An empirical investigation of US credit card users: Card choice and usage behavior

InternationalBusinessReviewVol.5, No. 2, pp. 209-230, 1996

Pergamon

S0969-5931 (96)00006-6

Copyright© 1996ElsevierScienceLtd Printedin GreatBritain.Allrightsreserved 0969-5931196$15.00+ 0.00

An Empirical Investigation of US Credit Card Users: Card Choice and Usage Behavior Ali Kara,* Erdener Kaynak# and Orsay Kucukemiroglu* *College of Business Administration, Pennsylvania State University at York, 1031 Edgecomb Ave, York, PA 17402, USA tSchool of Business Administration, Pennsylvania State University at Harrisburg, Middletown, PA 17057, USA Abstract - - The purpose of this research is to analyze household credit card choice and usage behavior. The theoretical model used to analyze the credit card choice behavior is a conjoint model which assumes the utility maximization and rational evaluation of the available credit card alternatives. The study also investigates the effects of credit card attitudes and practices on the credit card usage behavior. The data for the study were collected in southcentral Pennsylvania and analyzed by using traditional conjoint analysis and factor analysis. Study findings indicate that credit card holders and users show distinct differences in the use and selection of credit cards. Four different types of credit card customers identified necessitate the development and implementation of multiple target market strategies by credit card issuing companies. The results of the study offer important managerial and public policy implications for decision makers at banks, financial institutions and other credit card dispensing firms. Copyright © 1996 Elsevier Science Ltd

Key Words - - Credit Card, Consumer Choice, Conjoint Analysis, Services Marketing.

Ali Kara is an Assistant Professor of Business Administration at Pennsylvania State University at York. His articles appeared in publications such as Journal of Advertising, International

Journal of Research in Marketing, Journal of Global Marketing, the International Journal of Management Science, Journal of Applied Business Research, Journal of Euromarketing, Management International Review and the International Journal of Bank Marketing. He teaches variety of quantitative business analysis and marketing courses at the Penn State York Campus. Erdener Kaynak is Professor of Marketing at the School of Business Administration at Pennsylvania State University at Harrisburg. He is an author or co-author of 20 books and more than 200 articles some of which have appeared in Journal of Business Research, Journal

of Advertising Research, Journal of the Academy of Marketing Science, Management International Review, Columbia Journal of World Business, Journal of Global Marketing, European Journal of Marketing and many others. He has been a training advisor, consultant and senior advisor in five continents at over 25 countries. His latest project assignment was a UNDP sponsored project in Kyrgyzstan. Dr Kaynak has also received a number of scholarship and distinctions nationally as well as internationally. The most recent one is a Fellowship of the Japanese Society for the Promotion of Science. Orsay Kucukemiroglu is an Associate Professor of Business Administration at Penn state University, York Campus. He has published over a dozen diverse journals such as Decision

Sciences, Management International Review, European Journal of Marketing, Journal of Business Ethics, Journal of Professional Services Marketing and etc.

209

An Empirical Investigation of US Credit Card Users

210 International Business Review 5,2

Introduction In the banking market, commercial banks of all sizes must remain alert to ever-changing environmental factors and be ready to re-formulate appropriate marketing plans and strategies to meet the needs of the evolving banking marketplace. To this end, banks need to study two interrelated issues of global bank marketing strategy. The first issue is whether a bank can provide the needed/required banking services to its diverse target markets. The second is whether a bank's existing resources and competencies can match the current needs and expectations of its target markets (Kaynak, 1986). Commercial banks interested in serving their customers more effectively need to restructure their marketing strategies and plans to establish better bankcustomer relationships. In their drive to establish a better relationship with their customers, banks constantly seek out ways to differentiate their offerings and/or develop unique and more appropriate services for distinct market segments. Among others are developing a special bundled account designed to serve the needs of a single target market, designing checking accounts and certificates of deposits for senior citizens, and developing a variety of credit card options for a diverse socio-cultural market. In this process, bank credit cards constitute an important element of a commercial bank's marketing strategy. The c h a n g e s in t o d a y ' s b a n k i n g m a r k e t s are creating e n o r m o u s opportunities for credit cards. Considering the saturated credit card market in the US, the markets of Europe and the Far East are becoming increasingly attractive to credit card companies looking for growth. In 1993, more than $1 trillion was spent through credit cards, and it is estimated that the global credit card market by the year 2000 will be $2 trillion. Therefore, most financial/non-financial institutions are eager to get into the credit card market because of its attractive size and high earnings potential. Table 1 illustrates the profiles of major credit card issuers and markets. Past studies indicate that nearly two thirds of US families maintain some kind of credit cards and that their use is increasing geometrically. What makes consumers possess 5-6 credit cards and use one type of card rather than another when making a purchase? What factors determine frequency of credit card purchase? Answers to these questions will enable banks to determine appropriate credit card marketing strategies. In the US, overall credit card usage has increased substantially over the last five years. For instance, at First Chicago Bank, increased credit limits have been offered to customers to enable them to purchase more products and services. Cash-back bonuses and no annual fee schemes are methods Discover Card uses to encourage cardholders to increase their usage rates (Lunt, 1992). The studies on credit card choice and usage that have been conducted so far are of a static type which have looked at consumers' attitudes towards credit cards as a generic item and/or consumers' perceptions and preferences of credit cards compared to other forms of revolving credit. More specifically, there are no studies reported that offer guidelines to the managers of credit card issuing companies on how different group of consumers make their

211 d L)

"d

An Empirical Investigation of US Credit Card Users

g '=~

8

e~

"~

o

u,

o ~Nol l- -

o o

..~ -~ ~~ ~.~

~',~

< o

o0

¢'4 t.¢3

r-i cq

o N

r~

o.m ,...,

~o

.=~ o o

E

Z~

4eNN~o

L) ,...,,

m ,./:i o

o[-.,

~i

°~ .~Ne o0

N

.d

Ha

en- N

~.H

N °

o

a'~

"r, o o

o c,l

..~~

o

e

mr,.)

212 International Business Review 5,2

credit card choice decisions among several available alternative brands. Thus, the primary objective of this study is to analyze the credit card choice and usage behavior of US consumers. The major research questions addressed in this study are: (a) (b) (c)

(d)

What are the general factors that affect different groups of consumers' credit card choice and usage decisions? What is the relative importance of each factor in consumers' overall credit card usage and choice behavior? What are the possible relationships between consumers' attitudes towards credit cards usage and the total purchases made by credit cards for a given period? What are the managerial implications of these behavioral patterns?

Review of Literature on Credit Card Research Relative to other consumer loan instruments, the interest rates charged on credit cards have historically been very high and have changed very little over time. Despite this shortcoming, ease of use and convenience have made credit cards very attractive to customers in developed countries. This high growth potential makes the credit card markets very attractive for many institutions and therefore this crowded market is very competitive compared to other forms of payment. Hence, these factors have captured the attention of several researchers from a variety of disciplines such as economics, finance, law, marketing, and psychology since the early 1970s to study credit cards, and therefore a sizable body of literature has been created on credit card ownership and usage. Most of the previous research on credit cards has centered mainly on the development of user profiles and analysis of broader economic issues pertaining to credit card demand and supply (Hawes et al., 1978; Adcock et al., 1977; Martell and Fitts, 1981; Goldstucker and Hirschman, 1977; Kaynak and Yucelt, 1984; Hirschman, 1979; Kinsey, 1981). Based on the past literature, one can develop numerous bases for defining market segments as targets for strategy development. Most studies, however, have attempted to identify markets through the analysis of demographic, socio economic, attitudinal, and/or personality characteristics (Martell and Fitts, 1981). Several other studies have found age, sex, and marital status to be significant determinants of credit card selection and usage (Slocum and Mathews, 1970; Kinsey, 1981). Likewise, occupation, education, and income are accepted generally as potentially significant correlates of usage. In most cases, economics-based work has been directed toward predicting consumer demand by using a number of economic parameters such as c o n s u m p t i o n patterns (Garcia, 1980; Russell, 1975) and theoretical explanations of the behavior of the bank card industry (Calem, 1992). Mathews and Slocum (1969) and Slocum and Mathews (1970) analyzed the relationship between socio-economic factors and credit card usage behavior. They explain that cardholders with low income and low socio-economic

213 Author(s)

Description of research

Finberg (1986)

Credit card stimuli as unique and distinctive direct spending

Garcia (1980)

Examined the effects of credit cards on social and economic variables; a survey

An Empirical Investigation of US Credit Card Users

Development of user profiles; who uses the Shay and Dunkelberg (1975); Batra credit cards; characteristics of different credit (1975); Hirschman (1979); Martell cards etc. and Fitts (1981); Johnston (1975); Plummer ( 1971); Slocum and Mathews (1970); Awh and Waters (1974); Dunkelberg and Smiley (1975); Crook et al. (1992); Goldstucker and Hirschman (1977); Bowers (1979); Kinsey (1981) Baxter et al. (1977)

Predicting consumer demand of credit cards

Blackwell et al. (1975); Hawes et al. (1978)

Attitudinal survey of credit cards

Mandell ( 1972); Garcia (1978)

Effects of credit cards on the money supply

Hirschman and Goldstucker (1978)

Effects of credit card use on retailing

Murphy and Ott (1977)

Discrimination between consumers who have differing income elasticities

Kara et al. (1994)

Credit card development strategies for youth market

Eastwood (1975)

Theory of consumer credits; credit card debts have been socially acceptable

Hunt et al. (1990)

Credit cards and materialism

Calem (1992); Asubel (1991)

Customer loyalty and interest rate competition in credit card markets

Handelsman (1989)

Switching behavior of ethnically diverse retail customers

Kaynak and Yucelt (1984)

Cross-cultural comparison of credit card users

Worthington (1990)

Retailer credit cards and competition

Amine (1989); Barker and Sekerkaya (1992)

Credit card in the Middle East; in developing economy

Ingene and Levy (1982)

Cash discounts compared to the credit card sales

Fitzpatrick (1976)

Analysis of bank credit card profits

Goldberg (1975)

Effects of banking regulations on credit card use

status use credit cards to generate revolving credit more often than do high income and high socio-economic cardholders. M u r p h y and Ott (1977), on the other hand, studied the credit cards from the economic theory perspective and u s e d the m i c r o e c o n o m i c t h e o r y o f p r i c e d i s c r i m i n a t i o n to a n a l y z e the discrimination b e t w e e n c o n s u m e r s w h o have differing i n c o m e elasticities.

Table 2.

Credit Card Ownership and Usage Research: 1970-1994

214 International Business Review 5,2

~i i ~,°° ! g

!

i

°~

r~

<

g

i.

I "S

,<

< °~

t..

fi

!~ ~ t

E ,<

i

215 From their analysis, they predict that bank cards will most profitably be accepted by In'ms that sell goods having high income elasticities. Behavioral work, on the other hand, has been descriptive or correlational and has attempted to answer the question of "Who is the credit card user and what are their demographic and socio-economic profiles?" (Slocum and Mathews, 1970; Plummet 1971). For example, Baxter et al. (1977) made predictions of user characteristics based on their assessment of credit card advantages in saving time when shopping and paying bills. Attitudinal surveys refer to the convenience of using credit cards over using checks (Blackwell et al., 1975). Some other studies reported in the current literature indicate that credit card possession and use are positively correlated with the anticipation and actualization of further use (Hirschman, 1979). Similarly, psycho-social characteristics of credit card users were studied through the Means-End analysis. For instance, studies have revealed differences in attitudes in the ways the cards are being used between those who use credit cards as an element of convenience and those who use the cards as a regular source of revolving consumer credit (Peter and Olsen, 1994). It has been further pointed out that c o n v e n i e n c e use can be positively related to household age, income, and relative financial liquidity. In contrast, a liberal attitude toward borrowing can be positively related to use of revolving credit (Canner and Cyrank, 1986). In a comparative study of Canadian and US consumers' attitudes toward ownership and use of credit cards, a number of similarities emerged in ownership and use. This study showed that whereas US users tended to rely on bank cards exclusively more than Canadians, Master Card, Visa, and Discover were found to be the most popular in both nations. The cards were used for purchasing goods and services and for identification purposes, but most respondents did not use the cards to their maximum potential (Kaynak and Yucelt, 1984). Since the publication of this research, at least in the US market, a number of changes have taken place which are contrary to these findings (Fleming and Sapsford, 1994). Therefore, to find out answers for the research questions, a conceptual framework was utilized. This framework is illustrated in Fig. 1. The majority of the studies reported in the credit card literature did not analyze the effects of the credit card attributes to understand consumers credit card choice behavior, and little work has been carried out on the relationship between consumers' credit card attitudes and their use frequency of the credit cards. Hence, these two factors are the major issues analyzed in this research. This figure shows the two main components, credit card choice and credit card use, which serve as major issues to be studied in this investigation. In this framework, availability of credit cards, available credit card information and alternative forms of payment are assumed to be external variables affecting credit card choice. On the other hand, credit card attributes are assumed to be input variables to credit card choice. External factors like economic, demographic and socio-economic factors are assumed to have some impact on the credit card use while attitudes towards credit card use are assumed to be input variables to credit card use. Finally, negative and positive experiences

An Empirical Investigation of US Credit Card Users

216 International Business Review 5,2

with credit cards are assumed to be outputs, as well as influencer of credit card use.

Methodology It has been pointed out that the bank credit card is the major innovation to receive wide public acceptance around the world (Fleming and Sapsford, 1994). Hence, it is very important to study credit card usage by use of empirical data to determine correlates of use and choice of credit cards (White, 1980). Beating this in mind, one of the purposes of this empirical study is to find out the US consumers' selection, evaluation and usage of credit cards. The survey was c o n d u c t e d in the tri-county region of southcentral Pennsylvania, where three major cities - - namely, Harrisburg, Lancaster and York - - were selected as the base for sampling of the population. A stratified method was used. In terms of economic well-being of residents, two types of neighborhoods, namely, upper income and middle income, were identified in each city. Past credit card literature indicated that there is a high correlation betwen increased income level and rate and frequency of credit card usage (Garcia, 1980). Survey questionnaires were hand distributed to 400 respondents in the three predetermined cities of York, Harrisburg and Lancaster. After a one-week waiting period, the questionnaires were personally retrieved from the respondents. A total of 286 usable questionnaires were obtained, yielding a 71.5% response rate. This response rate is highly acceptable by social science standards. Table 2 shows the profiles of the respondents who participated in the study. Table 2 illustrates that 51% of the respondents were females; 44% of them were between the ages of 31 and 50; 65% of the respondents had an annual household income between $20,000 and $50,000, and nearly 16% had income level above $50,000 in 1993; and 57% of them were white collar workers. A full profile conjoint analysis was used in the study. Conjoint analysis is a decompositional m e t h o d that estimates the structure of a c o n s u m e r ' s preferences (i.e. estimates preference parameters such as part-worths, importance weights, ideal points), given his or her overall evaluations of a set of alternatives that are pre-specified in terms of levels of different attributes (Green and Srinivasan, 1990). There are three major phases in conducting a full profile conjoint study. The first phase involves developing product profiles for consumers to evaluate - - the design phase. The second phase involves estimating consumers' utility functions - - the analysis phase. The third phase involves simulating consumer purchasing behavior to evaluate various strategies for product positioning, pricing, and segmentation - - the simulation phase. Conjoint Designer handles the design phase. Designer allows researchers to produce full profile conjoint designs very efficiently. It produces the type of design most widely used by experts - - orthogonal arrays. Orthogonal arrays represent a special type of fractional factorial design that allows orthogonal estimation of all main effects with the smallest number of combinations (Green et al., 1978). Other things being equal, increasing the number of products a consumer evaluates leads to more precise

217 estimates of the person's utility function. In other words, there is a trade off between the number of profiles in a design and the precision of the utility function. Full profile studies generally use orthogonal designs which represent a good compromise solution to the problem. In addition, orthogonal arrays prevent a biased response to one product feature. Conjoint Designer automates the task of generating these designs and allows the researcher to edit and customize the finished design as well.

Analysis and Discussions Credit Card Choice Credit card choice and usage behavior among US consumers have shown significant changes in the last decade. Although in recent years a successful national debit card was introduced into the US market, Americans still continue to use bank credit cards at an accelerating rate. Choosing an economically appropriate credit card on the part of consumers requires a knowledge of consumers' credit card usage and comparison information on credit card costs. Credit card issuers need to provide more than a matrix of comparison data to consumers for them to make economically appropriate choices. The best information provision format is one which includes a summary of ratings of all available credit card brands (D'Astous and Miquelon, 1991). Conjoint Analyzer used in the study handles the analysis phase as well as basic simulations. As such, Conjoint Analyzer picks up where Conjoint Designer leaves off, namely, after the consumers have evaluated the credit card product profiles for choice. A thorough credit card literature review helped to identify six variables that consumers consider while evaluating the credit card alternatives. These factors are listed in Table 3. Although there was a careful selection of variables, there were still too many product profiles for the respondents to evaluate (5 x 4 x 3 x 4 x 4 x 2 = 1920). However, a fractional factorial design, using Bretton Clark Conjoint Designer, reduced the number of card options from 1920 to 25, which were considered very reasonable for a respondent to evaluate. Table 4 shows the descriptions of the 25 different credit cards. By using those 25 credit cards, a research instrument was designed. Respondents were asked to evaluate 25 credit cards in terms of 'likelihood of consideration" for obtaining credit cards selected on an 11-point scale, ranging from 0 (definitely would not consider) to 100 (definitely would consider). Credit card product profiles are shown in Table 4. Table 5 summarizes the group statistics for all respondents. The second column of Table 5 indicates that annual fee (23.96%) and interest rate (21.76%) were found to be the most important whereas credit card type (8.37%) was the least important factor on their choice decisions. The fourth column in Table 5 illustrates the conjoint part-worths for each attribute level. Interpretation of these values is very simple. The larger the part-worth, the higher impact that level makes on the choice. For instance, VISA brand name

An Empirical Investigation of US Credit Card Users

218 International Business Review 5,2

Demographics

Number*

%

Male Female

136 140

49.3 50.7

Total

276

100.0

less than 20 20 to 30 31 to 50 over 50

16 100 123 37

5.8 36.2 44.5 13.4

Total

276

100.0

Marital Status Single Married Other

118 143 15

42.7 51.8 5.5

Total

276

100.0

Sex

Age

Occupation Blue collar White collar Otherst

84 157 35

30.43 56.88 12.69

Total

276

100.0

49 71 94 40

19.3 27.9 37.0 15.8

254

100.0

Household Income less than $20,000 $20,000-$30,000 $30,001-$50,000 over $50,000

Table 3. Profile of Respondents

Total

*Differences are due to the missing observations. tlncludes unemployed, students, and farmers.

has the highest part-worth (7.565) and DINER'S brand name has the smallest part-worth (-8.144). In fact, one could expect these results because the DINER'S credit card has a very small target market and is more popular in Europe than the US. The part-worth of the other factor levels can be interpreted similarly. It is clear that respondents prefer higher credit limits to the lower ones. However, consumers perceived credit limits between $1,000 and $5,000 very similarly. That is, according to the results of this study, credit limits between $1000 and $5000 will have similar effect on consumers preference of that card. On the other hand, credit limits less than $1,000 or more than $5,000 were the most differentiating levels. That is, the utility of credit limit is the highest for more than $5000 level. Overall, a gold card was preferred (highest part-worth) to other types. Part-worths of the annual fees

219 Factors

Factor levels

1. Brand name

1. Visa 2. Master Card 3. Diner's Club 4. American Express 5. Discover

2. Credit line (limit)

1. Up to $1,000 2. $1,001-3,000 3. $3,001-5,000 4. Above $5,000

3. Card type

1. Gold 2. Platinum 3. Classic

4. Annual fee

1. None 2. Less than $25 3. $25-50 4. Above $50

5. Interest rate

1. Less than 10% 2. 10-14% 3.14.1-18% 4. Above 18%

6. Type of payment

1. Full amount 2. Deferred

paid for the credit cards showed significant differences. No annual fee had the highest utility value, while above $25 fee had the significantly negative impact on the choice. This is a very important finding because generally credit card issuers make money in three ways: annual fees, interest on balances, and the so-called discount collected from merchants on each transaction. A significant portion of the income of some companies like American Express comes from the annual membership fees. These companies need to quickly change their strategy to be competitive in this crowded market. The partworths of the different interest rates were also significantly different. Less than 10% interest received the highest utility (10.214), while more than 14% interest rates had a negative impact on the credit card choice. Finally, full payment of the statement also received significantly less utility value than the deferred payment. Perhaps, American Express should more aggressively promote its Optima card to this segment of the credit card users. Table 6 shows the distribution of the weights for each factor level. It is very clear that type of payment, annual fee, and brand name were the three most differentiating factors in credit card choice. On the other hand, the type of credit card and credit line are the least differentiating factors. For example, there is no difference in the consumers' preferences when credit limit is less than $3,000. This also true for Platinum and Gold cards. This confirms that the consumers do not want to pay annual fees; fees of $50 and above becomes

An Empirical Investigation of US Credit Card Users

Table 4 Factors and Factor Levels Used

220 International Business Review

5,2 m

O

~ z ~

z

u~u~

c~

O

uJ

~

~

~

O

O

~

uJ

~

~

221 Factors

Importance

Levels

Part-worths

Brand

18.82%

Visa Master Diner's AMEX Discover

7.565 1.484 -8.144 -1.127 0.223

Credit line

16.85%

Up to $1000 $1001-3000 $3001-5000 Above $5000

-3.160 -1.365 -0.365 4.890

Type of card

8.37%

Gold Classic Platinum

0.884 -1.196 0.223

Annual fee

23.96%

None Less than $25 $25-50 Above $50

17.593 -0.238 -5.213 -12.142

Interest rate

21.76%

Less than 10% 10-14% 14.1-18% Above 18%

10.214 8.831 -5.431 -11.614

Payment type

10.24%

Deferred Full Amount

4.611 -4.611

critical in their choice. Similarly, above 14% interest rate received very low importance weight. The simulation program was also used to test the market and to find the market shares of hypothetical credit cards for the same respondents by using conjoint function built. Five hypothetical credit cards which were not included in the original design were created. Table 7 shows a description of the hypothetical credit cards and their simulated market shares. Our model r e v e a l e d that the first h y p o t h e t i c a l credit card, c o n s i s t i n g o f VISA, $3,000-$5,000 credit limit, Gold card, No annual fee, 10-14% interest rate, and a deferred payment plan, is preferred the most, with 33.22% market share. Credit cards number 2, 3, 4 and 5 are preferred in that order, as seen in Table 7. However, if we keep all the factor levels the same for credit card number 1 but change the type of payment from deferred to full amount, the market share declined significantly, as we indicated earlier that type of payment was one of the most differentiating factors. This was also true when the interest rate is changed from low to high.

Attitudinal and Behavioral Correlates of Credit Card Usage Previous studies on credit card usage have indicated a relationship between various consumer attitudes and credit card usage patterns (Rolfe, 1992).

An Empirical Investigation of US Credit Card Users

Table 6.

Summaryof Group Statistics

222 International Business

Factors

Factor levels

Review

Brand

Visa Master Diner' s AMEX Discover

5,2

Weights (%)

Rank

50.35 15.55 6.01 14.34 13.25

1 2 3 2 2

100.0 Credit line

Up to $1000 $1001-3000 $3001-5000 Above $5000

Card type

Platinum Gold Classic

Annual fee

None Less $25 $25-50 Above $50

16.43 17.67 23.67 42.23

2 2 3 1

100.0 32.51 42.52 22.97

2 1 3

100.0 70.79 16.02 10.01 3.18

1 2 2 3

100.0 Interest

Less 10% 10-14% 14.1-18% Above 18%

53.71 31.63 8.13 6.54

1 2 3 3

100.0 Payment type Table 7. Distribution of Preferred Weights (%) for each Factor

Full amount Deferred

28.62 71.38

2 1

100.0

Therefore, the next step was to generate a set of items to capture the domain of credit card usage behavior. On the basis of previous studies, 18 items were developed. The attitudes of the consumers towards the credit cards were reflected in these statements. Table 8 illustrates the items used in the study. The data on these items were collected from 286 credit card users using a 5point Likert scale ranging from strongly disagree to strongly agree. Factor analysis was used to uncover the underlying dimensions of the credit card usage behavior. The principal components method was used as the factor analysis method in the study. Factor analysis results are given in Table 9. Overall, Kaiser's Measure of Sampling Adequacy (MSA) was 0.7117 and considered adequate.

223 Attributes

Card 1

Card 2

Card 3

Card 4

Card 5

Brand Credit line ($) Type Fee Interest Payment

Visa $3000-5000 Gold None 10-14% Deferred

Master card $1000-3000 Classic Less $25 Less 10% Deferred

Discover Above$5000 Classic None Less 10% Deferred

Diner's Card Above$5000 Gold None Less 10% Deferred

AmericanExpress $3000-5000 Gold $25-50 10--14% Full amount

Market share

33.22%

30.39%

18.73%

12.72%

4.95%

An Empirical Investigation of US Credit Card Users Table 8.

Hypothetical Credit Cards and Market Shares

Factor analysis o f the data yielded four factors, which explained 69.6% o f the total variance. The first factor, consisting o f five items, explained 24.6% o f the total variance; the second factor, with five items, explained 19.7% o f the v a r i a n c e ; the third factor, with three items, e x p l a i n e d 13.4% o f the variance; and the last factor, with five items, explained 11.9% o f the total variance. A n a l y s i s o f f a c t o r patterns s h o w s that the first f a c t o r indicates negative credit card attitudes which are unfavorable opinions about holding and u s i n g credit cards. C o n s u m e r s w h o held these attitudes b e l i e v e that shopping with credit cards is an incorrect approach and a bad habit. They relate some o f their financial problems to the use o f credit cards. Therefore, this factor was labelled as Credit Card Aversive Attitudes. On the contrary, the second factor indicates the positive towards the use o f credit cards and those consumers who held these attitudes think that a credit card is a very effective tool which needs to be utilized in a modern society. These consumers like the convenience o f credit cards in shopping. They also use credit cards as a credit h i s t o r y b u i l d i n g tool. T h e y b e l i e v e in the n e c e s s i t y o f a c r e d i t card f o r obtaining certain services, such as car rental and hotel r o o m reservations, and t h e y like the s e c u r i t y that credit cards p r o v i d e o v e r the m a n u f a c t u r e r s '

1.

2. 3. 4. 5. 6.

7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Credit cards make me buy things I do not need. Using credit cards in shopping is a bad habit. Buy today pay later is an incorrect approach. Families have heavy debts due to high usage of credit cards. I would not have used credit card if did not have a credit card. I would buy anything with credit card. I use credit card(s) for only security reasons. It is prestigious to use a gold or platinum card. I pay the full amount at the end of a grace period. I prefer to use one or two credit card only. It is very difficult to live in an advanced society without credit cards. Credit cards are convenient during travel. Credit cards are more convenient than writing checks. I prefer those credit cards that charge lower interest rates. I opt for a credit card that offers percentage rebate on my purchases. Ownership of credit cards is a necessity to obtain certain services. When I use a credit card I feel that I will not pay for the charges later. Usage of credit cards builds my credit rating.

Table 9.

Statements Used in the Study

224 International Business Review 5,2

guarantees. Thus, this factor is labeled as Credit Card Prone Attitudes. The third factor indicates the feelings of the consumers about credit card ownership and usage, which is different compared to the previous two groups. Those consumers who held this attitude use credit cards for prestigious reasons. They are ready to buy almost anything with credit cards, and they do not worry about the possible debt burden that credit cards could create for them. Therefore, the third factor represents Outer-directed Credit Card Attitudes. Finally, the fourth factor is labeled as Felt-involved Credit Card Attitudes. Those consumers who held this attitude are very careful in their spending, and they pay in full amount at the end of the grace period to avoid the finance charges imposed by banks. In most cases, they use a very limited number of cards, namely, one or two at most, because they want to control the credit card charges, and the only factor that makes them to use the credit card is security reasons. Based on the factor patterns found, it is important to analyze the direction of the relationship between these attitudes and the dependent variable, that is total credit card charges (uses) in a specified period which was self-reported by the subjects. This dependent variable is a critical factor for the credit card companies because their survival depends on the total charges that consumers put on their credit cards and the finance charges that accrue on a monthly basis. The overall amount charged on credit cards also affect credit card companies revenues through the discounts collected from the merchants. Therefore, in this study it was necessary to analyze and discover the relationships between those attitudes and consumers' credit card usage behavior. In other words, it is very important to find answers to the following questions: what is the relationship between the credit card aversive attitudes, credit card prone attitudes, outer-directed attitudes, and felt-involved attitudes and the total purchases made by credit cards for a given period? In order to find answers to these questions, a multiple linear regression analysis was performed. The dependent variable used was the total charges made by the credit card consumer in a one-month period. The factor scores generated from the factor analysis were used as independent variables. The results of the regression analysis are illustrated in Table 10. Table 10 illustrates that the R 2 of the model is 73.2%, which can be considered sufficiently high for the purposes of the study. Four independent variables were found to be significant in predicting the total charges made by a consumer in a given one-month period. Using the regression results, the relationship between the factors and the dependent variable can be explained. It is seen from Table 10 that Factor 1 (Aversive Attitudes) and Factor 4 (Feltinvolved Attitudes) have a negative relationship with the dependent variable (total charges made) while Factor 2 (Proneness Attitudes) and Factor 3 (Outer-directed Attitudes) have a positive relationship. Therefore, one can conclude that consumers with aversive and felt-involved attitudes toward the credit card usage may have a tendency to avoid charging on their credit cards. Marketers need to adopt different marketing strategies for these consumers. In contrast, those consumers who have outer-directed and credit card prone

225 An Empirical Investigation of US Credit Card Users

rr--

t'---

c5

i'---

c5

' ,o

c5

(J

~J

¢,j

0 0 0 0 0

~-;

~,g:~

~ 0 ~

e.~

t~

~

.~

~ .~

~

~'~ ~ ~.

'-

~ ~,-~

~

•

.

~ e _~ t'~l,-~

~

t~

~"

t'xl ~¢) ¢ ~ 0 ~ . . - ~

t~

O~ ~¢) ~ "

~

O~ I ~

~,'~.~

~

"~

226 International Business Review 5,2 Table 11. Results of Multivariate Regression Analysis

Variable INTERCEP FACTOR1 FACTOR2 FACTOR3 FACTOR4

fl 2.826470 -5.338078 3.398549 8.681094 -2.005035

T

Prob > ITI

1.853 -3.506 2.232 5.692 -1.317

0.0649 0.0004 0.0051 0.0001 0.0704

R2=0.7315 F = 5 3 . 9 8 (P<.001).

attitudes should be the main target for market concentration as well as for credit card market and product development strategies.

Conclusions Credit cards are now sufficiently important in magnitude to deserve future research efforts. The present study were based on the assumption that credit cardholders were making their choice and usage decisions according to utility maximization theory and were rational customers. Also, this study assumed that the determinants of credit card choice and use include multiple factors such as social, p s y c h o l o g i c a l , legal and e c o n o m i c factors as well as product/service attributes. As mentioned earlier, most of the existing literature on credit cards is concentrated on some of these factors like characteristics of credit card holders but not on the impact of the product/service attributes on credit card choice. Also, the research on the effects of credit card attitudes on the credit card use behavior has been generally descriptive and does not include attitudes impact on the amount of credit card usage. In this study of credit card holding and use behavior among US consumers some credit card attitudes were measured and related to credit card usage. For each of the attitudes some consumers were more favorable and some less favorable. These attitudes, that every subject held, were related to credit card usage. Four major dimensions of credit card attitudes are identified (credit card prone, credit card aversive attitudes, outer-directed attitudes, and feltinvolved attitudes). Multiple regression analysis results indicate that the relationship between the credit card attitudes and the amount of credit card usage is statistically significant. Credit card Aversive Attitudes and Feltinvolved Attitudes have a negative relationship with the total charges made by a credit cardholder. On the other hand, credit card Prone Attitudes and Outerdirected Attitudes have a positive relationship with the total charges made by a credit cardholder. Therefore, one can conclude that consumers with aversive and felt-involved attitudes toward the credit card usage may have a tendency to avoid charging on their credit cards, whereas consumers with prone and outer-directed attitudes may have a tendency to put charges on their credit cards as much as possible. It is known that so-called discounts obtained from merchants are a major income source for the credit card suppliers and that as the total amount charged on credits increases, the revenues will also increase due to the d i s c o u n t s o b t a i n e d f r o m the m e r c h a n t s . C o n s i d e r i n g the

227 competitive pressures felt from the annual membership revenues, understanding target customers' attitudes toward credit card usage is significantly important for a credit card issuer. Therefore, marketers need to adopt different marketing strategies for consumers with aversive and felt-involved attitudes. Those consumers who are outer-directed and credit card prone should be the main target for both market concentration as well as for credit card market and product development strategies. Each market segment maintains distinct belief systems, and each market segment's evaluation of credit card attributes and its usefulness also shows variations. Moreover, to understand the credit card choice and selection behavior, credit cards were evaluated through the use multiple product/service attributes and attribute levels which yielded 25 different credit card profiles (a reduced set). Conjoint analysis of these credit cards showed the substantial differences exist among the importance of attributes. A m o n g the many attributes considered, the low interest rate and the lower annual fee or no annual fee credit cards were seen to be the most important attributes. The part-worths of the different interest rates (levels) were significantly different. Less than 10% interest received the highest utility, while more than 14% interest rates had a negative impact on the credit card choice. Interest rates between 10% and 14% mainly perceived very similar. No annual fee had the highest utility value while above $25 fee had a significantly negative impact on the choice. This is a very important finding because a significant portion of the income of some companies like American Express comes from the annual membership fees. These companies need to quickly change their strategy to be competitive in this crowded and competitive market. Also, VISA brand name has the highest part-worth and DINER'S CLUB brand name has the smallest partworth. In fact one could expect these results because the DINER'S CLUB credit card has a very small target customers and is more popular in Europe than the US. Generally, respondents gave higher utilities to higher credit limits. However, a credit limit between $1,000 and $5,000 has not seen much different, whereas less than $1,000 and more than $5,000 had the most important differentiating impact on the choice decision. Overall, a gold card received the highest utility. Finally, paying the credit card balance in full (charge cards) received significantly less utility value than the deferred payment type. Perhaps American Express should more aggressively promote its Optima card to this segment of the credit card users. Since there are several credit card institutions and each is offering very similar services, consumers have flexibility to give up certain cards and obtain others that offer better benefits. Future Research Avenues This study examined US consumers' evaluation and use behavior of credit cards. Additional studies are needed to examine some of the major concerns for credit card managers. These are: how a successful national debit card will affect credit card usage, and why Visa and Master Card want to own national debit schemes. Choosing an economically appropriate credit card requires a

An Empirical Investigation of US Credit Card Users

228 International Business Review 5,2

knowledge of consumers' credit card usage and comparison information on credit card costs. Here cost-benefit analysis may be of greater help to the decision maker to make economically appropriate choices in credit card issuance. In recent years, the importance of Money Access Service (MAC) has increased tremendously in the US. For some banks, it is the largest provider and fastest grower in the transaction service category. It is predicted that these debit card transactions will first replace cash transactions, then they will replace check writing, and then finally replace the use of credit cards. Further studies could look at the impact of MAC on credit card usage behavior, or, conversely, the impact of credit card usage on the development of MAC. It is maintained that credit card usage is not uniform across the country in the US. What does account for the divergences in the use of credit cards in different regions/states of the US? As well, many credit card companies do not really know what their customers want from them, or they do not know how to find out what their customers desire. What is needed here is to discover unspoken but expected and/or unexpected and unspoken needs and wants of credit card users through motivational research technique. Research of this type will unravel inner dynamics of credit card usage. Competitive pressures coming from non-financial sector credit cards and a decline in consumer usage are creating an unfavorable market environment for credit card issuing financial institutions. A further research topic may be to consider how the financial institutions should develop strategic marketing plans to be able to counterattack the onslaught coming from non-financial institution credit card issues. Finally, a comparative study of US versus foreign credit card users' behavior would provide additional insight into this important area of research.

References Adcock, W. O., Hirschman, E. C. and Goldstucker, J. L. (1977) Bank Card User: An Updated Profile, in Perreault, W. D. Jr (Ed.), Advances in Consumer Research, Association for Consumer Research, Atlanta, Vol. 4, pp. 236-241. Amine, L. S. (1989) A Study of the Diffusion, Acceptance and Marketing of Credit Cards in the Middle East, in Hawes, J. M. and Thanopoulos, J. (Eds), Proceedings of 1989 Academy of Marketing Science, pp. 89-92. Asubel, L. M. (1991) The Failure of Competition in the Credit Card Market. American Economic Review, Vol. 81, pp. 50--81. Awh, R. and Waters, D. (1974) A Discriminant Analysis of Economic, Demographic, and Attitudinal Characteristics of Bank Charge-Card Holders: A Case Study. Journal of Finance, Vol. 29, pp. 973-980. Barker, T. and Sekerkaya, A. (1992) Globalization of Credit Card Usage: The Case of a Developing Economy. International Journal of Bank Marketing, Vol. 10, pp. 27-31. Batra, H. (1975) A Study of Consumer Credit Demand. Journal of Consumer Credit Management, Vol. 6 (Winter), pp. 67-75. Baxter, W. F., Cootner, P. H. and Scott, K. E. (1977) Retail Banking in the Electronic Age. Allenhold, Osmun and Company, Montclair, NJ. Berry, J. (1994) Don't Leave Home without It. Business Week, 21 February, pp. 76-77. Blackwell, R. D., Hawes, D. K. and Talarzyk, W. W. (1975) Americans' Use of Credit Cards:

229 A Nationwide Study of Female and Male Attitudes. Bulletin of Business Research, Vol. 50, pp. 5-8. Bowers, J. (1979) Consumer Credit Use by Low Income Consumers who have had a Consumer Education Course: An Exploratory Study. Journal of Consumer Affairs, Vol. 13, pp. 334-345. Calem, P. S. (1992) The Strange Behavior of the Credit Card Market. Business Review, January/February, pp. 3-14. Canner, G. B. and Cyrnak, A. W. (1986) Determinants of Consumer Credit Card Usage Patterns. Journal of Retail Banking, Vol. 8, Spring/Summer, pp. 9-18. Crook, J. N., Hamilton, R. and Thomas, L. C. (1992) A Comparison of a Credit Scoring Model with a Credit Performance Model. The Service Industries Journal, Vol. 12, No. 4, October, pp. 558-579. D'Astous, A. and Miquelon, D. (1991) Helping Consumers Choose a Credit Card. Journal of Consumer Affairs, Vol. 25, No. 2, Winter, pp. 278-294. Duffy, M. (1990) In Crowded Market, Specialty Players Seek a Niche. American Banker, September 17, p. 6A. Dunkelberg, W. C. and Smiley, R. M. (1975) Subsidies in the Use of Revolving Credit. Journal of Money, Credit and Banking, Vol. 7, pp. 471-490. Eastwood, D. (1975) Consumer Credit and the Theory of Consumer Behavior. Journal of Behavioral Economics, Vol. 4 (Summer), pp. 39-105. Feinberg, R. A. (1986) Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation. Journal of Consumer Research, Vol. 13, pp. 348-356. Fitzpatrick, D. B. (1976) An Analysis of Bank Credit Card Profits. Journal of Bank Research, Vol. 7, pp. 199-205. Flemings, C. and Sapsford, J. (1994) Pick A Card. Wall Street Journal, 15 February. Garcia, G. (1980) Credit cards: An interdisciplinary survey. Journal of Consumer Research, Vol. 6, pp. 627-637. Garcia, G. (1978) Bank Credit Cards, Time Deposits and M2. Journal of Economics and Business, Vol. 30, pp. 230-235. Goldberg, L. G. (1975) The Effects of State Banking Regulations on Bank Credit Card Use. Journal of Money, Credit and Banking, Vol. 7, pp. 105-112. Goldstucker, J. L. and Hirschman, E. C. (1977) Bank Credit Card Users: A Net Market Segment for Regional Retailers. MSO Business Topics, Vol. 25, pp. 5-11. Green, P. E., Carroll, J. D. and Carmone, F. J. Jr (1978) Some New Types of Fractional Factorial Designs for Marketing Experiments. In Sheth, J. N. (Ed.), Research in Marketing, Vol. 1, pp. 99-122. JAI Press, Greenwich, CJ. Green, P. E. and Srinivasan, V. (1990) Conjoint Analysis in Marketing: New Developments With Implications for Research and Practice. Journal of Marketing, Vol. 54 (October), pp. 3-19. Handelsrnan, M. (1989) Switching Behaviors from Credit Card to Cash Payment Among Ethnically Diverse Retail Customers. International Journal of Retailing, Vol. 4(1), pp. 31-44. Hawes, D. K. (1987) Profiling Visa and Master Card Holders: An Overview of Changes - 1973 to 1984, and Some Thoughts for Future Research. Journal of the Academy of Marketing Science, Vol. 15(1), pp. 62-69. Hawes, D. K., Talarzyk, W. W. and Blackwell, R. D. (1978) Profiling Bank Americard (VISA) and Master Charge Holders. Journal of the Academy of Marketing Science, Vol. 6(1-2), Winter-Spring, pp. 101-113. Hirschman, E. C. (1979) Differences in Consumer Purchase Behavior by Credit Card Payment System. Journal of Consumer Research, Vol. 6 (June), pp. 58-66. Hirschman, E. and Goldstucker, J. L. (1978) Bank Credit Card Usage in Department Stores. Journal of Retailing, Vol. 54, pp. 3-12. Hunt, J. S., Florsheim, R. A., Chatterjee, A. and Kernan, J. B. (1990) Credit Cards As Spending-Facilitating Stimuli: A Test and Extension of F e i n b e r g ' s Conditioning Hypothesis. Psychological Reports, Vol. 67, pp. 323-330.

An Empirical Investigation of US Credit Card Users

230 International Business Review 5,2

Ingene, C. and Levy, M. (1982) Cash Discounts to Retail Consumers: An Alternative to Credit Card Sales. Journal of Marketing, Vol. 46(2), pp. 92-103. Kara, A., Kaynak, E. and Kucukemiroglu, O. (1994) Credit Card Development Strategies for the Youth Market by Use of Conjoint Analysis. International Journal of Bank Marketing, Vol. 12(6), pp. 30-36. Kaynak, E. (1986) Globalization of Banks: An Integrative Statement. International Journal of Bank Marketing, Vol. 4(3), pp. 3-8. Kaynak, E. and Yucelt, U. (1984) A Cross-Cultural Study of Credit Card Usage Behaviors: Canadian and American Credit Card Users Contrasted. International Journal of Bank Marketing, Vol. 2(2), pp. 45-57. Kinsey, J. (1981) Determinants of Credit Card Accounts: An Application of Tobit Analysis. Journal of Consumer Research, Vol. 8, September. Left, L. (1983) Credit Cards Battle for the Gold. Marketing Communications, Vol. 8(2), February, pp. 26-27. Lunt, P. (1992) What Boosts Card Usage? ABA Banking Journal, Vol. 84(7), July, pp. 8285. Mandell, L. (1972) Credit Card Use in the United States. Institute for Social Research, University of Michigan, Ann Arbor, MI. Martell, T. and Fitts, R. (1981)A Quadratic Discriminant Analysis of Bank Credit Card User Characteristics. Journal of Economics and Business, Vol. 33(2), Winter, pp. 153-159. Mathews, A. L. and Slocum, J. W. Jr. (1969) Social Class and Commercial Bank Credit Card Usage. Southern Economic Journal, Vol. 26, pp. 316-316. Murphy, M. M. and Ott, M. (1977) Retail Credit, Credit Cards, and Price Discrimination. Southern Economic Journal, Vol. 43, pp. 1303-1312. Peter, J. P. and Olsen, J. (1994) Understanding Consumer Behavior. Richard D. Irwin, Chicago. Piggot, J. (1983) EFT/POS in Four European Countries. Retail and Distribution Management, Vol. 11(6), November/December, pp. 43-46. Plummer, J. (1971) Life-style Patterns and Commercial Bank Credit Card Usage. Journal of Marketing, Vol. 35, April, pp. 35-41. Rolfe, R. (1992) Visa's New European Strategy. The Journal of European Business, Vol. 4, No. 2 (November-December), pp. 32-35, & 39. Russell, T. (1975) The Economics of Bank Credit Cards. Praeger, New York. Shay, R. P. and Dunkelberg, W. C. (1975) Retail Store Credit Card Use in New York, Studies in Consumer Credit, No. 4, Graduate School of Business. Columbia University Press, Columbia University. Slocum, J. and Mathews, L. (1970) Social Class and Income as Indicators of Consumer Credit Behavior. Journal of Marketing, Vol. 34 (April), pp. 69-74. White, K. J. (1980) Consumer Behavior in a "Less-Cash" Society. Journal of Consumer Credit Management, Vol. 12(2), Fall, pp. 50-56. Worthington, S. (1990) Retailer Credit Cards: A Competitive Threat. International Journal of Bank Marketing, Vol. 8(4), pp. 3-9.