Digital Payments Make It Easier than Ever for Young Consumers to Make Bad Financial Decisions

Insights from the Banking and Payments Intelligence Report -- June 2022

By John Cabell, Director of J.D. Power Banking and Payments Intelligence.

Comedian Jerry Seinfeld nicely summed up the current state of digital transformation in a recent Netflix comedy special. Noting the subtle evolution of language over time, he observes that people “get on a train, and in a cab, but you take an Uber.” He then concludes: “You take it! You take Uber! Because there’s no money. It’s like free.”

Now, Uber is not free, of course. Anyone who has ever looked at their credit card statement after their teenage kids spent a weekend ordering fast food deliveries and shuttling themselves to and from friends’ houses can attest to that. But the germ of truth in Seinfeld’s comment that makes it so funny is that when you are using Uber—in that moment—it feels like it’s free. That psychology is creating a dangerous paradox for the millions of Americans now using digital payments, buy now pay later (BNPL) services and mobile wallets to pay for everything from dining and ecommerce to rent and utilities.

To get a clearer sense of how Americans are using these digital payment alternatives, the J.D. Power Banking and Payments Intelligence team conducted a pulse survey to evaluate user experiences with different services and asks how the growth of these services is affecting overall financial health. Ultimately, the research finds that digital transactions are rising in popularity—with credit and debit cards still leading the way in overall utilization—while BNPL, mobile wallet and person-to-person (P2P) payments are earning high customer satisfaction scores, particularly from younger customers. The research also finds that digital transactions are making it easier for young customers to overspend. 

Debit and Credit Cards Still King, but Digital Alternatives are Winning Converts

In terms of overall utilization, debit and credit cards are still the most frequently used payment methods by a long shot. Across all age groups, 32% of consumers have used a debit card in the past three months and 28% have used a credit card. While digital payments alternatives like mobile wallets, P2P apps and BNPL have claimed a great deal of industry attention, they are used much less frequently. Just 2% of consumers used a mobile wallet and just 1% used a P2P app or BNPL during the three-month period.

While overall usage of digital payments is still relatively low, the technology is winning converts when it comes to customer satisfaction, particularly among younger customers. In fact, overall customer satisfaction is highest for credit cards (4.4 on a 6-point scale) and BNPL. Satisfaction scores are higher for these digital alternatives among customers ages 18-44 than they are for those ages 45 and over.

Different Solutions for Different Situations

Use cases and life stage appear to influence the decision to use one payment type over another. The primary reason for using credit cards among 61% customers ages 45 and older is to earn valuable rewards with purchases. Among customers younger than 45, just 36% are using their credit cards to earn rewards, while 25% are using credit cards to break up their payments over time.

Debit cards, by comparison, are prized for their lack of interest charges and debt. They are also used more heavily by younger consumers for large recurring expenses, such as rent, car payments or insurance.

BNPL users cite low payments, the ability to buy more expensive purchases, lack of interest charges and promotions and rewards as their primary motivators.

It’s Like Free

Younger consumers tend to have higher levels of satisfaction with most payment types, although they generally have less understanding about payment methods and are making poorer financial decisions when using these solutions. For example, 38% of consumers ages 18-44 say they only partially understand the payment methods associated with these services and 5% say they do not understand them at all.

As a result, more young customers tend to struggle with financial health. Just 41% say they pay off their credit card statements each month and 28% say they sometimes overdraw their checking accounts with their debit cards.

Younger customers have also been the most enthusiastic adopters of BNPL services. They tend to have more accounts and are more likely to be paying off multiple purchases at once. However, many are also failing to take advantage of interest free options and instead paying beyond their budgets and not paying on time.

Across the board, the research shows that younger customers (under age 45) generally have less understanding about alternative payment methods, are less likely to take advantage of rewards, less likely to pay off balances each month, more likely to overdraw their account balances and tend to struggle with financial health. The simplicity of the interface combined with the immediate gratification these digital payments solutions provide is creating a potentially dangerous illusion that many purchases are either without cost or something to worry about later. This phenomenon exposes a longer term need for consumer education and financial advice accompanying the growth of new payment options.

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This Banking and Payments Intelligence report was authored by John Cabell, director, banking and payments intelligence at J.D. Power. Please contact us at the numbers below to connect with Mr. Cabell, or to learn more about the underlying research.