As the credit landscape shifts under the pressure of economic change, new technologies and evolving consumer behaviors, financial institutions must explore how to adapt strategies to meet those challenges head-on.
On a recent episode of the Banking Transformed podcast, host Jim Marous spoke with Josh Turnbull, vice president of card and banking strategy and Craig LaChapelle, vice president of market development at TransUnion, about the changing patterns in consumer credit management and how financial institutions are innovating to meet evolving demands.
Q: How has consumer credit behavior changed since COVID and what trends do you see in credit utilization and payment patterns right now?
Josh Turnbull: Jim, that’s a great question and a good place to start. So, to think back to what happened during COVID, everyone’s aware of this as a reminder: We saw a tremendous influx of liquidity. People could not pay debts or pay down debts and you saw all this excess cash flowing into the system.
As a result, credit scores improved significantly during the pandemic, which is important to know and understand, given our current situation.
So, where are we today?
In the middle of 2024, we’re seeing the results of some lenders who were prudent and changed their underwriting strategies, knowing what was going on with consumers throughout COVID and some of that increased liquidity and the effects of some lenders who did not. 2021, ‘22 and even ‘23 were incredibly active years in putting new cards out in the market — shattered records with the number of new cards and credit lines and balances.
Where are we today? Today, we’re at a place where we’re seeing charge-offs break all-time records. We’re seeing delinquencies back up to and above where they were pre-pandemic. If you adjust those for the market size, they’re not breaking records, which is great, but it’s still a concern to our issuing partners.
Q: Have new customer segments emerged in the credit card market with unique needs and preferences?
Craig LaChapelle: Yes. It’s a good question. There are two ways to answer. Just remind me if I don’t come back to the second method or the second lens. But ultimately — and I think Josh alluded to this — it’s a tale of two markets in many ways.
And I don’t know. At least initially, it’s not necessarily like there’s a new risk layer. Still, if you divide the risk bands up between higher risk, which is subprime through the beginning of prime and lower risk, which is prime and up to super-prime, there’s a tail of two markets. So, the higher risk folks, the beginning of prime and lower, the delinquency’s clearly higher.
Some of that’s due to score migration score shifts that Josh talked about. Some of it’s also just due to more stress; more folks are feeling the impact of inflation and the higher rates, meaning they must pay more to stay current from an interest rate standpoint.
The Growing Threat of Credit Card Fraud
Q: What are some of the biggest fraud threats facing the credit card industry today?
LaChapelle: Sure, I’ll answer this question with the acknowledgment that this answer could change in six months, but one of the things we’re seeing is … I’m not sure; I forget how we characterize it, but essentially, fraudsters initiating or tricking consumers into doing fraud.
Whether it’s exposing their information leading to account takeover that puts both the consumer and the institution at risk, whether it’s transferring money with phishing schemes and what have you.
It’s gotten to a point where many of our customers are more worried about good consumer-initiated fraud; they are being manipulated. We call it consumer manipulation.
Turnbull: Jim, let me add something about what you shared with Craig. And not to alarm anyone, but just in terms of some of the numbers we’re seeing from a fraud standpoint. So, early charge-offs, which we define as charge-offs that happen a year, less than a year after the card was opened and that process of charging off can take about six months.
So, really, this is the card whose balances are run up within six months. Those losses have grown 44% since 2019, before the pandemic and that’s now a multi-billion-dollar problem. With higher credit lines, the growth rate for prime and above is close to 70% compared to pre-pandemic losses – that’s alarming.
Q: How are institutions leveraging new technologies to combat these fraud challenges?
LaChapelle: I think we believe that if we’re talking about fraud prevention, the best way is to overlap data on the person, the device itself and then the behavior. You have patterns on all three of those and look for risky behaviors or variances different from the baseline. You can do that on those three different dimensions. It’s a good signal of potential fraud.
AI’s Impact on Credit Decisioning and Customer Care
Q: How do you see AI and generative AI changing how organizations manage decision-making, customer care and fraud prevention?
Turnbull: Anytime we have a conversation with AI or a customer, or I do, I’ll speak for myself. Really try to start with so much that falls under the AI or machine learning umbrella and try to parse what we’re talking about, from very sophisticated generative applications down to things that have been used for quite some time, which are frankly widespread.
From a credit risk standpoint, you’re seeing some applications in model development, but that’s a long way off due to regulatory uncertainty, transparency and all kinds of other things that you would expect. That will make it kind of a maybe not the last frontier, but not one of the first to really harness the power of AI.
I think what we just talked about is an example, going from if I have a million customers if I put a tool out there for them to engage and provide static content or content that’s slightly tailored to being able to provide whether it’s a customer service resolution path down to, again, your question, Jim, on financial engagement tools, something that’s very custom to me.
Q: What are some regulatory concerns surrounding using AI in credit decisions?
LaChapelle: Well, I mean, I echo some of Josh’s points. The thing with AI is that it’s tough, particularly in a heavily regulated industry. There’s a wide range of possible things, but you have to put the lens on what is permissible.
We can get ourselves in quite a hairy situation where the dataset on which you’re training your models is not correct, which leads to some provocative answers, to say the least. But also, you have to make sure that from a fair lending perspective or a service perspective, we don’t have differentiated treatment.
Innovations in Credit Card Offerings
Q: What new or exciting products are financial institutions offering to break through the noise in the credit card market?
LaChapelle: So, I’ll start with this, Josh and then you can correct me. If we look at innovation —and I’ll touch on it, we’ll call it engagement or marketing — we’re seeing an increasingly focused focus on our issuers across the scale, this size, scale and what have you.
Focusing on managing customer data sets in their own environment, whether it’s most often cloud-based, talking ID resolution, linking first-party and third-party data and automating, in some cases, the whole marketing infrastructure. Now, the benefits there are increased personalization, speed and cost.
So, increasingly as they invest in this and deploy this, we’ll not only see better offer design and offer fit because of the benchmarking aspect, the understanding of the behaviors, but also more relevant, I would say, offer timing in terms of personalization, when and how the offer is put forward.
Q: How are issuers balancing profitability with attractive consumer offerings?
Turnbull: No, I completely agree, Craig. You and I have been part of multiple conversations with customers where two or three years ago, the key metric was the CPA cost per account and how much it cost me to get an account. And it’s been interesting to watch that shift from cost per account to much more of a value-focused equation.
And I would just say, I probably have three cards in my wallet right now where I do well, but I’m sure the issuer’s underwater in terms of what they’re providing me from a points benefit, whatever standpoint relative to what they get from me. There is one card where one of the privileges is now contingent on how much money I spend on that card on an annual basis.
The Future of the Credit Card Industry
Q: What significant shifts do you see happening in the credit card industry over the near-moderate term?
Turnbull: Two things that I would hit on: one, to the point Craig made, how you use data and the evolution of being able to pull my data or my data and other people’s data together and make smarter decisions, whether it’s who I market to, how I underwrite, those types of things.
The other thing I’ve been thinking about through this conversation is how airline loyalty programs worked five years ago. Jim, you talked about your travel habits that used to be. How many miles I flew determined whether I was silver, gold, platinum, diamond, or what have you.
I could have purchased many cheap tickets that took me around the world, but that’s changed. It’s about how much I spend with the airline and my value to them. I will watch that and that’s interesting to think about in relation to credit cards, financial services in general and rewards.
Q: How might economic factors like a potential recession impact the credit card landscape?
LaChapelle: Josh is a little more strategic; I’ll keep it as a macro interim perspective. We will see a return to outbound marketing growth across the spectrum. Now, much of this depends; I said it’s macro because it depends on a hard or soft landing.
A hard landing would be high unemployment with rates decreasing. A soft landing would be a moderate change in unemployment with rates decreasing, perhaps a little less. We’ve still seen many regional players in a soft landing so I would be very cautious.
When the soft landing comes in, we’ll see more outbound marketing and product designs across the issuers and issuer groups.
From a hard landing, there will likely be an increased effort with new product designs in the less risky space. Even in the more risky space, there will be a lot of work done on model recalibration and trying to tease out the differences within the wristbands. So, depending on the landing type, we will see an increase in upbound marketing.
For a longer version of this conversation, listen to “The Art of Standing Out in Financial Service Marketing”, a podcast with Jim Marous, available here. This Q&A has been edited and condensed for clarity.
Justin Estes is an award-winning writer, strategist, and financial marketing expert with expertise in banking, investments, and fintech. His clients include the NYSE, Franklin Templeton, Credit Karma, Citi and, UBS, and his work has appeared in Forbes, Barrons and ThinkAdvisor as well as The Financial Brand.