Plastic Choices: Consumer Usage of Bank Cards versus Proprietary Credit Cards

Article excerpt

Abstract

Using survey data from retail and gasoline cardholders, we examine the substitution of general purpose (bank) cards for proprietary cards and how issuers can predict which consumers are most likely to substitute. Convenience and rebates are the primary reasons for using a bank card. However, consumers use their proprietary gasoline cards to keep purchase records and proprietary retail cards to obtain better service. These results help explain the growth in popularity of "co-branded" cards. (JEL G21)

Introduction

Over the past decade, co-branded credit cards have become the consumer's choice for making retail purchases. Within the first five years of their introduction, 135.9 million co-branded cards entered circulation, accounting for 43 percent of all MasterCards and 24 percent of all Visa cards (Frank 1996; Market Research 1999). The findings of our surveys, completed prior to the introduction of the first co-branded MasterCard by Chemical Bank and Shell Oil Company, provide detailed insights concerning the reasons for the development and continued growth of cobranded cards in addition to how consumers choose between a bank card and a proprietary credit card.

Charge volume statistics demonstrate the growing appeal of credit cards to consumers. U.S. charge volume on credit totaled $1.23 trillion during 2001, accounting for more than 21 percent of purchases. With more than 400 million bank cards, 300 million "store" cards, and 100 million gasoline cards, the array of payment options offered to customers has become an increasingly important dimension of retailing. A total of $80 billion in revenues and 2.2 percent average return on assets demonstrates the competitive intensity of the credit card industry.2

There are three primary reasons associated with the increased importance of the payment system. First, customers wish to minimize the transaction cost of paying for their purchases. For example, oil companies have boosted gasoline sales per station by installing pump-based card readers to speed up transactions, which reduces the transaction cost in terms of the customer's time. Second, payment devices can and are being used to build brand loyalty (repeat purchases). Bank card issuers have found rebates are particularly effective at encouraging repeated card usage across a wide variety of retail outlets. The power of rebate programs has not been lost on retailers: many have agreed to jointly issue a "co-branded" Visa or MasterCard. Third, technological advances have greatly increased the value of the information captured about customer preferences when credit cards are used instead of cash or checks. Purchase patterns are key ingredients in target marketing efforts to generate incremental sales. The growing popularity of general-purpose (bank) credit cards is causing many retailers to re-evaluate the purpose and relevance of their proprietary credit card programs (a proprietary "store" or "gasoline" card is typically accepted only by the issuing merchant and its affiliates).

With the proliferation of bank credit cards in wallets and the increased acceptance of such cards by merchants (including non-traditional outlets such as fast food restaurants and grocery stores), the merchant's proprietary plastic no longer provides a unique credit service. Consolidation of charge activity into a smaller number of cards in the wallet is feasible. Increased competition begs the question: Will proprietary cards survive as a payment alternative in the customer's wallet, or has their time passed?

To date, no empirical work has analyzed why consumers choose to use one type of credit card over another (proprietary versus bank card usage). Duca and Whitesell (1995) look at card ownership. Martell and Fitts (1981) and Canner and Cyrnak (1985) compare the demographic characteristics of credit card users to non-users. Neither study, however, controls for the opportunity to use credit cards (i. …