The news: Many consumers kicked off their holiday spending this weekend, but economic uncertainty and inflationary pressures will shift what they’re spending on and how, per a November survey from PYMNTS and i2c.

• Spending on gifts is expected to increase a modest 2% year over year (YoY) across income levels, averaging roughly $1,000.
• But spending on non-gift holiday purchases will decrease this year, at roughly $860 per consumer compared with $1,160 last year. These purchases include travel, dining out, and experiences like live entertainment.

Bills trump shopping sprees: Student loan repayments will be a driving force behind holiday budgeting.

• About 17% of consumers have student loans to repay after the pandemic-driven pause in repayments, according to Deloitte. The average monthly payment is expected to be roughly $400 per borrower.
• Almost half (48%) of these consumers plan to adjust spending by cutting back on holiday expenditures, per Deloitte’s holiday retail survey. It will also reinforce more cost-conscious behaviors like searching for deals and rewards.

Four trends to watch: Here’s what payments firms should be aware of to stay competitive during what’s expected to be a more frugal holiday shopping season.

1. Credit cards will be the top payment choice this holiday season.

• About 62% of consumers plan to cover holiday expenses with a credit card.
• Credit card use during the holidays will increase across income levels and generations.
• More than two-thirds (68%) of baby boomers and 64% of Gen Xers will use credit cards, compared with 44% of Gen Z shoppers.

Credit card providers have beefed up their rewards offerings ahead of the holidays to capture this volume.

• American Express added rewards redemption at Amazon checkout for its cash-back cardholders.
• And Mastercard partnered with Live Nation to bring live entertainment benefits to its cardholders.

But putting so much holiday spending on credit cards could add to rising consumer debt loads and delinquencies.

• Credit card balances increased 15% YoY to a record $995 billion in Q3 2023, per TransUnion.
• And the 90-day borrower delinquency rate was 2.34% in Q3, up from 1.94% in Q3 last year, and 1.82% pre-pandemic in Q3 2019.

2. Younger consumers will lean on BNPL to finance their holiday purchases.

• Gen Zers are more likely than other demographics to finance holiday gifts with buy now, pay later (BNPL).
• About 39% of Gen Zers will use BNPL over the holidays, as opposed to just 9% of baby boomers and 21% of Gen X consumers, per i2c and PYMNTS.
• US BNPL spending is expected to reach a monthly record $9.3 billion in November as consumers start their holiday shopping, per PYMNTS and Sezzle.

BNPL providers have built out their shopping features to capitalize on holiday spend.

• Klarna launched a suite of retail tools in October including an AI-powered shopping lens, cash-back rewards in the UK, and shoppable videos.
• And Afterpay partnered with Rokt last week to display targeted offers in Afterpay’s checkout, which can help boost basket sizes.

3. Gift cards will be the second-most popular retail gift category, behind clothing.

• More than one-third (37%) of shoppers plan on buying gift cards this holiday season, per i2c and PYMNTS.
• Gen Zers will lead the way in gift card buying, according to Blackhawk Network’s holiday sales forecast: Gen Z plans to buy 70% more gift cards than older generations this holiday season.
• And digital cards haven’t overtaken physical cards: the average Gen Zer will buy 10 physical gift cards and 7 digital cards.

Gift card providers are leading into the demographic with tailored offerings.

• Blackhawk Network, for example, launched multi-choice gift cards and personalized gift card bundles—like a Games and Grub card that lets recipients redeem the card at brands like Xbox and Domino’s—to meet Gen Z’s interest in unique gifts.
• Blackhawk also partnered with Klarna to lean into Gen Z’s love of BNPL.

4. Digital wallets and rewards points will also be key payment methods for holiday purchases.

• Almost 30% of consumers plan to use PayPal for holiday shopping, and about 15% plan to use Apple Pay, per i2c and PYMNTS.
• Twenty-eight percent of shoppers said they’ll use their rewards points to purchase gifts, highlighting another way consumers are trying to save money.

The takeaway: Despite many consumers budgeting and cutting back this holiday season, holiday sales will still make up a large share of annual spending.

US holiday retail and ecommerce sales are projected to make up 18% of the full-year sales in 2023, according to our forecasts. Capturing this volume is vital to retailers' and payment providers’ success this year. Offering payment choice, rewards, and cost-savings incentives can help them draw in shoppers.

This article originally appeared in Insider Intelligence's Payments Innovation Briefing—a three-times-weekly recap of top stories reshaping the payments industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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