By Ray Birch
RANCHO CUCAMONGA, Calif.—Look for credit card spending to continue its resurgence in 2022, say a half-dozen experts, who predict the credit picture this year will more closely reflect the pre-pandemic landscape.
The analysts --in a two-part series--also told CUToday.info they are also urging credit unions to focus on rewards, particularly niche rewards, to keep pace with the attractive rewards programs big banks introduced in large numbers in 2021.
“Late-2021 spend performance does indicate that we will continue to see a resurgence in credit card spend as consumer confidence builds,” said Beth Phillips, managing director of strategic portfolio growth at Co-op Solutions. “However, the tale of credit card balances is not quite as positive in comparison to prior years. Co-op’s data show November month-end balances remained down by just over 1% from the prior year. Balances are growing slightly, but for the first year since 2004, credit union balances have grown at a slower rate than the bank segment, according to NCUA data.”
Beth Phillips
‘Demand is Growing’
In addition, TransUnion is also reporting the consumer landscape is starting to more closely resemble the pre-pandemic era.
“With forbearance programs expiring and stimulus funds drying up, demand for credit is growing and consumers are reevaluating their credit needs—which is a sign of a humming and functioning economy,” said Charlie Wise, head of global research and consulting at TransUnion. “The year 2022 will mark a continued return to lending in the credit market, which will help fuel the continued resurgence in consumer spending.”
Phillips pointed out COVID-19 continues to cause disruption with new variants.
“But initial analysis indicates that credit will remain stable in Q1 2022, with the assumption that debit will outpace credit slightly in this quarter as consumers have typically pulled back in their credit spend post-holiday,” she explained. “After Q1, credit and debit patterns will remain stable with optimism that credit balances will rebuild throughout 2022.”
For 2022, Phillips said the “low-hanging” opportunities lie within building balances—slowly.
“Credit unions should focus on rebuilding their existing member credit balances with consistent balance growth initiatives, paired with at least one credit line increase effort,” Phillips said. “However, what is most prevalent in payments today is the effort to gather every possible transaction.”
What to be Thinking About
Phillips said credit unions must begin thinking about card program success in terms of purchase volume capture, not balances.
“Consider the turn rate—the ratio of purchase volume to balances. For example, a portfolio of $100 million in spend and $25 million in balances has a turn ratio of four times,” Phillips said. “Since 2015, the turn rate for the top 10 Visa and Mastercard issuers has increased from 2.1 times to four times in 2020, with expectations that this will reach 4.5 times by end of 2021. What does this mean? Credit unions must focus on offering compelling rewards offers and heavy marketing efforts to retain current members and capture new accounts.”
Transactional success is more indicative of member engagement, said Phillips.
Tim Kolk
“If transaction volumes are not growing at market rate (+20% current state), the credit union is losing ground,” she said. “Depending on their current state, growing transactions requires compelling product sets, rich rewards and ongoing marketing strategies to incentivize member loyalty. Transactional growth comes at the investment in rich rewards, though if the product set is competitive, this investment will not be as much as the interchange potential in the product offering. In 2022, the focus should be on either establishing the correct rewards offering or promotion of current card products and rich rewards to capture transactions, new and existing, at every turn.”
An Overall Surge
Tim Kolk, principal at TRK Advisors, observed that overall spend surged in 2021, particularly after Q1.
“And it appears this is most true in spending segments that did not come under a lot of financial stress last year,” Kolk explained, saying debit captured more spend in financially stressed categories. “I expect continued strong purchase growth in 2022 unless there is a serious economic downturn.”
Kolk said credit balances remain down for most issuers compared to pre-pandemic levels.
“This is because, while spending has regrouped, consumers seem to be voluntarily careful about rebuilding balances,” Kolk said. “I suspect pressures, from fintechs and BNPL, are pulling some balances out of the credit card industry, but that is likely still marginal. The biggest reason for balances staying suppressed is voluntary cardholder behavior.”
‘Always be the Case’
Debit is always the preferred payment vehicle for those who are more conservative in their spending, said Kolk.
“That will always be the case,” he said. “There was some movement from a portion of credit users to debit during the pandemic as they became uneasy, but those folks are likely reversing—or already have—their behavior as they feel more comfortable with the future. Because of all of this I think credit growth has fully rebounded from 2020 and will grow more robustly than debit in 2022.”
‘Continue to be Strong’
Bill Hardekopf
Bill Hardekopf of Money Crashers believes the uptick in credit card usage will continue throughout 2022.
“Consumers improved their credit scores during the pandemic, partially because they were unable to go anywhere or do very much,” he said. “This led to a decrease in spending. In addition, a number of people used their stimulus checks to pay down their credit card debt. So, we saw an increase in the credit scores for a significant number of people. When the economy opened back up, more people were eligible to receive a credit card, so credit card applications and originations increased. That is one reason I think we'll see credit card usage continue to be strong in 2022.”
In addition, stimulus checks have ended and people do not have the incremental income.
“We'll see more consumers having to put transactions on their credit card,” Hardekopf said.
“Finally, I think people are excited to get out and live life again now that the country has opened back up,” Hardekopf said. “They are eating out more, travelling more, and spending more. All this leads to greater expenditures on credit cards.”
The Need for Rewards
Hardekopf pointed out many credit card issuers are offering some very attractive rewards.
“In order to compete, I believe credit unions may want to offer some new rewards,” he said. “They may not be able to go toe-to-toe with the large issuers, but they can offer some creative rewards that may attract new credit card customers.”