After spending more than enough time in risk management, one can have an informed view that credit card users care about their spending and repayment. The gut feeling is that people are good and do not abuse credit; instead, they pull back spending and take their responsibilities seriously. Yes, there are a few bad apples, but on the whole, self-governance outweighs irresponsibility. This premise was outlined in a recent Mercator Advisory report on Collections: Credit Card Charge-off Collections Takes Brains, not Brawn.
Three interesting stories today support Mercator’s view.
The first comes from UCLA’s Anderson School of Management.
With the U.S. suffering its worst job losses since the Great Depression — 30 million unemployment claims filed in just six weeks — a big question is how deep, and long-lasting the decline in consumer spending will be.
Consumer outlays, after all, account for nearly 70% of the economy.
The study found that consumers overall responded quickly, and negatively, to the news that the local unemployment rate reached a new one-year high: In the two weeks after such news, consumers in those areas collectively cut their discretionary spending (outlays on non-essential things) by an average of 2%, compared with areas with many similar economic fundamentals that didn’t post a new 12-month jobless-rate high.
Not surprisingly, consumers’ first instinct when facing a troubled economy is to cut spending on relative luxuries, as opposed to necessities. The average 2% drop in discretionary spending in the two weeks after a new 12-month high in local unemployment was fueled by lower spending in sectors that included restaurants, travel, and jewelry, the study says. “Consumers who experience a local unemployment maximum spend approximately 1.5% less in restaurants in the subsequent two weeks,” the authors write.
The JP Morgan Chase Institute, one of my personal favorite research sites where there is plenty of transaction data to consider, has a similar spin of the battered consumer. In a news pickup by Reuters, we read:
Spending on non-essential goods and services, like retail, restaurants, and entertainment, fell sharply across income brackets accounting for nearly all of the drop in spending during that period, the JP Morgan Chase Institute said.
This is primarily due to the stay-at-home orders put in place by many U.S. states, and less due to job loss, at least for now, said Diana Farrell, president, and chief executive of JPMorgan Chase Institute.
“While surprising, we expect this may change over time as layoffs, furloughs, and unemployment insurance further impact families’ bank accounts,” Farrell said in a statement.
The overall fall in spending was 8 times larger than the average drop in household credit card spending in the first month of unemployment during regular times, according to the report.
Credit card users who report household incomes of less than $26,000 reduced spending by 38%, while wealthier cardholders, with incomes of more than $95,000, reduced spending by 46%. The group says the difference largely reflects higher average spending by wealthier households.
And Politico, a source that is typically to the left of my centrist view, had a similar pickup.
“Average American household credit card spending has fallen sharply by 40% year-over-year across all household income levels. As of the second week of April, this drop in spending appears to be primarily driven by the pandemic and social distancing … and, to a lesser extent, by initial income losses.
Here are three simple takeaways.
- Envision a 2 x 2 grid. Consumers will fall into one of four boxes: those that can and can not pay, and those that are willing and unwilling to pay. Credit behavior and scoring easily classify cardholders into these boxes. Those willing and able to pay are easy. Those willing but unable to pay are the ones that need coddling. Those unwilling and unable need a different treatment than those unwilling and able. Simple enough.
- Credit card companies need to modify their strategies to adapt to the current, unexpected credit crisis. Rather than dumping out accounts to collection agencies, credit card issuers must extend their back-end collection process. This will save millions in non-interest expense.
- Sooner or later, the economy will recover.
The long game for credit card issuers is essential for business continuity, growth, and continuity.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.