Macro conditions are beginning to affect day-to-day consumer spending. For years, American consumers took on growing debt loads disproportionate to their incomes and savings. Innovest’s October 2008 report, Credit Cards at a Tipping Point, describes the mortgage market collapse as only one symptom of a larger problem and that credit cards will be next. Falling house prices, higher cost of living and unemployment rates are now exacerbating the financial health of the consumer and will result in a spike in charge-offs in 2009, as well as mounting risk for banks and issuers with heavy exposure to credit card lending.

The front end of this wave of credit erosion is being heralded by many retailers that offer their own credit cards to customers, such as Target (TGT.N: Quote, Profile, Research, Stock Buzz), Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz), Lowe’s Companies Inc (LOW.N: Quote, Profile, Research, Stock Buzz), and Gap Inc (GPS.N: Quote, Profile, Research, Stock Buzz). Typically used as loyalty programs and promotional tools, these store-branded credit cards tend to have low approval barriers to entice users. Faced with defaults on a potentially massive scale, retailers are less equipped than banks to deal with the resulting financial burden. Target, for one, said that it is cracking down on late accounts and warns of possible lower-than-expected third quarter profits due to further credit loss. The Federal Reserve’s quarterly survey of bank loan officers released November 3rd stated that 20% of domestic banks, on net, reported having reduced credit limits on credit card accounts for even prime borrowers.

As a provider of a cash-based online payment option for retailers, we are seeing a shift away from credit usage as a direct result of the credit crunch. Some merchants are reporting a 10% increase in shopping cart drop-outs due to credit “sudden death” – the unpleasant discovery that credit is no longer available – a result of tightening lending standards as credit issuers scale back approval rates on new cards and reduce credit limits on existing accounts.

What is the shape of things to come for consumers? It is inevitable that heightened awareness of the struggling economy will influence spending behavior at large. We see evidence that consumers will move towards managed spending that gives them more control. Out of prudence and in some cases, simple necessity, online purchases will be made increasingly from available funds. Our quarterly Online Spending Index indicates that 37% of consumers have decreased usage of their credit cards over the last 3 months and 32% show preference to pay now options versus paying later.

The expansion of e-commerce over the past decade, offering previously unattainable efficiency and distribution, was a road paved with credit instruments. However, current economic conditions challenge the long-held practice of relying solely on credit and give rise to the type of shopper, who spends more strategically. It’s about financial well-being and about tools that help consumers achieve a healthy financial lifestyle