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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 Two Quarters of Data, COVID’s Impact on Consumer Credit Cards Is as Follows:
- Consumer spending behavior has been drastically affected, both reduced and redirected to different spend categories.
- These spend changes (e.g., travel spending) are likely to be affected for two to three years at least, with some changes becoming permanent.
- Declining spend sectors (e.g., travel, dining) will be at least partially offset by gaining sectors (e.g., grocery, online retail, digital services).
- The trend in total spend will be dependent on the course of the broader economic and employment dislocation, affecting consumers’ willingness to spend, borrow, and repay.
- Some trends are independent of COVID-19, like consumers’ consolidated spend on a single card.
- Another independent trend is consumers’ shift to debit rather than credit.
- Immediate pressure on credit card rewards programs has already begun.
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.