Consumer credit card debt has dipped to levels not seen since 2006 and the memory of pre-recession spending habits continues to get hazier with each passing day. In May, revolving credit card balances totaled over $790 billion, down $180 billion from mid-2008 peak levels. Debit and Prepaid volume accounted for 44% or nearly half of all plastic spending, growing substantially from 35% in 2005 and 23% a decade ago. Although month-to-month tracking suggests some noise in the trends as illustrated by the slight uptick in credit card debt from April to May, the changes we are seeing are not at all temporary. What we are experiencing is a combination of many factors including the aftermath impacts of recession tightening, changes in the level of comfort for financing non-essential purchases, the “new boomer” population entering the workforce in greater numbers and the diligent efforts to improve the general household wallet composition by Gen Xers.
How do card issuers shift existing strategies?
- Baby boomers are entering that comfortable stage of life where incomes are higher and expenses are beginning to trail off as the last child is put through college and mortgage payments are predominantly applied toward principle. This group worries more about retirement investments and depressed home values and as such, they demand high value for their spending. Rewards based credit continues to resonate well with this group. Thirty years ago, baby boomers watched as their parents used cash, money orders and teller checks to manage finances but today’s population has access to many more options and are highly educated. As such, this group demands value for their business and a constant review of competitive offerings and development of new, relevant rewards products are needed to sustain market share.
- The younger generation is focused on technology. Debit and prepaid products accessible through mobile apps are more widely accepted for this group unlike ten to fifteen years ago when multiple credit cards with four figure credit limits each were provided to college students in large scale. Today’s new boomer is educated on the risks of using credit, while at the same time, parents are apt to absorb more of their children’s monthly expenses. Servicing this segment’s needs, while helping them to establish a solid credit history, will result in long-term penetration in a growing segment.
- Recent CARD Act and subsequent amendments have taken a bite out of revenue previously used to offset increased risk and related costs that allowed card issuers to service the near-prime sector. However, we are seeing a trend of new lenders getting in to the credit card game while existing issuers start to slowly evaluate the next tier. After six quarters of consistent credit card delinquency declines, we are seeing slow signs of relief. The average VantageScore for new card originations increased by 8 points from the end of 2008 into early 2010 driven by credit tightening actions and has started to slowly come back down in recent months.
What all of this means is that card issuers have to be more sophisticated with risk management and marketing practices. The ability to define segments through the use of alternate data sources and access channels is critical to ongoing capture of market share and profitable usage. First, the segmentation will need to identify the “who” and the “what.” Who wants what products, how much credit is a consumer eligible for and what rate, terms and rewards structure will be required to achieve desired profit and risk levels, particularly as the economy continues to teeter between further downturn and, at best, slow growth. By incorporating new modeling and data intelligence techniques, we are helping sophisticated lenders cherry pick the non-super prime prospects and offering guidance on aligning products that best balance risk and reward dynamics for each group. If done right, card issuers will continue to service a diverse universe of segments and generate profitable growth.