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Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Products for a New User Environment
After a Decade of Growth, Revolving Credit Sees a Decline:
- After an extended period of growth following the Great Recession, revolving credit outstandings had finally exceeded $1 trillion in 2020…
- …Only to see a marked decline starting in Q1 2020, with bank and credit union outstandings dropping $138.5 billion in just two quarters.
- The speed of decline in revolving outstandings is higher at banks (-13.4%) than at credit unions (-9.8%).
- One factor in play may be the implementation of Current Expected Credit Losses (CECL) accounting standards, which force issuers to look at risk from an account rather than a portfolio level.
- Consumers were already trending toward debit use vs. credit card use: 2018 was the inflection point.
- The period 2019-2020 continued the move toward less credit card use with an all-time high of 49%, indicating lower card use.
- Another trend affecting credit use is a growing consolidation into a single preferred payment method.
The pandemic changed life as we know it for credit card lenders and cardholders. Being a lender is not so simple anymore. Profitability is under siege, driven by loss provisioning, declining outstandings, changing spending patterns, debit competition, erosion in the power of rewards, and a deep recessionary environment. Primarily driven by the externality of the COVID pandemic, many behavioral changes among cardholders are likely to be long term, if not permanent.
Mercator Advisory Group research, Credit Card Products for a New User Environment, indicates a shift in credit and debit patterns. Contactless payments mean more to merchants, consumers, and issuers than ever. Durable spending is down; consumptive spending is up. And, credit card deferrals do not seem to carry the stigma they once did. Rewards consume a large portion of interchange, and in a shifting market, all costs must receive consideration.
“You cannot simply throw rewards at consumers and expect profitable market share,” comments Brian Riley, Director, Credit Advisory, at Mercator Advisory Group, and the author of the research note “Credit Card Products for a New User Environment.” Riley adds that “Credit cards are certainly not going away, but expect lower returns, higher risks, and shifting purchase patterns at least through 2025. And, do not forget the investor. It might be balance sheet lending or asset-backed securitizations enabling the credit card lender, but without the investment, card lending will cease. Lending is a risk-based business; it requires a return for tolerating the risk.