Deep Dive: Measuring COVID-19’s Impact On Consumers’ Payment Preferences

The COVID-19 pandemic and safety measures taken to slow the virus’s spread have overturned consumers’ daily lives, including what they are buying and which payment methods they are using to transact.

Households stocked up on necessary items to reduce how often they had to leave the house as social distancing and stay-at-home orders rolled out starting in March. Many businesses closed, and others allowed employees to work remotely to follow public health policies. These changes have presented consumers with new economic conditions and created different purchasing priorities. Consumers have reduced discretionary shopping to better safeguard their budgets during the economic downturn, even as they rushed to buy pantry staples.

Consumers are also rethinking whether they should be paying for goods with cash, credit cards or debit cards. Concerns about the virus lingering on paper bills or point-of-sale (POS) terminals have made some consumers and merchants favor digital purchasing. Consumers must also consider whether it still makes sense to use credit when cash is tight, or if doing so will put them into debt that could become harder to pay off as job losses deepen.

This month’s Deep Dive examines the difficult decisions consumers are facing and explores how the outbreak is shifting consumers’ purchasing habits and transaction methods. Understanding consumers’ new approaches to commerce can help merchants and financial institutions (FIs) cater to customers’ needs during the pandemic and anticipate which behavioral changes may continue into the future. This may include promoting goods and payment instruments that match consumers’ new behaviors.

Grocery Spending Climbs

The kinds of goods that consumers are purchasing have changed significantly to match new economic and social realities. Stay-at-home orders and newly remote workforces have resulted in fewer car trips and thus less need for gas, for example. The price of oil plunged into the negative in late April before making a lukewarm recovery, reaching a national average of $1.80 per gallon — more than a dollar short of the average price during the same period in 2019.

Gas is not the only sector that has been hit, as store closures and consumers’ desires to trim spending have resulted in steep declines in retail purchasing. Apparel and accessory retailers reported an 89.3 percent year-over-year decline in April sales, and retail as a whole underwent a 21.5 percent year-over-year drop. Supermarkets, however, have experienced headline-making rises in sales.

Consumers responded to early pandemic containment efforts and restaurant closures with a surge in grocery purchasing as they sought to fill their refrigerators and pantries. Grocery spending was also spurred by concerns that some goods could become less available in the coming days or weeks, resulting in a spike in buying during late March. The volume of grocery purchases made over PULSE’s debit network was 25 percent higher than usual during March 17 to March 24, for example. This high demand began to ease in the days following, however, as consumers built sufficient stockpiles or started to feel that there was enough for everyone. PULSE noted that grocery purchasing volume declined during the week of April 3 to only 15 percent higher than typical levels.

Credit union service organization (CUSO) PSCU reported that, among its members’ customers, debit spending at grocery stores was up 10 percent year over year for March 17 to March 23. This purchasing continued to rise, with the week of April 6 to April 12 seeing debit card spending at grocery stores hit a level that was 17.3 percent higher than PSCU had seen during the same period in 2019. These numbers and PULSE’s data indicate the prominence of supermarket purchasing as consumers continue to cook at home.

Consumers spent more on groceries not only with debit cards, but also with credit cards. PSCU reported that credit cards marked a 24.9 percent year-over-year increase in grocery spend from March 17 to March 23 and a 21.1 percent year-over-year increase from April 6 to April 12. This trend shows that although credit card spending was higher than usual in this sector, it was still declining. This comes at a time when debit card grocery spend continues to climb to new levels. The discrepancy that PSCU noted between credit and debit card use may speak to larger shifts in how consumers prefer to make their payments during these unprecedented times.

Credit and Cash Are Being Treated With Caution

Consumers are reconsidering which payment methods they feel most comfortable using for purchasing beyond just grocery shopping. PSCU noted that consumers in general are spending less via credit cards than they were the year prior, but they are using debit cards more. The CUSO observed a 28.9 percent year-over-year decline in credit card spending across purchasing categories for the week ending April 19. Overall credit spending rose during the following week to only 25 percent less than 2019 levels. This decline in general credit use was not mirrored for debit, however — debit spending was 5 percent higher year over year during that latter week, in comparison.

The rise in debit spending while credit spending remains low could indicate that consumers prefer to spend only the money they have in the bank. That could be because financial uncertainties make it difficult to predict how much money households will have at the end of the month for credit card bills. Recent reporting from the Consumer Financial Protection Bureau underscored consumers’ caution toward debt, with the group noting a 40 percent decline in credit card applications between the first and final weeks of March.

Using credit cards for in-store retail purchases has grown, but only by a small amount. One recent report from data analytics company NPD Group found that the share of all in-store purchases made with credit cards has risen 3.4 percent over January 2020 rates. Credit cards now claim 82.1 percent of these transactions. Consumers making in-store purchases largely turned to cash for their non-credit card transactions. Marshal Cohen, NPD chief industry adviser for retail, said in the report that the relatively small increase in credit use might reflect that some customers had withdrawn significant quantities of cash during the early days of the pandemic as a precaution — in case bank accounts became more difficult to access — and are now working through those funds.

There is potential for cash to still take a hit during the pandemic, however, as merchants are focusing more on accepting touch-free payments. Some restaurants now require customers to pay digitally through apps or online ordering forms, with grocery chain Publix enabling Apple Pay purchases as of March, for example.

Consumers are undergoing significant life and financial changes due to the pandemic, and they are revising their purchasing behaviors to match. Shoppers are reevaluating which purchases are necessary, which can wait and whether it is safe to use credit or handle physical dollar bills. These changes in what consumers buy and which payment instruments they use could be temporary, but they may also result in new habits that stick around long after the crisis is over. Merchants and FIs that better understand shoppers’ new preferences will be better able to pivot and accommodate them.