Does Millennials’ credit card wariness spell trouble for retail?
When J.C. Penney CEO Marvin Ellison recently pointed to the business positives that have come from the chain’s test of major appliances, one key point was the high percentage of new customers who were signing up for the retailer’s credit card to finance their purchases. The willingness of consumers to take on debt has proven to be a net positive for merchants over the years, but that may be in jeopardy as Millennials push back against the “charge it” mentality of their parents.
An analysis of Federal Reserve data by The New York Times has found that credit card debt among those 35 years of age or younger has fallen to its lowest level since 1989. Younger consumers typically prefer to use debit cards or services such as PayPal that pull directly from bank accounts when they make purchases.
A number of factors explain the wariness of Millennials to take on credit card debt. Many in the generation carry a heavy load of student loan debt that they are years away from paying off. Others have witnessed family and friends struggle to pay off credit card debt.
Some Millennials are concerned about future finances as they move into their mid-thirties and contemplate their children’s education, as well as their own eventual retirement. A survey of 1,000 adults by the Society of Grownups, reported by Bloomberg, found that half of those between 21 and 29 are receiving financial support from relatives. Interestingly, 41 percent expect to help support their parents in their retirement years.
Laws enacted after the financial collapse as well as unemployment and under-employment among Millennials has also cut off access to credit for many. Research conducted earlier in the year by the Pew Research Center found that 71 percent of males between 18 and 34 were employed compared to 84 percent in 1960.
- Student loan debt isn’t the only thing keeping millennials awake – CNBC
- How Millennials Became Spooked by Credit Cards – The New York Times (tiered sub.)
- Millennials want money to leave home – RetailWire
- Millennials Mooch Off Their Parents Now But Plan to Support Them Financially Later – Bloomberg
- J.C. Penney’s (JCP) CEO Marvin Ellison on Q2 2016 Results (Earnings Call Transcript) – SeekingAlpha
Discussion Questions
DISCUSSION QUESTIONS: Should retailers worry about the reluctance of Millennials to use credit cards? What effects do you expect it to have on the business in the years to come?
Poll
BrainTrust
Robert DiPietro
SVP Energy Services and New Ventures, HomeServe
Max Goldberg
President, Max Goldberg & Associates
At the end of the day, all that spending with no reserves catches up to you so what’s good for consumers will prove to be good for retailers. If you’re not laden with debt, holiday gift buying seems like an easier proposition, no? Besides, relying on consumer debt is very short term thinking — you go, digital natives!
Retailers may be concerned that Millennial customers may not want to take on credit card debt, but in the long run, lower debt and higher savings is good for the economy. Retailers, as they have done so many times before, will need to adapt to consumers’ changing habits.
Millennials have already shown a wariness towards traditional advertising, now they are less willing to accumulate debt. Retailers should lead the way in showing value for the products they sell and demonstrating ways that consumers on budgets can afford them.
Well, a picture has been developing of the Millennial, and it speaks to a smaller retail environment:
I think this speaks to fewer stores, a shrinking landscape, continued success in fast-fashion and smaller-footprint grocery stores. It doesn’t bode well for big box retailers of all shapes and sizes.
Retailers should only worry about the reluctance of Millennials to use credit cards if they (the retailers) are going to lose money off the carrying charges, but retailers will probably gain in the long run because they won’t have to chase collections, which is very expensive and doesn’t really “pay off” in the long run anyway. The only drawback is if Millennials (or those using these new payment systems) are less prone to impulse shopping, and only concentrate on well-thought out and planned buys with their debit cards or PayPal.
I agree. It’s an apparent wash. The real loss to retailers may be access to additional names and addresses for marketing.
It will have wonderful effects. I can tell you from experience that being debt-free gives an individual a lot more freedom. The same with businesses. Working in the grocery industry, some of our best run supermarket companies are debt-free, other than perhaps some small token debt. In my opinion, student loans are totally unnecessary and play upon people’s ignorance, as do many other types of debt. Being in debt is no different than being addicted to drugs. It takes determination to break the habit and guts to just say no. But the debt dealers are everywhere, tempting people with cheap credit to get them hooked. At the end of the day, anything bought with credit is usually something useless and of no value. I might make the exception to a house, but only if purchased at a deep discount.
Taking on personal debt to shop is a short-sighted approach to existence. Once a consumer reaches his/her limit on the debt to which they can have access, they are no good to a retailer anymore. So since we all now have other forms of payment (many of which draw directly from our bank accounts) there may indeed be less credit card usage/debt, but the long-term effect on retailers will be a wash as some of my other colleagues commented.
Millennials clearly have a different perspective on consumption. They are less prone to purchases and looking for experiences. They spend money on different things, but that won’t keep them from purchasing things they need. They will do it on their terms vs. a store credit card. A generation of consumers that doesn’t want to take on excessive debt will likely help the economy in the long run.
Many Millennials already carry a significant amount of student loan debt (and this is a net negative for our country) and are in no hurry to rack up credit card debt. Savvy retailers will focus on creating a compelling store experience that will lure younger customers into the store.
We really need to be aware that not all Millennials are alike. The reasons for them having fewer credit cards are varied. Some are positive signs that they are learning from us Boomers that credit debt is tough to live with. The more strict financial institution lending criteria (developed primarily by us Boomers spending more than we could afford) is a challenge that is preventing Millennials from taking on more credit debt.
Bottom line, I don’t believe this is slowing down the growth of retail overall, especially in the U.S., where credit cards were really born. Millennials are shopping more than ever. Their shopping habits are driving significant shifts in retail evolution. However, those retailers that adapt to this evolution will secure their growth potential for the future. Easier said than done, of course!
Aversion to, or at least caution concerning, debt may seem to be the problem for retailers, but more often it is a symptom. When the purchase is not inspired, it is easier to use debt avoidance as a good reason not to buy (and sometimes it is, and should be), but when a product is the fulfillment of a lifestyle need or want, the credit card will come out and that beautiful cha-ching will sound at check-out, as the store-branded bag is carried as a badge of honor.
Retailers should align with responsible spending and part of that proposition should be educating consumers about building on what they have (from that or similar stores) and refreshing what they have based on all the factors that fuel a buying decision.
Smart consumption serves brands well, with immediate and lifetime customer revenues.
Where the use of credit is not suitable, a wish list can be. And the purchase should always be inspired by the retailers based on the brand promise.
Americans between the ages of 20 and 35 were raised at a time of austerity AKA the great recession, 2007-now. Economists claim the recession ended in 2008, but as retailers we know better. These folks are more like their grandparents, who endured the Great Depression, than their parents who struggled with a subprime mortgage and credit card debt.
On top of that, this is the first generation who attended college when the cost doubled in 20 years which led to crushing student debt. So most of these folks are money wise; smarter than their parents and hopefully as wise as their frugal grandparents.
Membership has its privileges …
That was the long term positioning of Amex. Perhaps that is the promise that will resonate with these parsimonious shoppers. The value to the card holder must be greater than an incremental “open to spend.” The value should come from an array of benefits that are relevant to this new and different mind set, these should aid and abet the outlet brand experience.
Proprietary credit cards are scary. And retail ain’t for sissies!
Lower use of credit can crimp spending in the short-term. After all, credit is really just time-shifting your income. If Millennials are unwilling or unable to spend ahead of income, retail purchases get spread out over time.
But lower formation of households is a bigger driver of Millennial spending than credit. The need to buy is a bigger driver than is the way to buy. And nothing increases the need to buy as much as children.
Millennials are waiting longer to get married and have children. The fertility rate of Millennials is the lowest of any U.S. generation ever recorded.
Some of the same influences that create aversion to credit also create aversion to starting families. These include paying off existing student loans, lower income in relation to rising home prices and experience watching older generations struggle with spending and the loss of real estate wealth. Further, putting off the use of credit makes it harder to qualify for mortgages, which in turn suppresses home buying and related household purchases.
The leading edge of Millennials is entering the housing market. Let’s hope that augurs well for pent up demand.
I’m going to take this a step further and say it’s not so much about whether they use credit cards or not. The bottom line is they are spending less and yes that will have, and is having, an impact on retail.
Retail needs to re-think services and experiences.
And that’s my 2 cents
If retailers are concerned about credit card use by Millennials, they are looking at the wrong metric. If they should be concerned about anything, it should be the shopping habits and behaviors of Millennials.
Wringing your hands about credit card use only takes the retailer away from “how do I do business with Millennials?”
Credit is not a long-term solution for retailers. Remember that the consumer interest payments to credit cards decreases their overall retail spending. While easy credit makes it easier for large-ticket items to be purchased (I am thinking appliances or automobiles), it is not prudent to finance day-to-day spending. Millennials are learning proper financial management to dig themselves out of already high student loan debts, which is good for them. For retailers, what they really need to be concern about is how the student loan debt is weighing down the Millennial spending power. That, however, is a separate topic.
The new normal … I mean even on the face of it, was the old normal of “finance a purchase at 20% + a year” really a good decision for anyone but the credit card company? I suspect retailers will do just fine, but only after an adjustment to a lower level of spending that’ll cause some shakeout in the market. Credit card companies may have to come to the realization that they can’t sell cards with $25 monthly penalty fees and 20%+ interest charges.
No, retailers shouldn’t be worried about “reluctance of Millennials to use credit cards.” Ultimately who cares how you pay for a purchase? They should be worried that the Millennials don’t have the incomes to support the purchase in the first place … talk about fixating on the symptoms and ignoring the disease!