Understanding the dynamic between credit and debit—and now, increasingly, prepaid—is key to understanding how to grow the U.S. payments business in a challenging environment.

A new position paper from MasterCard Global Insights indicates just how that dynamic is evolving in the third year of the financial crisis. U.S. credit card purchase volume increased by $111 billion in 2010, while U.S. debit and prepaid purchase volume increased by $177 billion—6.3 percent and 14.6 percent, respectively. This is in stark contrast to 2009, when U.S. credit purchase volume shrank by $181 billion and debit and prepaid purchase volume increased by only $82.9 billion. So what caused the U-turn?

MasterCard estimates that $89 billion out of credit’s gain of $111 billion was due to an increase in consumer spending—which means that discretionary spending drove 62 percent of the 2010 spending increase. The other portion of the spending increase was largely due to price increases in non-discretionary spending, primarily, though not exclusively spending on petroleum. And $30 billion of credit’s gain came from cash and checks.

Credit’s Gain of $111 Billion was Largely Driven by an Increase in Consumer Spending

The consumers leading this resuscitation of consumer credit—the segment MasterCard refers to as “Credit Worthy” — were able to pay down debt and increase their liquid assets in reaction to the financial crisis. Now they are spending more, compared to 2009, especially in non-discretionary areas. These consumers are also looking to get higher returns on their liquid assets so they can meet their chief financial goal, saving for retirement. This may be a golden opportunity for issuers to offer products with value propositions that help meet the pent-up demand for non-discretionary spending while delivering higher return on liquid assets.

Topics: Credit, Debit