savings accounts, as well as savings accounts offering higher rates to customers that make timely credit payments."

As it relates to the survey, Landis says the new spending patterns could pose financial institutions with new challenges and opportunities.

"According to the findings, consumers will be opting to pay down credit-card bills within the first cycle, use more cash and debit and less credit on their purchases, and lean heavily upon gift cards for holiday giving," he explains. "For financial institutions that still rely heavily on revenue and fees from credit cards, the challenge is to stay ahead of shifting consumer preferences for cash and alternative payment methods, such as mobile and micropayments, while at the same time adapting to new card legislation."

Just in time for the holidays, the Federal Reserve proposed rules for regulating gift cards that would restrict fees and expiration dates on the payment instruments.

Even though this new-found thriftiness among Americans, and proposed protections from the Fed, may do nothing for financial services companies' credit card interchange revenues and retailers' pocketbooks, it may also mean fewer collections headaches for them. As noted above, people intend to pay down their credit card bills within the first billing cycle. The majority of respondents when asked about the likelihood of their delaying payment beyond the first bill received said this was "not at all likely" (42 percent) or "unlikely" (22 percent). Only 19 percent said this would be "somewhat likely" and 12 percent said this scenario was "very likely." The remaining 5 percent were "not sure."

Regardless, Landis says banks are getting better at using various tools to aid in the collections process.

"Banks are getting smarter about using analytic tools coupled with demographic and geographic data to gain better insight to predict and head off future collection issues," he relates. "This insight is also helping to improve banks' interactions with customers in their actual collection efforts."

Similar tools are also used in banks' anti-fraud efforts. With the recession, some fear this holiday shopping season might bring out fraudsters in droves. However, Landis is a bit optimistic.

"With the increased use of debit this holiday season, fraudster's may target weaknesses in areas like signature debit, rather than PIN debt," he explains. "But, we may actually see less fraud this holiday season than in the past because consumers are more debt-sensitive and wary of major spending, less credit is being made available, and, in many cases, credit lines have been reduced. Also, we see identity theft protection services and technology—such as LifeLock, and service bureaus like Experian and Equifax—becoming more mainstream and playing an increasing role in combating fraud."

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