Are Credit Cards Slowly Dying?

For the last 50 years, few financial products have been more profitable for the issuing institutions than credit cards. Indeed, companies like American Express would routinely report double-digit growth year after year, an impressive feat given the sums to which that growth equates. While the industry would occasionally experience ebbs and flows, typically occasioned by shifts in the economy, overall growth consistently remained strong.

For the last 50 years, few financial products have been more profitable for the issuing institutions than credit cards. Indeed, companies like American Express would routinely report double-digit growth year after year, an impressive feat given the sums to which that growth equates. While the industry would occasionally experience ebbs and flows, typically occasioned by shifts in the economy, overall growth consistently remained strong.

However, these companies have recently begun to experience slowed growth, and even moderate shrinkage in recent years. While the shift is not catastrophic, the effects are becoming increasingly alarming for those involved in the credit card industry. Indeed, the growth of E-commerce has made the use of credit cards more widespread and allowed smaller retailers to enter the market and compete. Nevertheless, this has not completely offset the downturn in the credit card industry.

In part, stiff competition has come in the form of debit cards. Rather than carrying balances, debit cards allow users to draw on funds already on deposit with their financial institution, typically with minimal or no expense to the end user. Although recent legislation (the Durbin Amendment to the Dodd-Frank Act) boosted credit cards by penalizing debit cards, the effects were not sufficient to completely halt the erosion of credit cards’ dominion over the non-cash payment sphere.

American Express, while not the most widely accepted card, was one of the most successful for many years. As noted, it routinely posted double-digit growth. However, that has dipped significantly in recent years. Some of that may be due to its aggressive practices that include taking a larger slice off the top of sales and recent court decisions prohibiting some of its business practices. But, a large portion of this slowing growth reflects changes in consumer spending habits.

Many Americans are no longer willing to carry balances that will allow credit card issuers to earn interest. This is a lesson likely learned after the economic downturn and slow recovery following the crash of the real estate market. As a result, those customers who still use credit cards are more inclined to pay off their balances at the end of the billing cycle to avoid paying interest. Alternatively, many have forsaken credit cards almost entirely in favor of debit cards that are accepted in virtually all of the same locations as credit cards. Other payment solutions, like PayPal, are also chipping away at credit cards’ domain, even offering new solutions that allow PayPal acceptance at physical retail locations in much the same manner as a credit or debit card.

In response, credit card companies are attempting to compete by offering more incentives, such as frequent flier miles, cash back, and other rewards programs. Still, many fear this may be too little incentive offered too late in the game to make much difference. Nevertheless, while other companies continue to sag, Capital One’s fortunes appear to be on the rise. This credit card issuer has gone against the trend of other companies by continuing to extend credit to riskier borrowers. While this was once a popular field prior to the economic crisis, it has been abandoned by most other lenders, leaving room for Capital One to expand into the resulting void.