Consumer credit card spending came to a halt in March, surprising experts who had expected a steady increase. The total outstanding revolving credit rose by a mere 0.1%, a stark contrast to the consistent 5% monthly rises observed since the pandemic began.

The Federal Reserve reported that revolving credit rose by $152 million in March, marking the smallest increase since credit card debt declined in 2021. This figure is notably lower than February’s $14.12 billion increase, nearly a hundred times as much as the March figure.

Economists had expected a $15 billion increase for March. What went wrong? Part of the issue lies in a baseline problem, with credit reaching higher levels in February than initially reported. The Fed’s initial report indicated a $11.2 billion increase for that month, still placing  revolving credit at an all-time high. The higher figure released this week caused the percentage increase for March to be lower than initially anticipated.

Factors Slowing Credit Increases

Higher interest rates are likely a factor. The average interest rate for a credit card reached 21.59% in February, its highest since the Fed began keeping track of rates in 1994. But, that should have already been factored into the estimates.

The expert error doesn’t seem to have come about because Americans were spending less. An earlier report from the Bureau of Economic Analysis, released at the end of April, found that personal consumption expenditures (PCE) increased by $160.9 billion in March, a rise of 0.8%. On a percentage basis, that matched the rise in PCE from February.

A Spike in Income

That same report showed a significant increase in income. Personal income rose by $122.0 billion in March, representing a 0.5% monthly rate of increase. Disposable personal income, which is personal income minus personal current taxes, increased $104.0 billion.

In February, disposable personal income had risen by just $49.7 billion. This means Americans had an additional, unexpected $50 billion in income to play with in March. Real personal income minus transfer receipts—which include such things as retirement and unemployment benefits—is currently at an all-time high.

Was that a factor in the nation incurring so much less credit card debt? We’ll gain further insights in early June when the Fed releases its next report on consumer credit. The report will hopefully provide a clearer picture of the sustainability of this trend.

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Households worldwide are leaning on credit cards to meet everyday costs as inflation and elevated interest rates take a toll. In the U.S., credit scores for lower-income cardholders have fallen to their lowest point since the beginning of 2020, indicating that credit delinquency might still get worse.

In the UK, a Bank of England credit conditions survey revealed that both mortgage and credit card delinquency rates increased by the end of 2023. That’s even as borrowing rose in both credit card and non-mortgage lending.

In reference to the UK report, Javelin Strategy and Research Director of Credit Brian Riley said, “Consumers in every market face the dual challenge of rising interest rates and high inflation. Like the U.S., loan demand is strong, but consumers are leaning on credit cards to support their household budgets. They are simply not able to keep pace with rising costs.”

A Global Problem

The Q4 report from the Federal Reserve Bank of Philadelphia echoed many of the concerns raised in the Bank of England survey. Around 3.5% of U.S. credit card balances were over 30 days past due—that’s the highest level of delinquent accounts since 2012, and an uptick from the previous quarter. The amount of accounts that were 60 or 90 days past due rose as well.

The number of borrowers who were simply making minimum payments also soared to its highest mark, increasing 0.34% from the previous quarter. Roughly 10% of cardholders have a balance exceeding $5,200, and 25% of accounts broke $2,000 for the first time.

Relief may be on the way for UK borrowers because the Bank of England projected that inflation is expected to drop below 2% in the coming months. However, it clearly hasn’t made any impact for consumers yet.

Kareem Haji, who oversees UK financial services for KMPG noted: “Defaults across all unsecure lending (not including mortgages) increasing over the same three-month period indicates many people are still struggling to meet their day-to-day costs. Lenders will need to be vigilant and continue to offer support for borrowers in the interim.”

Thinking Downfield

The initial response from lenders was not as supportive as borrowers might like. Credit card issuers in the UK have begun to shorten the interest-free periods for credit card balance transfers.

In the U.S., many card companies have begun to tighten credit limits. The median account had a $3,000 limit in Q4 2023, which continued a yearly decline. In contrast, the average credit limit was $3,368 in Q2 2023.

Riley, who has been forecasting a delinquency wave for years, said, “Credit card issuers need to think downfield into late 2024 and early 2025. These stresses will turn into real operational risk that will result in higher chargeoffs.”

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With Americans continuing to leave vacation days on the table—especially younger demographics—there’s a rising determination to travel, even if it means borrowing money to do so.

According to a data from Bankrate, more than a quarter of those surveyed said they would be willing to take on debt to travel this year. That’s more than double that of those who would do the same for categories like dining out and live entertainment. Specifically, 44% of Gen Zers and 37% of millennials expect to spend more on travel in 2024 than they did a year ago. In contrast, 34% of Baby Boomers said the same.

Nearly half of Americans did not use all their vacation days in 2022, according to Expedia’s Vacation Deprivation Report 2023. Even those using vacation days didn’t use them for fun. More than half used at least one day for personal appointments, and nearly as many used an average of two vacation days in lieu of sick days. Respondents cited financial reasons as the biggest issue that prevented them from using their allotted vacation time.

A Struggle to Pay for Travel

A recent Credit Karma study reported that 92% of millennials and Gen Zers would rather receive the gift of travel or an experience like a concert or sporting event, rather than paying for material items. This falls in line with another study from Credit Karma which found that 38% of Gen Zers and 28% of millennials have been influenced to spend money they don’t have on travel after being exposed to other people’s vacations on social media.

The upshot is simple: More debt to pay for the travel young people so richly desire. Younger individuals have been found to favor rewards points more than older generations, presenting a rich opportunity for companies offering travel rewards cards. Prepaid gift cards have also become an option for older consumers looking to provide the younger generation with what they desire but may not afford.

“Gift cards provide a great opportunity to allow recipients to get the gift they want,” said Jordan Hirschfeld, Director of Prepaid at Javelin Strategy & Research. “It’s unlikely that a giver would directly buy a plane ticket or an on-site experience, but a gift card to offset those costs or provides a more meaningful opportunity and a treasured gift.”

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Nearly two-thirds of U.S. consumers are in credit card debt, average roughly $5,875 in prepayments, according to new data from Clever Real Estate.

The company polled 1,000 U.S. credit card users and found that nearly half rely heavily on their credits cards for essentials, including food, rent, and utilities. But because of the current state of the economy, and the fact that the cost for goods and services has increased significantly, consumers are having a difficult time keeping up with their bills and paying them off. In fact, nearly a quarter (23%) of respondents said they’re going deeper into debt as a result.

Financial Woes

Consumers are spending roughly $1,506 each month via their credit cards, according to the research. More than a quarter (28%) said they are having a tough time keeping up with the minimum payments, while fewer (14%) said they’ve even missed a payment this year.

According to Clever Real Estate, millennials are struggling the most, compared to their younger and older cohorts. In fact, more than two-thirds (67%) of millennials surveyed said they’re in credit card debt, with an average balance of nearly $6,800. In contrast, baby boomers said they carry an average credit card debt of $5,143 while Gen Z is not carrying as much credit card debt, averaging a balance of $4,461.  

U.S. Debt Is Reaching New Highs

Data from the Federal Reserve released earlier this year found that U.S. household debt has reach $17 trillion in Q1 2023.

While the Federal Reserve found that mortgage originations during the first quarter of 2023 were low, auto loan originations increased, particularly when compared to pre-pandemic volumes.

By and large, credit card balances have been increasing over the past year—and will continue to increase—as inflation grows. Consumers, particularly those that are struggling to make ends meet, will continue to lean on their credit cards for necessities.

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Headlines proclaiming record credit card debt levels in the U.S. may have elicited concern, but analysis from WalletHub reveals a more optimistic reality.

At first glance, it may seem that U.S. households are drowning in credit card debt, with a staggering $1.03 trillion owed as of Q2 2023. But, as WalletHub’s analysis of Federal Reserve Bank of New York data reveals, the impact of inflation can’t be overlooked when weighing the significance of these numbers.

Diving into the Figures

While credit card debt in the U.S. is at a record high, when adjusted for inflation, the narrative isn’t as ominous. According to WalletHub, total credit card debt is 18% below its inflation-adjusted peak, and the average U.S. household carried roughly $8,668 in credit card debt by the end of Q2 2023, which is “20% below the record on an inflation-adjusted basis.”

When inflation is accounted for, it becomes evident that previous periods in recent history have seen higher debt burdens. American households, on average, appear to be managing their credit card debt more responsibly than in the past, and the ratios of credit card debt to deposits and total household debt to deposits are on favorable trajectories.

“I’m cautiously optimistic about the economic environment going into 2024,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “The large bank delinquency rate has been increasing steadily, which we interpret as normalizing to pre-pandemic levels. However, as we discuss in our report “A Mid-Year Review of Credit Cards,” charge-off rates at small to mid-size banks are at highs unseen since 2009.”

There’s also an impending economic hammer that is about to drop this fall—student loan payments are set to resume after a three-year hiatus.

“We are about to see a significant shock to the market when student loan payments come due in October for the 44 million borrowers holding $1.57 trillion in debt. I fear that households have been making long term financial decisions, such as taking out auto loans, without budgeting for these extra payments,” Danner said.

The post Adjusted for Inflation, Levels of Credit Card Debt Aren’t So Bad appeared first on PaymentsJournal.

Consumers in the U.S. continue to struggle with payments, as interest rates and inflation plunge households further into debt. According to new data from the Federal Reserve Bank of New York, U.S. household debt has reached $17 trillion in the first quarter of 2023.

The research is based on the New York Fed Consumer Credit Panel, which draws data from anonymized Equifax credit reports, this report provides valuable insights into the state of the economy and its impact on American households.

Record Levels of Debt

According to the Federal Reserve, aggregate household debt balances have increased by $148 billion in Q1 2023, a 0.9% rise from the previous quarter. This brings total balances to $17.05 trillion, representing a $2.9 trillion increase since the end of 2019, just before the pandemic-induced recession. While growth in mortgage balances has been relatively modest, other forms of debt, including home equity lines of credit (HELOC) and auto loans, have shown consistent upward trajectories.

The data also highlights a reduction in mortgage originations during Q1 2023, reaching the lowest point since Q2 2014. However, auto loan originations remained elevated compared to pre-pandemic volumes. These insights indicate potential shifts in consumer preferences and financial priorities, which could influence the development of new payment solutions and lending models.

The Federal Reserve Bank of New York also provides valuable data on delinquency rates and public records. While delinquency rates remained low and roughly flat in Q1 2023, the transition rates into early delinquency for credit cards and auto loans increased.

Inflation—A Global Problem

We’ve previously covered how credit card balances are increasing as inflation grows, and how more Americans are struggling with increasing costs and decreasing savings.

Cost-of-living is becoming a growing issue, and not just in the U.S. In the UK, for example, keeping up with the rising cost of goods is leaving some people to shoplift—or in many cases—turn to buy now, pay later (BNPL) services to divide up their payments in smaller installments to help during this difficult time.  

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The persistent cost-of-living crisis in the United Kingdom has another symptom: a rise in shoplifting.

A news report from the country cited incidents “being reported rampantly in the UK.” The report fixated on food costs, noting that they had risen 19% in March 2023 from a year earlier.

That inflationary rate for food nearly doubled the overall March rate of 10.1% reported by the Office for National Statistics last month. The agency’s next report is due on May 24.

British tabloid Metro cited a survey indicating that one in 10 young people has resorted to shoplifting. The same report suggested that the crisis is landing on the younger set with particular force: 37% of young adults have sought financial support to buy food, compared with 5% of those over 55.

Prices have skyrocketed in recent years, with a steady climb beginning in March 2021. A downward drift has occurred only recently, but it has not been enough to ease the pain. Each monthly number is year over year:

UK Inflation Rate, February 2021-March 2023

Contrast that with the U.S. numbers during the same period (again, monthly statistics are year over year):

U.S. Inflation Rate, February 2021-March 2023

Inflation is a global problem, but the impact isn’t the same everywhere.

On Thursday, the Bank of England increased the interest rate for the 12^th consecutive time, lifting it to 4.5% from 4.25%, in an effort to tame inflation. The central bank has said that it expects the inflation rate to fall later this year. Initial projections had it dropping to around 4%, but around 5% is now anticipated.

Dealing With the Pain

Earlier this year, a report indicated that some UK residents were using buy now, pay later (BNPL) loans as a way of soothing their money woes during the cost-of-living crisis.

At that time, more than a third of workers in the UK had used the loans, with another 15% saying they expected to use such loans, in which goods or services are received, then paid for in installments that are generally interest-free.

The problem, of course, is that many consumers who are cash-strapped now put themselves in greater jeopardy by taking on future obligations. Indeed, BNPL users often profile as debt-laden.

These payment products—which don’t trigger credit checks, a fact that makes them more appealing to younger, less creditworthy segments—are now drawing regulatory attention in the United States, as outlined in a Javelin Strategy & Research report written by analyst Daniel Keyes, Buy Now, Pay Later’s Suddenly Uncertain Future.

Meanwhile, Back in the UK …

In a sign of where the UK crisis is landing hardest, the pediatric medicine Calpol is reportedly one of the most frequently shoplifted items. A news report said daily essentials such as milk and cheese have been fixed with security tags.

According to data compiled by Statista, reported shoplifting incidents hit nearly 275,000 in England and Wales in 2021-22, up from 227,983 in 2020-21. And though that’s a remarkable rise, the numbers in the five previous years—before the cost-of-living crisis—were much higher:

• 2015-16: 337,257
• 2016-17: 370,306
• 2017-18: 382,650
• 2018-19: 375,173
• 2019-20: 359,315

The post Cost-of-Living Pressures in UK Drive Desperation appeared first on PaymentsJournal.

Debt collection requires a lot of technical support. Given that a typical debt collection case load comprises 100 accounts per person per day, staffing debt collectors for a million accounts requires a small army. As a result, triaging the accounts and assigning them to staff who are best equipped to address them is crucial.

To meet this challenge, companies such as Zoot have developed account management and debt recovery systems that analyze customer behavior to rank delinquent payers by risk level, and assign them to the staff best equipped to manage them. Optimized debt-recovery systems will be crucial for financial institutions as the pandemic glut of savings diminishes and consumers take on more debt.

Changes in Credit Card Trends Since the Pandemic

At the beginning of the pandemic when unemployment spiked, consumer debt declined paradoxically. This was due to government financial support as well as changes in consumer behavior. Consumers benefited from increased unemployment aid, antieviction policies, stimulus checks, and loan forbearance programs. In addition, because of COVID-19, consumers decreased their spending on shopping, fuel, dining, entertainment, and travel.

As a result, consumers were in a better place financially, on average, after the pandemic. With extra funds and reduced costs, many consumers paid off debt and accumulated savings. This led to a decline in credit card balances and loan delinquencies.

In 2022 this trend has reversed, with inflation cutting into consumers’ budgets. From December 2021 to May 2022, total household debt increased from $14 trillion to $16 trillion. In Q2 of 2022, the number of credit cards Americans hold increased to a record 500 million. All of this reflects the reality of the American economy: people are struggling to keep up with inflation. Credit card delinquency rates have increased since their lows during the pandemic, as have foreclosure rates.

For financial institutions, this means the financial situation of their customers has changed. As a recent True Acord article explained, “Consumer ability to acquire, and feasibility of keeping up with payments for most types of loans is very different today than it was a year ago. And that customer’s profile changes again when they start missing payments due to financial stressors.”

Financial institutions should anticipate that consumer debt will continue to rise, especially if a recession does come. They need to focus on optimizing their debt collection systems so they can be ready for the storm.

What Is a Debt Collection System?

A debt collection system leverages the customer data it has and allows banks to assess the likelihood an individual customer will repay their debt, as well as helps banks devote debt collection resources accordingly.

Zoot’s system uses cash flows, collections history, collateral, account balances, customer demographics, bankruptcy filings, and account activity to help determine risk ratings for customers.

As an example of how this works, Zoot looks at a customer’s credit line and evaluates how much credit they’ve used so far and how much is available. “Does the customer only use $100 of it or are they running up to $5,000 every month? That data says a lot about how the customer manages a budget,” said Brian Riley, Co-Head of Payments Research at Mercator Advisory Group.

One red flag is the use of cash advances. “[Cash advances] have a much higher interest rate. To get $20 out of an ATM on your credit cards could cost you $8 in interest fees,” he said. “A person who does that repeatedly is a high-risk customer.”

People who bounce checks are inherently riskier as well, as are those who consistently don’t make payments until the end of the month.

Using the Risk Model Effectively

When it comes to customers who aren’t paying off their debts, banks tend to hand over that information to collection agencies to recoup that money. “For those who don’t have the money, banks work out arrangements,” said Riley. “There are certain consumers who can’t pay due to temporary situations—they’re in the hospital, there’s a natural disaster, or they’re dealing with a family emergency.”

If customers have a reliable track record, it doesn’t make sense to waste internal resources collecting from them. Moving collections staff toward the riskiest customers lets banks manage their collections with fewer staff.

The more interactions with customers, the more likely those customers are to pay back debt. According to Zoot, “Consistent interaction with delinquent account owners can reduce charge-offs, strengthen customer retention, further trust and goodwill, and reinforce the institution’s reputation.” A debt recovery model goes through those millions of accounts and sorts them into groups. “Typically, there’s three groups of accounts,” said Riley. “There’s ones where no matter what, they’re not going to pay; there’s another that, with a little effort, will pay; and finally, there’s one that just doesn’t have the resources to pay.”

The debt-recovery system sorts these customers into account queues in a case management platform. A collection manager assigns staff to these work queues and can sequence the queues in order of urgency.

Riskier clients require more aggressive efforts to collect, while dependable clients may require less aggressive efforts. “A bank customer with a mortgage that’s paid off who has been working for 40 years is less risky than a young guy right out of college,” said Riley.

Using Collections Staff Wisely

According to Riley, the turnover rate in the collections department is very high, typically around 25% to 30% a year. As a result, highly trained debt collectors are scarce.

“If there are 500 debt collectors at a bank, 100 of them will be relatively new, 100 of them will be well trained, and 300 will have medium-level training,” said Riley.

A debt recovery system can classify accounts into different buckets based on the likelihood of client repayment. Those categories can be deployed to employees with the right level of skills.

Collecting from delinquent customers is “more brain than brawn,” Riley said, leaning on his experience running a debt collection unit at Chase. “If somebody is 30 days delinquent, I don’t want to kill their account and alienate them as a customer. As time goes on, I slowly increase pressure. If a customer hasn’t called me in four months, or had no contact, I’m not going to be that forgiving when he wants to make an arrangement. But at the end, you can’t get blood from a stone.”

With Zoot’s debt collection software, it’s possible to give certain segments of the population a pass on debt collections based on extenuating circumstances. “With the Fort Myers hurricane, do you really want collection calls when people’s windows are blowing off?” Riley asked. A sophisticated collections system like Zoot’s can block all accounts in an affected zip code. “This happens every year in New Orleans,” he added.

Preparing for the Future

According to Zoot and The Washington Post, “the modest delinquency rates of the recent past appear to be coming to an end. Charge-off rates remain at historical lows, but falling since 2010, they recently plateaued and in mid-2022 showed a hint of an increase.”

This implies that customers will be more likely to be delinquent on paying debt in the coming year. As bank profits are hit by inflation, banks need to focus on making their businesses as efficient as possible. Focusing on optimizing debt collections is a good step toward that effort.

The post Optimizing Debt Collection at Financial Institutions appeared first on PaymentsJournal.

UK fintech startup Yapily has released a new report titled, “Connecting the Dots: Open Banking and Financial Wellbeing,” which surveyed 2,000 consumers and 500 UK businesses. The report comes as the UK is facing historic levels of inflation and economic stress. They found that 95% of consumers expressed concern about the cost-of-living crisis. The UK Consumer Prices Index (CPI) rose to 10.1% in September, a return to its peak in July and areas most affected include energy (electricity & gas), motor fuel, and food.

When times get tough during economic stress, consumers tend to turn to credit products. The report showed that 66% of consumers used a financial product or service to supplement their income, which was accomplished in a variety of ways: 33% used credit cards for the first time, 27% used Buy Now, Pay Later (BNPL), 18% overdrafts, 13% personal loans, and 6% turned to payday lenders.

Businesses have also looked for ways to supplement their income during these difficult economic times. Roughly three-quarters of businesses reported using a financial product or service for cash flow management over the last 12 months and 33% reported using business cards for this purpose. Business cards provide a fast way to get working capital, but the credit line comes at a higher interest rate than a traditional small business loan.

Overview by Ben Danner, Research Analyst at Mercator Advisory Group.

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Consumer debt; encompassing credit card debt, student debt and auto loans, but not mortgage debt, continues to rise sharply, as Americans struggle with increasing costs and decreasing savings, a sharp reverse from the higher use of debit products in the past several years. A recent article in SchiffGold by Michael Maharrey details the rising trends:

“In August, revolving credit increased by a staggering 18.1% as total consumer debt surged to a record $4.68 trillion, according to the latest consumer credit data from the Federal Reserve. Total consumer debt increased by $32.2 billion in August, an 8.3% increase on an annual basis. That was well above the $24 billion projection…

To put the 18.1% increase into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.”

Bridge the Consumer Debt Gap

The current scenario amplifies coverage that Mercator has been providing that identifies both cause and potential solutions for financial institutions to bridge the gap with consumers, keep them in healthy financial situations, and benefit their business in the long term. As my colleague Brian Riley wrote in his research, this disposable income is at risk as personal expenses rise and consumers have no additional income alternatives to utilize when accounting for necessary spending. While credit will benefit, the added risk could become burdensome and also make credit less available to more at risk populations. In addition, as Maharrey reports, the tendencies in fiscal policy will be to make the cost of credit more expensive.

“And it appears that the Fed isn’t finished raising interest rates. This is bad news for Americans depending on credit to pay their bills. With interest rates rising, Americans are paying higher and higher interest charges every month with minimum payments rising. With every Federal Reserve interest rate increase, the cost of borrowing will go up more, putting a further squeeze on American consumers.”

Broaden the Toolbox with Prepaid Products

As an alternative FIs should look to broaden their toolbox to create better entry ramps for consumers who are not credit worthy or need to limit the additional stress of utilizing their remaining available balances. My latest research provides insight into the unique ability of prepaid products to provide such a gateway for FIs to create new opportunity that makes better budgeting sense for consumers, provides access to the credit/debit rails for customers and builds long term goodwill with budget conscious consumers.

The trends pointing to progressively larger increases in revolving credit also amplify the opportunity I wrote about last week. The fintech community to lean in the situation and be cognizant of credit and inflationary issues when developing products and business plan expectations. It’s clear that even as inflation moderates, the long-term effects of the past year will follow consumers and business looking to be financially stable.

Overview by Jordan Hirschfield, Director of the Prepaid Advisory Service at Mercator Advisory Group.

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