After the challenges of the pandemic, inflation, and surging interest rates, the credit card industry enters 2024 steeling itself for a riskier environment. Financial institutions must evaluate the strength of their credit card operations in light of tighter household budgets, the threat of disruption, and liquidity issues. Even the credit card rewards model is under attack.
With these and other challenges in mind, Brian Riley, Director of Credit Payments & Co-Head of Payments for Javelin Strategy & Research, put together a new report, 2024 Trends & Predictions: Credit Card Payments. It focuses on three trends critical to the success of the credit card industry in the coming year: preparing for an economic downshift, higher delinquency upflows, and the threat to the rewards model.
Economic Downshift
Credit performance metrics had dropped to record lows by the time pandemic-era relief programs brought savings rates to new peaks. Now that those programs have expired, credit card delinquencies are rising. And the threat of a recession looms.
The health of the credit card business is inextricably tied to the condition of household budgets.
“When consumers feel the pinch of rising prices, credit cards become a tool to help balance the budget,” Riley said. “In the case of handling unexpected medical bills, the credit card temporarily helps to relieve the pinch. Then, when the auto transmission fails, the card again helps save the day, and the cycle continues. As other life events occur, the credit card shifts from a tool to a crutch, and the cardholder can change from someone who regularly settles the bill to someone who can barely afford a minimum payment.”
The report identifies a series of steps credit issuers can take amid an economic downturn. Financial institutions have little control over these environmental factors but must manage ahead of them nevertheless.
One lingering challenge: The prime rate increased from 3.5% in March 2022 to 8.5% in July 2023, and Riley expects that it will take two to four years for the rate to return to the 4% range. When inflation spiked, the credit card industry was brought to the cusp of a credit risk increase in 2024. Riley recommends that credit policy groups prepare for the worst and expect regional differences, urban and metro trends, and even variations in age groups now that student loans have restarted their payment requirement.
Lenders should also consider products that embrace risky customers, without denying the risk. Capital One’s use of a progressively less-secured card after a proven payment history is a notable example. Chase’s recent launch of the Freedom Rise card is another one, with a required checking account to set a foothold into the credit for younger age groups.
Delinquency Upflows
Credit card delinquency is increasing because of household budget issues with inflation and costlier financing with credit cards, installment loans, and home financing. Even after consumer rates start retreating from their recent highs, credit card managers should expect that it will take two to three years to return the Federal Reserve’s targeted inflation rate of 3% or to a prime interest rate south of 6%.
Protecting the balance sheet will be a critical challenge in 2024, and the implication of weakened credit quality will be a fundamental challenge for card operations. Managing the risk requires credit policy managers to address three fronts:
- In the post-COVID-19 balance buildup, loosening credit standards brought weaker accounts into the ecosystem.
- Cardholders booked when savings accounts were flush, durable spending was low, and interest rates and inflation were at bay now face the unexpected situation of budgets that are not coordinated with spending requirements.
- Increasing delinquencies create an operational challenge for some issuers. “As evidenced by the weaker performance of small issuers versus large, some of them may have insufficient collection capacity,” Riley said. “As 2024 proceeds, this collection bubble will create a resource drain that few issuers can handle independently.”
The Threat to the Rewards Model
The rewards business model is at risk if proposed legislation sponsored by Sen. Richard Durbin (D-Ill.) gains traction. Durbin effected similar legislation for debit cards in 2010 under a design that required multiple routing options and invoked price controls of 21 cents per transaction, plus a reduced interchange of only 0.05%. The result not only raised retail banking fees but also eliminated point reward programs in the U.S. debit market. If the current legislation passes and is signed into law, credit card rewards could face a similar demise.
Credit cards are commodity products, which means that a Mastercard or Visa card achieves the same purpose at the point of sale. The sale is authorized at the same pace, the billing process follows the same course, and the cardholder works within an established credit limit. In Javelin’s long history of consumer research, reward programs remain a top driver for credit card selection.
However, card issuers must build a new feature to drive customer preference if the rewards model disappears or is fundamentally altered. One solution may be merchant-funded rewards, which propose a “do this, get that” scenario. For example, a $10 coupon might be offered for a $50 purchase at a specific merchant, an expected benefit provided in the debit card world. Although the offer does create a benefit, it is only loosely tied to usage and does not have universal appeal for consumers.
Riley’s recommendation is to create a long-term view of the credit card model, preparing for a time when interchange revenue may be reduced. The current U.S. interchange model now reinvests its revenue into cardholder rewards. Years of attempted regulation, and successful attacks in markets such as Europe and Asia, suggest the model may not last forever. Issuers would do well to get in front of the issue by addressing the entire customer relationship and honing their value propositions.
