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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
For Credit Card Issuers, the Pie Is Shrinking and Their Share Contracting:
- Q2 2020 combined credit & debit transactions for Visa & Mastercard declined to under 23 billion.
- In contrast, Q2 2019 combined debit & credit for Visa & Mastercard was 26 billion transactions.
- But the decline isn’t equal for debit & credit: debit declined 5.8% YOY; credit declined 22.5% YOY.
- The decline in credit & debit isn’t limited to transactions. Purchase spending volume was down 7% YOY as of Q2 2020.
- As of Q2 2020, credit has seen a 21.1% decline in purchase volume; meanwhile, debit purchase volume increased 8.6%.
- Consumers scaled back T&E and large-ticket purchases typically made on credit cards. Routine purchases have skewed towards debit.
- In just the space of two quarters (Q4 2019 to Q2 2020), credit cards went from a 53.6% share of purchase volume to a 44.7% share as debit volumes grew.
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.