The fourth quarter of 2019 saw credit card programs lead banking industry profits. Bankers and analysts had every reason to expect that trend to continue. Unemployment had become nil, consumers were spending aggressively and payments and credit just seemed to become more innovative and ever more readily available.
And then Americans disappeared indoors. Most of the nation’s businesses were shuttered. Jobs began melting away. And Washington began printing money.
“No one has seen this playbook before,” says Andrew Davidson, Senior Vice President and Chief Insights Officer at Comperemedia, a Mintel company.
In an interview with The Financial Brand, Davidson notes that consumers’ financial needs are in the midst of a continuous changing and shifting. As people’s circumstances and status swirls, new pain points will emerge and innovative and agile providers will find ways to morph to fit new needs and preferences.
Already one out of five American households (22%) are having difficulty, with those consumers saying they have been unable to make minimum monthly payments on credit cards. This is according to the May 8-10 J.D. Power Financial Services COVID-19 Pulse Survey. In a Google search, there are as many articles recommending that folks use federal stimulus checks to pay down credit cards as there are articles urging people not to do that with the money.
At the same time, during the strange period of the lockdown economy, Americans’ spending habits, much of it executed with plastic, have grown somewhat strange themselves. The Coronavirus Consumer Survey by the Business Insider Intelligence unit, found that nearly half (49.5%) of Americans surveyed have been spending less on nonessentials during lockdown, but 15.4% are spending more. The leaders in the latter behavior are men (18% versus 12.5% for women), Gen Z and Millennials (about 22% for each generation, far more than Xers and Boomers), and those making $100,000 or more annually.
People have not been pigging out on entertainment and games. The three dominant categories have been quite basic, though not typical under normal conditions: nonperishable foods like canned goods, pasta, and dried beans; household staples like cleaning supplies and toilet paper; and medical supplies like masks, gloves and medicines.
All items of practical value — value being something that Davidson, author of a report on the impact of COVID-19 on credit card marketing, believes will play a larger role as people shop for cards and compare theirs to other offerings.
Card Marketing Undergoing Cutbacks As Part of a Reset
All of this, and more, factors into decisions being made as the coronavirus recession builds up and financial services companies that issue cards throttle down on card marketing or plan shifts in emphasis. At the same time, newer competitors have been looking at this period as one to build market share through decisive and quick action. Davidson points to the offer that SoFi pushed onto Instagram to appeal to stuck-at-home consumers who would find a 20% cashback on DoorDash orders and streaming services attractive.
“Companies that are agile and able to pivot to meeting changing consumer needs will emerge stronger from the crisis,” he wrote.
Davidson began seeing card issuers trimming their marketing efforts on multiple fronts. This is borne out in remarks regarding credit tightening, marketing pullbacks and other shifts in first quarter 2020 earnings conference calls held by the largest issuers.
For example, Capital One officials noted that in the first quarter of 2020 purchase volume growth was up 8%. However, that was already declining sharply by the end of the quarter, when weekly levels were off by 30% from 2019’s first quarter. That 30% decrease held through mid-April, just ahead of the earnings call. Capital One’s Richard Fairbank, Founder, Chairman and CEO, attributes this to consumer caution which he thinks will continue even as conditions eventually begin to improve again.
As a result of these trends, Fairbank said that overall the bank is “making choices that are right out of our playbook on downturns … tightening our extension of new credit to avoid the heightened risk of adverse selection. And we’re also pulling back on near-term marketing in response to the decreased opportunity at this very moment for quality growth.”
Fairbank said that Capital One was making pullbacks in digital and online origination channels, direct mail, and some product-oriented national advertising. Fairbank noted that one out of ten Capital One consumers were taking part in credit card or other relief offers as of mid-April.
The CEO also noted that most card issuers were tightening up and that he thought that competition would “lighten up just probably because people are going to cut back on marketing. … I think that this will be a period where … issuers will be focused on meeting the needs of their customers and planning for opportunities when things change.”
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Credit Skies Darken Even as Lenders Stress Cautious Optimism
During the earnings calls officials said that consumers were availing themselves of “skip-a-pay” and other relief programs, including some who appeared to be doing so as a precaution rather than immediate urgency. This somewhat muted the impact on card credit performance in spite of soaring unemployment rates. This could also be the result of stimulus checks, the federal upgrade on state unemployment payments and other temporary factors.
“Overall, we have not seen a pronounced impact from COVID-19 on our credit statistics, but it is still early,” said Michael Corbat, CEO of Citigroup, during the company’s earnings call. Corbat was among bankers who spoke of the credit quality of their card portfolios being better, going into this new slump, than they had been in the past.
“If you take the cards portfolio we have today, which is of a better quality, than it was back in ’08 and you were to stress it for the ’08 financial crisis,” said Corbat, “our pro forma loss rates would be 25% to 30% lower than what we experienced in the last crisis.”
Paul Donofrio, CFO at Bank of America, said that while usage was down in the first quarter, “customer payment rates continued at a fairly steady pace.”
At Discover Card, Roger Hochschild, CEO and President, noted that the organization had been “tightening credit at the margin, as we have felt for some time that we are in the [late part of the] credit cycle.” This includes tighter underwriting for new card and personal loan accounts and a pullback on balance transfer offers and offers of credit line increases.
“While we are not immune from the impacts of deterioration in the economy, our portfolio is significantly better positioned than it was ahead of the last financial crisis,” said Hochschild. He pointed out that relief offered to borrowers represented 4% of loans in late April, and that the number of daily enrollments peaked in late March-early April.
These relatively upbeat predictions clash with what some experts think is coming for consumer credit and specifically for cards.
McKinsey said in a May 2020 paper that: “We expect unsecured retail loans to be extremely hard hit, given the historic levels of unemployment. Credit cards could reach cumulative charge-off rates over five years of roughly 25%-41%, compared with 33% during the global financial crisis. Total charge-offs may exceed those of the global financial crisis by about 60%.”
Comperemedia’s Davidson expects to see more tightening in the near future, resulting in fewer offerings in many quarters of new card accounts. He anticipates that this slowdown in promotion and growth will spread not just in credit cards specifically but also in personal loans.
“We’re certainly seeing a credit crunch in the offing,” he says.
In recent years personal loans have had a comeback, in part as a result of their attractiveness to online and marketplace lenders from the fintech fold. By far, historically, much of the volume of LendingClub has been debt consolidation loans taken out by heavy credit card users attempting to cut their credit costs by moving balances into the comparatively lower rate personal loan sphere, versus the double-digit rates that continue to prevail for card balances.
But alternatives to traditional credit also see these shifts as an opportunity. Point of sale installment plan companies such as Affirm, QuadPay and Klarna are upping their promotions to appeal to cash-strapped consumers. These brands typically aim at younger consumers and often affiliate themselves with sites of vendors that have appeal to Millennials and Gen Z.
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Shifting Gears in Response to ‘Temporary Normal’ and Beyond
It would seem obvious that a travel incentive credit card is not going to be a big draw for new accounts right now, not when flights are being cancelled for the foreseeable future or going out with a handful of people. But there’s more going on here than the obvious.
Davidson points out that marketers have to play at two levels, the immediate challenge and at the same time the long game. Acquisition is part of the credit card business, but so is retention and usage.
Take the aforementioned travel cards. Davidson believes that consumers will travel again, at least for personal purposes and vacations even if business travel yields at least in part to Zoom meetings and the like. So Davidson says there is something to the viewpoint that says “Accumulate your miles now, so you can plan you travel now and enjoy it later.”
The Points Guy website talked up the idea in an April blog: “These credit cards can be used for everyday expenses now to build up your points balances for an amazing redemption in the future.” An ongoing McKinsey survey found that post-COVID-19 48% of consumers plan to travel as much, domestically, as they did pre-crisis. And 23% of consumers plan to step up domestic travel once the pandemic has passed.
That’s the long game, so Davidson points out that brands that featured cards with travel incentives rapidly deployed alternatives to keep consumers interested in those accounts. This will go on for some time, he explains. With people holding back somewhat even as states begin to reopen, “competition for everyday spend … will further intensify as all cards focus on where consumers are spending right now,” he wrote in his report.
During the American Express first-quarter earnings call, Stephen Squeri, Chairman and CEO, addressed this point. “Since people are not currently traveling, eating out, or shopping in stores, we’ve adjusted our Membership Rewards program to include discounts at Amazon when you pay with points and the ability to earn double points with orders from Grubhub and Seamless through the end of the year.” He noted that American Express has added various limited time offers, credits and rewards suited to people staying at home.
Traditional cashback cards can also have a strong pull today, Davidson noted in his report, because consumers can use extra funds right now.
The Chase Freedom card added new cashback categories, with the promise of more additions, in the effort illustrated below.
And Capital One fortuitously had added the ability to shop with its card account points on Amazon in December 2019. Others have also started offering that option, some with bonus options.
Value Is the New Irresistible Offer
Pricing is also going to play a role in whether consumers stick with a particular card.
“Who wants to waste money on a credit card with an annual fee?” Discover Card’s Hochschild said during his earnings call.
Comperemedia’s Davidson believes in the period ahead the message of card value will trump everything else. While this aspect of card marketing has been especially important to Millennials for years, he says, other demographics will also consider it more important as the economy grows more difficult.
“Value is amplified in this crisis,” says Davidson.
Indeed, one factor he suggests marketers watch is affiliate sites. These are sites like NerdWallet, Bankrate and The Points Guy where the line between journalism and marketing gets straddled. Davidson suggests that as the economy tightens consumers will do considerable hunting online for the best deals and eventually this will lead them to these comparison sites. Typically it costs something, in some fashion, for a financial brand to be mentioned on such sites. So this is one place where marketing money may still be spent to promote cards. It’s one place in the future where brands can figure consumers will be.