The Millennial Generation and Paying Loans with Plastic

Millennial borrowers increasingly use cards to make purchases and payments, so evaluate solutions that capitalize on that trend without increasing your risk and regulatory burden.




Hallmarks of the Millennial generation, those born between 1980-2000, are familiarity and dependence on technology, mass communications, and social networking. Millennial group members expect and demand convenience, instant information, and networking from vendors. There are a variety of ways in which these characteristics and expectations manifest themselves, and they are impacting the future of payments. Since 2000, Millennial buyers have become an increasingly larger percentage of the buying public and the way in which commerce is conducted is beginning to change. Lenders that can offer products and services that cater to the demands of the millennial buyer will be well-positioned to capitalize on this important borrower group.

In today’s world of increasing convenience and high technology, Millennial borrowers demand more payment options from credit unions and other lenders. Research shows many of these borrowers from the digital age have never written a check and have no plans to do so. Statistics indicate demand for alternative payment options for recurring and regular household payments is likely to continue to increase and is an area of opportunity for lenders. For the past 20 yeas, Visa has conducted the Visa Payment Panel Study to identify trends in borrower payment preferences. The most recent study, published in May 2010, offers insight into the buying and payment habits of Millennial borrowers.

The study describes Milliennials as having grown up in an age where funds were always accessed via cards, starting with their first debit card received when they opened their first bank account, then progressing to credit or charge cards with rewards programs as the grow older. This cohort group, more than other groups, prefers to consolidate their spending on payment cards thereby reaping rewards that may include delayed payment and loyalty points, among others.

Based upon these facts and information in the Visa study, as well as the behavior and expectation of Millennial borrowers, one can extrapolate that financial institutions that cater to the demands of this tech-savvy and convenience-focused Millennial generation will be able to hone a competitive edge over those lenders that do not. One way in which financial institutions might be able to capitalize on the Millennials’ preference for payment cards is to accept payment cards for traditional home, auto, and other lending payments.

In 2008, 91% of panelists in the Visa study reported using a payment card in a given month. This represents a 13% increase in payment card usage since 2000. Within the same period, the use of checks within the group declined to 69%, representing a 15% decrease. This means approximately one-third of the population in the study claims to not use paper checks within a given month. Twenty percent of the respondents reported making no cash purchases of $5 or more within a given month. The Millennial borrower overwhelmingly prefers to use plastic rather than cash or even checks to make purchases. Of the panelists in the study, 60% held rewards cards, representing a 20% increase from 2001, and these rewards cards accounted for 84% of the card spending. This represents a 43% increase from 2001.

The panel study also shows borrowers are increasingly turning to payment cards for making recurring payments that have traditionally been paid by check or ACH. These recurring payments include magazine and other subscriptions, cell phone plans, and insurance premiums. According to Michael Marx, senior business leader for Visa Inc., of the $1 trillion annually expended in this category, less than $125 billion is paid using cards. This might appear less than encouraging at first glance, but Visa’s panelists have shown a growing proclivity to use their cards for recurring payments. In 2000, only 17% of panelists were using cards to make such payments; that number more than doubled to 40% by 2008.

Many payment industry observers anticipate borrower check use will continue to decline as generations that prefer checks as their primary payment method are succeeded by younger generations for whom cards have always been available. This trend can be roughly equated to the decline of the use of cash for payments, which was often preferred.

As stated in the report:

“When it comes to payment preferences, American borrowers have decidedly resolved the ‘paper or plastic’ question. A clear migration away from cash and checks to card and other electronic payment forms has been observed in the nearly two decades that Visa has been conducting its Payment Panel Study.”

Lenders evaluating whether to accept payment cards as payment for current accounts should consider several important points, including: 1) transaction costs to the borrower and lender, 2) cash advance fees, 3) the security of the payment solution.

As with any retail, ecommerce, or other payment made by card, there is a transaction fee associated with the use of the card. These transaction fees include the interchange charged by the card brand networks as well as other fees that may be added by the acquirer, issuer, and others. These fees vary depending upon a number of factors including type of transaction, transaction amount, and merchant type. Lenders should evaluate whether they prefer to accept the transaction fee as a component of the transaction or prefer to have the borrower cover the cost through a transaction fee. Under the card brand rules, lenders can add convenience fees to the transaction, passing the the costs on to the borrower. But card brand rules can be complex and expose the lender to risk of financial penalties if the lender does not manage with exactness and maintain compliance.

Historically, lenders that have accepted cards as payment for loans have processed the transactions as “cash advances” on credit cards. This creates two challenges. First, if processed as a cash advance, the lender does not have the option of passing on the transaction fee through a convenience fee. Second, cash advance interest rates are typically much higher than purchases made with a credit card. This discourages borrowers from making loan payments where the transaction is processed as a cash advance. It is suggested companies evaluate solutions that can process the transaction as a payment or purchase rather than a cash advance. This minimizes the costs to both the lender and borrower and increases the likelihood of a borrower making such a payment.

Security of transaction data and the impact of increasing regulatory compliance mandates should also be considered when a lender chooses a card acceptance option. If a lender chooses to build an in-house solution that accepts payment cards, the lender is now burdened in complying with all 12 of the Payment Card Industry Data Security Standard (PCI DSS) requirements and is subject to validation requirements in the same way a merchant is required. Furthermore, bringing additional data into the lender’s environment increases the risk of data compromises and increases the need for additional security measures. Finally, by accepting cards in house, lenders are increasing their responsibility to comply with the 48 state breach notification and data protection laws currently enforced in the United States. For this reason, it is suggested that lenders consider an outsourced solution. If a lender is using a third party to handle the transaction data and the data does not traverse the lender’s systems, then they are only required to ensure the third party is PCI DSS compliant and any physical copies of transactions are protected. Additionally, the regulatory burden of complying with the data breach notification laws can be reduced significantly.

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About ProPay’s LenderPay
Since 1997, ProPay has led the market in providing simple, safe and affordable credit card processing and electronic payment services for businesses ranging from the small, home-based entrepreneur to multi-billion-dollar enterprises. ProPay is leading the industry as a provider of complete End-to-End Payment Security solutions through robust encryption and tokenization, which reduces, and may even eliminate, the business’ risk of having sensitive payment data compromised. ProPay is the recipient of the prestigious 2010 ETA ISO of the Year. ProPay is a privately held company, headquartered in Lehi, Utah. For information, visit




Sept. 27, 2010


  • What credit unions in North Carolina use your system. I would like to talk with a credit union that is now processing payments thru Propay
    Elaine Williams
  • Some of us may think that the Millenial Generation is from 1977 to 95 for 3 reasons:

    1. A chart on the web proves that the annual birthrate REALLY started to dramatically increase in '77. The chart shows 3.3 million babies born that year and 3.14m in '76 (a 160,000 difference). The birthrate leveled off in '95.

    2. Those born in '77 just came of age when the web went public in '95, hence the "Net Generation", or Gen y.

    3. Studies show very similar attitudes between those born in the late '70s and babies of the '80s (the former also voted 66 - 32 for Obama).

    Supporters of these dates may have a point. However, I believe that ANYONE can be a Millenial if he/she is tech - savvy, open - minded to diversity of all kinds, and likes the latest pop culture. I feel this way because many people do not fit into the generation to which they were assigned. I say, let everyone choose whichever generation best matches their CHARACTERISTICS.