News: Analysis & Commentary
SORRY, WE DON'T TAKE CASH
Talk about a vibrant Thanksgiving shopping weekend: MasterCard spending exploded, up 34.8% from last year. Visa charges increased 24%. But it wasn't just holiday gifts these credit-card shoppers scooped up. They also bought pork chops. And movie tickets. And fillings for their teeth.
After a fling with frugality in the early '90s, Americans are back in love with their credit cards--and not just because the economy has improved. Credit-card marketers keep offering consumers more reasons to whip out plastic. They're coaxing businesses--from supermarket chains to the family dentist--to accept the cards. And by offering airline miles or rebates, they're providing more incentive to use credit cards in place of cash or checks.
"EVERYTHING." Consumers are responding big-time. This year, market leader Visa USA Inc. expects its sales to expand 23.4%, to $280 billion. That's the biggest gain ever, easily surpassing the 17.5% jump in 1990. MasterCard International Inc. foresees a similar gain. Meanwhile, total installment debt, including auto loans, should rise 12% in 1994, according to DRI/McGraw-Hill.
One convert to the increasingly cashless society is Marie Franoise Razzi-eri, 48, a San Francisco mother and homemaker. She had never used a credit card but recently applied for a Mileage Plus Visa card from United Airlines Inc. The reason? "I want to get some trips," she says. "I am going to charge everything: food, groceries, at the gas station, tuition--everything."
Razzieri isn't alone. Consumers love rebate products such as United's, known in the business as co-branded or affinity cards. MasterCard now has 49.6 million of them outstanding, up 42% from a year ago. Meanwhile, new issues of plain-vanilla cards without rebates will increase only 5%. More people are shopping with more plastic: Andersen Consulting says the average spender held seven credit cards in 1989. Today, that purse or wallet carries 11.
Department stores such as Nordstrom Inc. and Bloomingdale's Inc. began offering rebate Visa cards this year, as interest in their private store-brand credit cards continued to fade. Even supermarkets are getting into the act. Cincinnati-based Kroger Co. already offers a MasterCard that gives credit toward food purchases. Giant Food Inc., a supermarket chain in the Washington area, is negotiating with MasterCard. Such deals will help push grocery charge volume for Visa and MasterCard to $9 billion this year, up from $3.9 billion in 1992.
More kinds of businesses accept cards. MasterCard expects discounters such as Wal-Mart Stores Inc. and Price/Costco to take its plastic next year. Even the U.S. Postal Service will begin accepting Visa and MasterCard nationwide. Credit cards "will get into utilities, government [services], housing, mortgage, car payments," says Thomas O. Ryder, president for establishment services worldwide at American Express Co. "If you think about the way people spend money, those are all opportunities for plastic."
DEEPER IN DEBT? All this new plastic is likely to boost spending by consumers, but it's too soon to gauge the exact effect. Of course, new opportunities to charge also mean new opportunities to sink into debt. But card issuers insist that consumers are getting better at managing debt, and indeed delinquency rates are at low levels. Also, they say, a big chunk of charges gets paid the same month. A year-old study done for Visa by Yankelovich Partners Inc., for example, shows that 72% of grocery charges are paid by the month's end.
But critics note that most consumers don't use separate cards for food and luxury items. When the economy gets worse, they say, it will be tempting to roll over charges for essentials month after month. "It certainly gives them an opportunity to get into more trouble than they have in the past," says Mark M. Zandi, an economist at Regional Financial Associates Inc.
All the action is not likely to make card issuers much richer. Increased competition has lowered the return on equity on such operations to 20% or 25%, down from 30% to 40% a few years ago, says Joel Friedman, a consultant at Andersen. By the end of the decade, he expects that figure to be down to 15% to 20%: "This is no longer the jewel it once was, but it sure beats lending to Brazil," Friedman says. Perhaps frequent chargers will use their free miles to fly down there--and then put the rest of the trip on their cards.Russell Mitchell in San Francisco, with bureau reports