Although the latest numbers indicate that consumer credit card spending continues to grow, mounting consumer debt is following suit. It reveals a troubling trend: Consumers are not paying down their cards. Equally troubling are the rising charge-offs, especially among small and medium-sized banks.
In his latest report, “A Mid-Year View of U.S. Credit Cards,” Ben Danner, Senior Analyst for Credit and Commercial at Javelin Strategy & Research, delves into the most significant credit card trends in terms of volume and growth, how issuers are responding to the current economic environment, how small and medium-sized issuers should prepare themselves for a tempestuous economic landscape, and the potential effects of the legislation colloquially known as Durbin 2.0.
Trends on Credit Card Volume and Overall Growth
Despite the onslaught of alternative payment methods entering the market and their flourishing adoption, credit cards reign as the dominant U.S. payment method. In fact, Danner reports that 165 million Americans—roughly 64% of the U.S. population—hold credit card accounts.
“If we look at payments volume overall, I have combined the Mastercard and Visa payments volumes that they report in their in their quarterlies,” Danner said. “Credit payments volume overtook debit volume in the second quarter of 2022, which is a signal that consumers are getting back to normal. Credits, usually more than debit and payments volume.
“People are traveling again, which means they’re spending it on their credit cards. And reaping the rewards of doing that. And we’re sitting at about $1.037 trillion on credit card spend. The significant point here is that the Q1 quarterly spend in 2022 versus the Q1 in 2023, there’s growth. People are still using their credit cards, and that’s the significance there.”
Although an increase in credit card spending is a welcome sign, issuers do not have much to benefit from if card users are not paying their balances back. The outlook is increasingly risky, with credit card debt inching closer to a trillion dollars.
How Issuers Are Responding to the Current Economic Climate
Reasons abound for the increase in charge-offs in the past few years. The most notable was the COVID-19 pandemic, as thousands of people lost jobs or saw their hours significantly reduced. The economic ramifications are still being felt.
“The charge-off rate is really an important indicator for the economic environment,” Danner said. “And when we segment that on small and midsize banks versus the kind of top 100 banks by asset size, you can see that the small and midsize banks’—these are your regional, small regionals, and community banks—have charge-off rates of 8.27%—way higher.
“That’s reaching the point where nearly 10% of your books you’re having to charge off because people aren’t paying back the credit card debt.”
In contrast, the top 100 banks, such as J.P. Morgan Chase, are sitting comfortably at around a 2.8% charge-off rate.
Such a high charge-off rate has not been seen in small and midsized banks since 2009, and those institutions are really feeling the brunt of the economic downturn. Danner says they don’t have the level of resiliency in their portfolios as their larger counterparts. Smaller and midsized banks also tend to serve subprime customers with credit card accounts, which means they will be the first to experience difficulty with negative shifts in the economy.
Danner recommends that small and medium-sized banks tighten their lending standards, especially for their subprime customers.
Also, student loan payments will come due in October, further pinching America’s purse strings. Banks are bracing for impact by creating card products for the Gen Z and Millennial segment, with rewards going toward student loan payments.
The Credit Card Competition Act and Its Potential Effect on the Credit Market
The Credit Card Competition Act is a bill that hopes to encourage competition among credit card networks. It would require merchants to route their credit card transactions to at least two credit card networks. One of those networks should not include Visa or Mastercard.
The aim is to lower the swipe fees for the merchant, resulting in less money for the banks and cost savings that are passed on to customers.
However, Danner says such customer savings have not been a reality. In fact, a recent study indicated that few merchants reduced their prices. Instead, most savings stayed with the merchants.
The interchange fees that banks charge actually help fund the rewards built into their credit card loyalty programs. If the legislation is enacted and these fees are cut into, banks will be forced to find other ways to support rewards, whether by charging annual fees or raising late fees.
Where The Market Is Going Is Anyone’s Guess
Danner indicates that it is difficult to give an accurate forecast of where the credit card market is headed. Even Chase CEO Jamie Dimon has made conflicting predictions of where things stand for the past several years.
For now, the evidence lies in the fact that consumers continue to spend using their credit cards, plunging deeper into debt, as they continue to purchase their everyday necessities.
And with student loan repayment coming down the pipe, Americans will be economically strapped further. All issuers and banks can do is keep their fingers on the pulse of the economic changes and build strategies accordingly.
