A study by TransUnion, in conjunction with Edgar, Dunn & Company, has provided some intriguing insights into consumer payment preferences, attitudes and behavior. The purpose of the study was to assess what payment methods are preferred by different categories of consumers, based on their credit rating. The authors said that the 2007 study is the first payment preferences survey that combined consumer credit risk characteristics and consumers' choices of all payment options, including cash, check, credit cards, debit cards, electronic payments and new online payment options.

Because the study shows preferences based on credit risk, it offers details on consumer payment preferences that have not been widely available in the past.

Debit Number One for the First Time

"This is the first year that debit is number one," said Beth Costa, director, Edgar, Dunn & Company. "We've seen it creep up each year, but now this year, it was number one." Costa said she was not surprised to see it move into the number one slot because they have seen indications that consumers want to use their own money for some purchases. The study found that 29 percent of respondents prefer debit cards versus 26 percent for credit cards.

Could it be that some consumers have used up their credit limits, and maxed out their credit cards? "Actually, half of the population that preferred cash, debit or check were actually prime risk and above," said Tim Claytor, director of Market Intelligence for TransUnion. "Access to credit was not an issue in that overall preference." Costa said that she was not sure access to credit explains why consumers prefer debit payment choices.

"We have heard consumers say, over and over, that they want to have control over their money," explained Costa. She said consumers want to use their own funds because they feel they can manage their spending better.

"They don't always get there," added Costa. "They don't always get to reduce their credit usage as much as they say they would like to. But, that is the trend we have been seeing." This study specifically asked consumers why they prefer debit. The question was also asked for other consumer funded options, like cash and checks, and the same reasons were cited.

Claytor said consumer preferences for debit payments should not be surprising, given all the media attention focused on credit responsibility.

Rewards Cards on the Rise

One illuminating finding of the study was the interest in credit cards that are used in rewards programs. These cards are typically co-branded with both a bank and a non-bank sponsor. The non-bank sponsor could be an airline, a store or a consumer group like AARP.

The study found that rewards credit cards represent 50 percent of all preferred credit cards today with 83 percent of rewards card owners using their reward credit card. Consumers are using more proprietary rewards credit card products, and this shift has seemingly come at the expense of co-branded credit cards, according to Costa.

The study also showed that proprietary rewards credit cards have gained in ownership, usage, and preference over both co-branded and affinity credit cards. In addition, 80 percent of those who hold reward cards are in the best risk categories.

Other significant findings of the study include:

• 50 percent of those consumers who prefer cash, check, and debit cards are in the prime and super prime categories.
• Relationship Rewards program connected with the consumer's primary financial institution is a greater incentive than a reduction of interest rates when acquiring a new credit card. Thirty-five percent of respondents indicated that Relationship Rewards is the leading incentive to acquire a new credit card from their primary financial institution (up from 31 percent in 2004).
• Fifty-five percent of respondents said they owned a person-to-person account (e.g., PayPal), while 10 percent reported active use.
• Rewards cardholders will use them 83% of the time, versus 77 percent of standard cardholders, or 75 percent of co-brand/affinity cardholders.
• There are significant differences in wallet usage and position across consumer risk segments and this behavior changes as overall risk migrates lower and higher between sub-prime and super-prime risk segments.

In addition to a growing desire of consumers to use their own funds as opposed to borrowed funds, i.e. credit cards, the other major impact is the value that consumers perceive in rewards programs. Rewards programs are not limited to credit cards; there are now rewards programs that involve debit cards. Some banks, for example, offer rewards for direct deposit and mortgages.

Given the popularity of rewards programs with consumers, Costa advises that there may be some value in considering how a prepaid program may be rewarding customers. For example, a bank with prepaid cards may want to think about rolling that into the enterprise rewards.

But, the biggest benefit of the study is the ability to determine consumer preferences by credit category. "Why market rewards programs to consumers who may not even care about rewards," said Claytor. "That's the whole idea behind the payments preference model. Tons of national credit card marketers are sending the wrong message to the right audience."

For example, although sub-prime consumers may not care about rewards cards, they probably receive several rewards cards offers in the mail. Claytor said the idea is to apply the data to a better message and a better targeting group for more efficient marketing.

"What Edgar, Dunn and TransUnion wanted to do was to take a general market research study and be able to apply that on the ground," said Claytor. He said the data from the study is applied across the entire TransUnion database of 240 million consumers. Credit products can now be targeted at individuals who are more likely to be attracted to that product, based on their credit status.