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Financial Evolution Doesn’t Stop During Recessions

A headline in today’s Wall Street Journal caught our eye today: “Debit-Card Use Overtakes Credit.”

The Journal writes, “The surging popularity of debit cards largely reflects the growing use of plastic by American consumers.  Credit and debit card purchases of retail goods and services vaulted past cash and checks in 2003.  Now the recession is giving many consumers second thoughts about their credit cards.” 

The American consumer–along with American banks and companies– is in full deleveraging mode.  Fiscal conservatism is the new norm, and credit card balances are being paid down.   But at the same time, the volume of purchases on credit cards actually grew in 2008, albeit just barely.  

So, people are still buying a larger percentage of their purchases on their credit cards, but they are being more responsible about paying them off at the end of the month.  The real story, and the WSJ points out, is the growth of debit cards, which for the first time surpassed credit cards in sales value in 2008.  Debit cards offer all of the same conveniences and protections as credit cards, but they force consumers to have more discipline.  You can’t get into debt troubles when you are spending your own money out of your checking account, after all.   

This is a positive long-term development for the country (even if the deleveraging process is painful to live through).  We can keep the efficiencies that come with plastic–such as enhanced security and ease of payment, particularly online–but we shed the temptation to buy more than we can afford.  This just goes to show that recessions do not necessarily impede financial innovation and evolution.  In fact, they often accelerate it!  

On a side note, one of our associates in Brazil told us once that Brazil’s horrid hyperinflation, which wreaked so much havoc for so many years, actually had some positive residual benefits.  Brazil’s banks are now highly efficient and extremely fast in clearing checks.  After all, during periods of 1,000% annual inflation, waiting even a few days for a check to clear can mean a real loss of purchasing power.  Now, Brazil is financially stable, but the beneficial adaptations remain.   There will no doubt be a host of innovations that our financial system produces to survive the current recession.  It will be interesting to see what spillover benefits our economy gets from these in the years ahead.