Trends Newsletter December 2022
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'Tis the Season for (Credit Card) Spending
'Tis the season when retailers look forward to Black Friday, Small-Business Saturday, and Cyber Monday. This year's 'season' began before Halloween; carols are heard in stores before Thanksgiving. Even with inflation overshadowing this year's season of joy, some experts anticipate that 2022 retail sales will increase. With inflation however, the majority of consumers will adjust spending downward and 1 in 10 will pass on gifts altogether.
Holiday 2022 has a decidedly different spirit in comparison with the past two years. Shoppers are back in stores. Omnichannel shopping is trending (buy online and pickup your purchase in a physical store, or shop in a brick-and-mortar store and have your purchase delivered). Several sources project that 40% to 50% of shoppers will be finished with their holiday shopping before Thanksgiving avoiding the last-minute crush and spreading credit card payments over several months before the holiday. Zoomers and Millennials are "planning to do at least some of their shopping on social media apps." Buy Now, Pay Later (BNPL) (see Transaction Evolution) is available for many online purchases from brown goods to holiday sweaters. Even though several systems are experiencing a toxic combination of delinquencies and bad press, BNPL adoption in the US is projected to grow. Amazon threatens credit-card profits by introducing Venmo (P2P) as a payment option to their 90 million active US customers who could link Venmo directly to their bank accounts. And don't discount 'cash.' Counter to the current push to go cashless, there are costs to society in doing so; "not accepting cash is illegal in several states where it is considered to be a discriminatory practice. In summary: Credit cards continue to rule the season.
In August, the New York Fed reported a 15% jump in credit card balances, the largest annual increase in two decades. Balances defied gravity to "account for roughly $890bn of Americans' staggering $16T in household debt." Bloomberg notes a concerning increase in account delinquencies especially among low income and subprime borrowers. These are not positive signals for retailers, nor for credit-card companies counting on another year of record profits. As per The Economist, Visa and Mastercard made $138bn from merchant fees last year.
In an executive meta-report of 2021 studies, RFI Global reports 50% of all consumers across five countries (Australia, China, France, United Kingdom and the United States) use a credit card monthly. In all countries except the US, card use has seen a slight year-over-year decrease in the proportions of consumers holding cards. By implication, America is the most acquisitive country of the five. The MacroMonitor reports that over three quarters (78%) of all US households (HHs) own at least one credit card; averaging 214 annual transactions. More than one-third of card holders report that they revolve their balance(s) in a typical month. Card ownership varies by age from 90% of older HHs to 70% of Older Millennials. Yes, surprisingly Younger Millennials (of which about half are Zoomers) are somewhat more likely to own a credit card than Older Millennials (73% versus 70%). Although Americans use only a small portion of their card limit, collectively they owe $887bn in credit card debt. According to Statista, in 2021 there were 1.103bn credit cards in the US. Since 2017, interest rates on outstanding card balances have been climbing steadily (even before inflation). Studies show that most Americans don't know the interest rate on their card(s).
Retailers' focus is merchandise-selecting the right assortment of goods at the right price to entice consumers to part with their dollars; until recently, payment methods were neither a concern nor a point of differentiation. Cash is always a payment option (although out of favor since Covid). Reliance on credit cards has continued to grow since their introduction in 1960s birthing a highly profitable industry.
Visa and Mastercard receive fees from banks for co-branded credit and debit cards; banks receive payments in the form of processing fees from merchants and interest on outstanding balances from consumers. Consumers, however, generally look for the most expedient method to obtain what they want or need to have; perks or rewards extend their buying power.
A new type of consumer is in the driver's seat shaping the future of your business. New payment methods are gaining market traction. For some households, cash is making a comeback as a method to control spending. Payment-network processors' (Visa and Mastercard) and banks' and credit unions' businesses will be significantly different by the end of the decade than from 2020. Seasons of disruption always give the gift of opportunity.
What are your 5-year, 10-year plans? While the number of households transactions expand and contract with economic sentiment, payment channels and amounts spent are evolving based on digital literacy, personal preference, and other factors not directly under providers' control. Ask us about Zoomers, the change agents of this decade.