Thesis Chapter 2: If credit cards encourage consumer spending among US and UK citizens?.
Review of Related Literature and Studies
The following are anecdotes and excerpts from various sources that are relevant in the direction of the study. All gathered materials focused on credit cards, consumer debt and consumer spending.
One related article cited for this study is one which basically is about the introduction of smart card and who will benefit from it. According to Worthington (1996), the smart card can be a useful addition to the existing payment options. More specifically, the article gave this very short but concise conclusion: “The financial institutions which are supporting the introduction of the smart card have their own agenda and a business case based on a cost and benefit analysis. They would, however, do well to consider fully the other players in the payment system supply chain, the retailers and the consumers. Technology driven products which serve only the needs of one group in a supply chain are not known for their success. The smart card could be a useful addition to the existing payment options at the point of service and it could offer retailers access to new delivery channels and better communication channels to both establish and maintain relationships with their customers. However, more attention needs to be paid to the costs and benefits to retailers, and indeed to consumers, before the question can be answered of whether the smart card will be boon or a burden to retailers.” (Worthington, 1996, p. 34)
Another related article cited was the article “Why we need to use credit cards: a university experience” by Roger Doost. It described what took place in a university when the authorities supported that credit cards should no longer be accepted for the payment of fees. It also discussed the arguments for and against the use of cheques and credit cards. It suggested that continuing to accept credit cards would be more helpful to students. The article conclude: “The university has negotiated the best rates possible for the use of credit cards. Many students and their parents see this as a service and this benefit cannot easily be taken away from them. If this service is denied, there is the possibility that a number of students would not be able to complete their education or, at least, it could delay the completion of their degree requirements. Finally, by eliminating charge card usage, the relevant expenses do not go away. Yes, there is more risk in handling cash and cheques. But also, the credit companies provide the money to the institution up-front at the time the credit card goes through. There is no waiting time and there is no loss associated with it. Otherwise, we may have to deal with some bad cheques and some uncollectable accounts and considerably more record keeping and tracking of collections and returned items from the bank.” (Doost, 1997, p. 106)
Another article by Worthington (1998) was cited for the study. It was an article comparing the “card centric” distribution of financial services in Japan and in the UK. The article gave this interesting conclusion: “The power of the chip card to hold a large amount of information and to be interactive with the POS terminal means that potentially all the different types of payment functions could be held on the one piece of plastic. Thus it is conceivable that instead of having to hold separate pay later, pay now and pay before cards, possibly issued by different card issuers, the chip card will enable all three functions to be held on the one card, issued to the card holder by the one issuer. The card holder would then decide at the POS whether he/she wished to pay later, pay now, or pay before. Loyalty schemes could be added to the same piece of plastic and the loyalty points collected and redeemed through the chip. There are already chip-based non-payment loyalty cards in issue in the UK, e.g. the Shell “Smart” card and the Boots “Advantage” card and with 27 million supermarket loyalty cards and over 15 million petrol retailer loyalty cards having been issued by early 1997, increasing numbers of the UK population are holding increasing numbers of plastic cards in their purses or wallets. The real potential of the chip card in the distribution of financial services comes not through its use as a payment card or as a nonpayment loyalty card, but through the access it could offer card holders to the management of their other financial affairs. Again the power of the chip would enable card holders to authorize and access true home banking, by placing their card into a reader attached to their screen, keyboard or telephone. The card would enable access to savings, investments and borrowing accounts and facilitate the transfer of funds between accounts, the drawing down of lines of credit and/or the deposit of funds into the card holders’ accounts. The chip card would also be the link between home banking and home shopping by providing the payment mechanism which enables secure payments to be made across the electronic infrastructure, again in either pay later, pay now, or pay before mode. Countries other than Japan and the UK are also moving towards card centric societies, based on the power of the chip card. France has had chip-based payment cards since the early 1990s; Australia, Hong Kong and Singapore have had successful pilots of chip card technologies. With the increase in international travel, the internationalism of retail formats and even the internationalization of financial services provision, there is every reason to believe that this card centric trend will continue. For current and aspiring providers of financial services one of the key questions that arises from the introduction of the chip card is, if the card holder can have all these financial services functions held on the one piece of plastic, then who is going to be the provider of that piece of plastic and the services that go with it? Hitherto card holders have been able to divide their loyalties between the various issuers of payment cards. The chip card will enable the development of a strong relationship between the provider of these financial services and the chip card holder and thus facilitate true relationship banking. The key question for financial service providers is, who will hold that relationship with the card holder? For this is a relationship that will be vital in an increasingly card centric world.” (Worthington, 1998, p. 219)
The study “Educating students: an ethics responsibility of credit card companies” aimed to acquire information on how college students handle debt to be able to formulate recommendations that will be given to credit card companies. This study was conducted because the practice of marketing credit cards on campuses is becoming increasingly controversial. “Critics have charged that credit card companies use unethical practices to encourage students to become overloaded with debt. In response, many colleges now ban credit card solicitors from campus. Perhaps the best way credit card companies can improve their image is to provide specific educational opportunities to students when they fill out credit applications.” (Austin and Phillips, 2000, p. 516) The study found out that students can learn specific types of information that should improve their ability to manage their debt. This information includes issues associated with the frequency of use of credit cards, the payment of credit card debt, and the number of credit cards held. The study suggests that credit card companies should change their marketing styles because of the negative publicity credit card companies are encountering in the recent years. Credit card companies need develop approaches that will improve their image with college administrators. The study therefore suggested that the best strategy credit companies can apply is to educate college students about the responsibilities associated with credit card debt. This way, companies will not only improve their image but also encourage the more ready acceptance of credit card companies on college campuses. As Austin and Phillips (2000) said: “If credit card companies educate college students appropriately, not only will students maintain long-term positive relationships with credit card companies, but the credit card companies will likely also improve their image with college administrators and the public.” (p. 517)
In relation, Kaynak, Kucukemirogli and Ozmen (1995) conducted a study in Turkey on credit card usage. According to the study, there is a rapid stage of development in credit card ownership and there is already a substantial increase in the acceptance of credit card ownership and usage in Turkey in the recent years. However, despite the more widespread usage, most credit card users are urban dwellers, educated professionals and high income earners. The study said it is a marketing challenge in Turkey to get more people to use credit cards that credit card issuers are meeting by offering cardholder benefits and incentives and urging merchants to promote debit at the point of sale. The study also found out that statistically, there are no differences with credit card usage between male and female. However, when the levels of education and income were considered, significant differences were observed. Specifically, it was found out that credit card users who receive low or middle income, or those who only reach high school or received an even lesser education, are more likely to value the credit feature (buy now without having the money) more than the services feature such as safety and convenience With the consumer credit card market in urban Turkey increasing rapidly, there is a need to boost portfolio profits through the use of new scoring techniques. The study suggested customer segmentation as a basis to ensure successful marketing strategies. Another strategy suggested was the cross-selling of credit cards, just so the cardholder loyalty to the bank will increase. In this cross-strategy, however, a standardize scoring and risk criteria across all product lines are required from bankers. (Kaynak, Kucukemiroglu and Ozmen, 1995)
In relation, Warwick and Mansfield’s study addressed the primary questions “How are student attaining their credit cards?”, “Are students knowledgeable about credit?” and “What are the students attitudes towards credit cards?” The study found out that majority of college students who own credit cards did not actively seek out credit cards, but were aggressively pursued by credit card issuers in the campus and through mail. The study also found out that while approximately half of the surveyed students did report knowing their credit balance and credit limit, majority of the surveyed students did not report knowledge of their credit card interest rate. More over, the study also found out that students in the US appear to have realistic attitude towards credit card usage. This was conducted in reference to the pressure being given by credit card industry to college students in the US to attain credit cards reflected by the aggressive promotional tactics employed by credit card companies to get college students to sign on as customers, and also due to the increase of credit card use in US households. (Warwick and Mansfield, 2000)
Another relevant study was done by Worthington (1995) entitled “The cashless society”. The study said that a tantalizing prospect for the 21st century is the concept of the cashless society, where the “clumsy and expensive to handle coins” are replaced by plastic cards. However, in this cashless society, some interested parties stand to gain more than others. Worthington discussed: “Outlines the rationale of those who are keen to promote the cashless society and the implications for marketers charged with winning consumer acceptance for payment by plastic card. Commencing with a European-wide view of the European plastic card market, focuses on recent developments within the UK, one of Europe’s leading countries in the use of plastic cards as a means of payment. The plastic card payment product is analysed under the three headings of pay later, pay now and pay before and a view is offered as to the future prospects for each type of plastic card in contributing to the development of the cashless society.” (p. 31)
Further, Worthington said that in the cashless society, there are two scenarios for marketers. “The first is how to educate and entice cardholders away from their existing payment media on to the use of just one piece of plastic. This requires attitudinal changes both from using cash and cheques to plastic payments and from keeping several accounts, often with different financial services suppliers, to achieve a pay later, pay now and pay before split in payment patterns…The second implication of the move to a single piece of plastic for a multiplicity of payment purposes is that such a piece of plastic will become the key physical manifestation of an account holder’s relationship with a financial services provider, replacing the cheque-book or pass-book. The prospect of only needing to hold one plastic card to conduct all non-cash payment requirements also implies only the one relationship with a financial services provider.” (Worthington, 1995, p. 40)
Austin, M. Jill and Phillips, Melodie R. (2001). Educating students: an ethics responsibility of credit card companies. In Journal of Services Marketing, Vol. No. 15, Issue No. 7.
Doost, Roger. (1997). Why we need to use credit cards: a university experience. In Managerial Auditing Journal, 12/2 , 105-106.
Kaynak, Erdener, Kucukemiroglu, Orsay and Ozmen, Ahmet. (1995). Correlates of Credit Card Acceptance and Usage in an Advance Developng Middle Eastern Country. In Journal of Services Marketing, Vol. No. 9, Issue No. 4.
Warwick, Jacqueline and Mansfield, Phylis. (2000). Credit Card Consumers: College students’ knowledge and attitude. In Journal of Consumer Marketing, Vol. No. 17, Issue No. 7.
Worthington, Steve. (1996). Smart Cards and Retailers-who stands to benefit? In International Journal of Retail & Distribution Management, Volume No. 24, Issue No. 9.
Worthington, Steve. (1998). The card centric distribution of financial services: a comparison of Japan and the UK. In International Journal of Bank Marketing, 16/5 , 211-220.
Worthington, Steve. (1995). The cashless society. In International Journal of Retail & Distribution Management, Volume 23, No. 7.