Payments Briefing: Digital payments are making it “easier than ever” for young consumers to make bad financial decisions
- This week, we look at how the convenience offered by digital transactions is making it easier for young consumers to overspend.
- We also discuss how the current global microchip shortage is impacting the payments industry.

Every day, millions of Americans use digital payment methods to pay for everything from rent and utilities to ecommerce purchases and dining out. A recent Banking and Payments Intelligence report by J.D. Power finds that while credit and debit cards continue to lead in overall use, digital alternatives like BNPL, mobile wallets and P2P payments are quickly rising in popularity, particularly among younger customers.
Yet, while this growth in digital transactions is undoubtedly making shopping more convenient, it’s also making it easier for consumers to spend beyond their means and make questionable financial decisions.
The report finds that 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 used a debit card in the past three months, while 28% used a credit card. Digital payment options were used much less frequently: only 2% of consumers used a mobile wallet, and just 1% used a P2P app or BNPL during the three-month period.
Source: J.D. Power
While the overall use of digital payments is still relatively low, these methods tend to score high on customer satisfaction. In fact, overall satisfaction is highest for BNPL, alongside credit cards. Satisfaction scores for these digital alternatives are higher among customers aged 18-44 as compared to their older counterparts.
Although younger consumers tend to have higher levels of satisfaction, they generally have a weaker understanding of most payment types and tend to make poorer financial decisions when using them. For example, 38% of consumers aged 18-44 say they only partially understand payment methods, and 5% say they don’t understand them at all.
As a result, young consumers tend to struggle with their financial health. Only 41% say they pay off their credit card statement each month, while 28% say they sometimes overdraw their checking account with their debit card, as compared to 6% of older customers.
Younger consumers have also been the most enthusiastic adopters of BNPL services, citing the ability to afford more expensive purchases, lack of interest charges, and promotions and rewards as their primary motivators. However, many are failing to take advantage of interest-free options and paying beyond their budgets, or not paying on time.
To sum up, the research finds that consumers under the age of 45 generally have a weaker understanding of alternative payment methods, are less likely to pay off their balances each month, are more likely to overdraw their account balances, and tend to struggle with overall financial health.
The report’s author – John Cabell, director, banking and payments intelligence at J.D. Power – believes that a major reason why young consumers are overspending is because digital payment providers have made it easier than ever to do so. He argues that the simplicity and convenience of the user experience offered by these digital payment solutions creates a situation where consumers get immediate gratification from making a purchase without having to worry about the high costs and potential debt associated with it.
“Digital payment methods like BNPL, P2P and mobile wallets often make payment experiences so frictionless that it becomes easy to lose track of overall personal budgeting,” Cabell told Tearsheet. “Younger consumers appear to be making riskier choices with these digital products and channels, which are very likely disproportionately impacting their financial health.”
Cabell says this points to a longer-term need for consumer education and financial advice to accompany the growth of new payment options – something both consumers and firms should be aware of in order to avoid big problems down the road.
However, Cabell also notes that younger consumers often have more financial challenges anyway, given that they are in early stages of life and career, and they may not be as familiar with how to best use financial products to their advantage. “For many, age and experience naturally develop greater wisdom and stability in such matters,” he concluded.
How the global microchip shortage is affecting the payments industry
With the Covid-19 pandemic, the global semiconductor supply chain took a significant hit. Buying microchips became more expensive as cycle times increased. As video game makers, smartphones, and automobile manufacturers evaluated where they stood, the payments industry found itself no less immune.
China, the world’s largest chip manufacturer, went into a series of lockdowns as part of the country’s zero-Covid policy. This resulted in the closure of factories and a drastic decrease in output. China’s lockdowns decreased total chip output by 5.1% in March this year. Additionally, the Russian invasion of Ukraine has made half of the world’s supply of neon, an essential ingredient in manufacturing chips, inaccessible.
The modern payments industry’s most prolific product is the payment card. Most of these cards now use an EMV chip, which stores the holder’s information and enables communication with other devices, like ATMs and POS terminals. So, the bottom line is, as chips are getting difficult to source, cards are getting difficult to produce – and banks don’t like that. After years of getting in the habit of freely making and sending out cards, they are being forced to predict and budget their production.
In 2021, contactless payment card manufacturers saw the prices of EMV-compliant chips increase by more than 50%. A recent Nilson Report study suggests the cost is set to increase further. It forecasts that the cost of producing finished, first-use plastic cards will increase between 5% and 20% this year and the next.
As the demand for microchips continues to outpace the supply, experts are expecting an industry-wide failure to deliver cards in time. According to ABI Research, up to 1 billion payment cards are at risk of not being issued over an 18-month timeframe, with 347 million at risk in 2021 and up to 740 million in 2022.
Banks face three specific risks that need immediate attention. First, they need to figure out how to continuously provide customers with new and replacement cards, as the chip shortage gets worse. Second, if people start moving back to cash payments, there is a risk of missing out on revenue. Third, there is a reputational risk and the risk of losing customers to competitors.
While there may not be an absolute solution, there are some steps the industry can take to immediately address the situation. Issuers have begun taking actions to prolong the life of existing cards and reduce the number of new cards issued: extending the expiration date of cards, encouraging mobile wallet usage, charging fees for replacement cards, and making the physical card optional. They are also starting new card orders earlier, which helps card manufacturers better plan for new orders.
Unless there is a sudden and drastic decline in the demand for chips, the supply disruption is unlikely to be resolved. Chip manufacturers have already begun amping up production, increasing prices, and working out their order lists. According to industry experts, the shortage is expected to extend into late 2022, with some even saying that the production of chip-based goods will continue to be delayed until well into 2023. A complete solution is far off, and immediate remedies are definitely needed.
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What we're reading
- Revolut moves in-store with physical card readers (AltFi)
- PayPal launches new credit card for small businesses (Finovate)
- Wise CEO and co-founder Kristo Kaarmann faces investigation over tax breach (CNBC)
- Mastercard drops album featuring its sonic brand (Finextra)
- Revolut rolls out Pay Later in Ireland to rival Klarna, Afterpay (Bloomberg)
- Klarna lashes out at "frankly irresponsible" Barclays research on BNPL (PYMNTS)
- China's digital yuan wallet downloaded by 261 million individuals (Finextra)