The credit card market is an increasingly complex and challenging space for banks to operate. Rising consumer expectations around technology, product options, and rewards have made it tougher to compete with big players. Meanwhile, rising interest rates and forecasts of economic headwinds in 2023 and 2024 will likely lead to higher delinquencies and charge-off rates. While many financial institutions need to grow their card portfolios, doing so also comes with risk. Financial institutions now need a new card strategy that considers the balance of risk and profitability, technology, card assortment, and financial education. Today’s cardholders are increasingly sophisticated. They seek customized cards, robust reward programs, and a digital experience that many smaller financial institutions can’t fully provide. Further complicating this low-rate card strategy is that rising interest rates and the prospect of deteriorating economic conditions in 2023 are forecast to lead to higher charge-off rates. The large bank failures that rocked the industry in the first quarter of 2023 have added to the air of uncertainty imposed by the prospect of a recession. While managing credit card programs in-house may have worked in simpler times, now need a forward-thinking, modern credit card strategy that balances profitability and risk, adopts the latest technology, and delivers the customization that cardholders demand.
Financial institutions are in a period of historically unprecedented disruption. Many are now adopting digital solutions to meet new customer deposit preferences, while also striving to evolve their card programs to keep pace and remain competitive. Coming off the heels of the Covid-19 pandemic, the economy is now facing high inflation, a tightening monetary policy, and the potential for a recession in 2023. This comes at a time when fintech has created new levels of competition from inside and outside the industry. While this is a challenging time for credit card issuers, there are opportunities within the disruption. Identifying these challenges can help financial institutions design a better card strategy that ultimately creates a better product with greater profitability and reduced risk.
Economic Pressures Could Pinch Profitability: consumers are becoming more financially stressed. Consumer credit, mainly credit cards, student loans, and auto loans rising and accelerating faster than incomes are growing. Meanwhile, the rising prices of consumer goods and historically high inflation rates have led many to look more toward short-term lending, with credit cards being the primary vehicle. Card issuers will have to work diligently to remain profitable in this environment. Issuers will have to carefully consider all the costs it takes to operate a card program, such as credit losses, fraud costs, and servicing expenses. With the challenges of a potential recession and ongoing inflation, many issuers are trying to focus on reducing costs rather than making the investments they need to stay competitive. The biggest concern it is hearing is around margin compression and liquidity. The institutions, fund their card loans from deposits. To keep depositors happy, they have to raise rates, which raises funding costs. There are going to be challenging years ahead from a profitability perspective. Banks can look back to previous periods of economic stagnation and high inflation to envision what 2023 and beyond may hold. The primary impacts during this period will include rising net charge-offs, margin compression, and being tied to a static portfolio to continue rate adjustments. As of early 2023, consumer loan delinquencies were on the rise. It is expected that card delinquency to increase in 2023 as consumers face liquidity shortages from the prolonged high inflation environment, slowing wage growth, and expected increases in unemployment. Banks also face intense competition in the credit card market and struggle to compete with the rewards, benefits, and technology big players offer. Cards are no longer just about putting plastic in a wallet but about the services and interactions cardholders receive through the process. For example, many top cards now have robust apps and mobile integration that can message consumers with alerts, purchase tracking, and other capabilities. These trends do not portend well for smaller institutions and are forcing banks to evolve to stay competitive. Technology creates a much stickier relationship but also takes a continuous investment to evolve. As card issuers battle for consumers on rewards programs and card member experience, BNPL continues to rise as an alternative to credit cards. This trend will likely continue as the lines blur between credit cards and BNPL. For example, BNPL and Affirm now offer physical credit cards, while credit card giant American Express now offers an app-based “Pay It/Plan It” service, which enables consumers to essentially create their installment plan on a card. As consumers seek more options, these alternatives to traditional credit card models could capture more incremental profits following two or three years.
Digital Experience and Card Options: while most card issuers have excelled in building strong card member relationships, customers are developing higher expectations. Having the best interest rate or card member experience is no longer good enough. Consumers seek more than just convenience in their cards. Many now want a strong focus on safety, flexible payment options, generous rewards programs, and strong customer service. As consumers take a more cautious approach to spending, shows they are now charging less on their primary cards and looking more to other channels, such as debit cards, BNPL, and cash. It is stressed the importance for card issuers of boosting product value and support for growing numbers of financially stressed customers. Financial institutions not only need a good card, but a solid strategy and program with multiple offerings that appeal to different people. Notable that cards build and enhance the relationship and serve as a gateway to other products, such as deposit accounts, mortgages, auto loans, and home equity loans. It may want to be the first card in their wallet that they pull out. It keeps the brand top of mind, too, and a credit card is an important way to do that. It’s also a form of marketing.
Should rethink the Credit Card strategy: Economic circumstances and competitive contests have created a multifarious environment for implementing a strong credit card strategy. Compared to other types of assets that offer more security with a more predictable income stream, credit cards can be risky to hold on a balance sheet in times like these. Most economists agree we are heading into a recessionary environment that could notably impact consumers’ ability to repay their credit card balances. This makes credit card strategy critical for credit unions and community banks that lack the buffer and scale of larger financial institutions. These organizations must now reevaluate their credit card strategy, including their product suite, profitability, risk, and technology. While credit unions and community banks have often positioned their cards as a back seat to their brand, they now need a more targeted credit card strategy that focuses on their product, experience, and innovation.18 Historically, the credit card strategy for these financial institutions has been to offer a low annual percentage rate (APR) that appeals to a mass audience. While this can attract account openings, it’s not always the most profitable option. Many of these customers and members pay off their bills at the end of the month, making them transactors rather than revolvers. Others use these cards for low fixed-term lending, spending thousands, then paying it off as quickly as possible to minimize interest. Many consumers now use their more sophisticated cards for everyday spending while reserving their low-rate cards as cheap, temporary loans. For many, that strategy of low-rate, basic cards has backfired. It’s not always profitable, and they’re starting to figure out members and customers are becoming much more sophisticated. Even when this basic strategy works initially, it typically leads card programs to flat terrain. While traditional levers like credit limit increases and zero percent balance transfers can provide a short-term smash, they are not viable to drive long-term growth in a card program. It has found it difficult to surpass and compete with bigger institutions’ card programs without taking on more credit risk and potentially making the card program unprofitable.
Key strategies might be: complex environment, credit card issuers should consider several components when developing their strategy- (1) Balancing Profitability and Risk, a successful credit card strategy hinges on finding the right balance of profitability and risk. Nothing crazy, but over the past couple of years, It has also been waiting for the other shoe to drop with credit experience. (2) Offering Tailored Products, it’s critical for banks to identify a range of products that appeal to consumers’ needs. While consumers enjoy low-rate cards, they also want tailored options that fit their lifestyles. Consumers also seek other benefits from their cards, including using them as a means to build their credit score. Secured cards typically have lower spending limits and enable consumers to build their credit while offering some financial institutions a higher profit margin. This can be an especially valuable market given the growth in younger consumers seeking their first credit card. Given the wide range of needs across a customer base, financial institutions should consider a robust suite of products to stay competitive and build deeper relationships to appeal to their base. A well-targeted segment can help them compete with bigger players and with BNPL. Despite the headlines about competition, card issuers still have several advantages in the space, including years of well-established relationships with consumers who use credit cards daily. (3) Mobile Capabilities, many smaller financial institutions have struggled to keep pace with technology and innovation, specifically with the mobile experience. Consumers expect the same mobile-first functionality with their card issuers as they have with their banks. They want do-it-yourself services such as the ability to check their balance, make payments, set travel notifications, and enroll in paperless statements. Other capabilities of a modern credit card app include the ability to manage alerts, search transactions, monitor for fraud, and lock and unlock cards. Finally, consumers expect to easily review and redeem awards with their mobile devices. Many consumers are now expecting an alert every time they use their card, with information on what that card was used for. Others may want to know when they reach a certain threshold. Technology is key to deepening the customer relationship, enhancing security, and helping the cardholder use credit efficiently. This technology can extend new benefits and opportunities for card issuers too. With access to purchasing information, the financial institution may be able to predict consumers’ needs and promote specific products. Financial institutions may be able to cross-sell auto loans or other types of loans. (4) Financial Education and Wellness, card issuers, and financial institutions have increased their use of financial wellness and education programs in recent years, and it’s now more critical given economic pressures. It is observed that access to tools to improve credit scores influenced the choice of a card. Which needs support with credit card best practices and education about managing debt and protecting their credit from cybersecurity threats. Some card issuers now offer internal programs or partner with fintech to help cardholders foster good habits and better manage their credit. If it is educating customers on the proper use of credit, they may be more likely to reach out to you when they run into trouble. They will potentially prefer being proactive instead of having collectors reach out to them.
Concluding thoughts: In the coming year and beyond, it is imperative that banks refocus their credit card strategies to reduce risk and enhance the customer experience. Offering a better product suite with less risk and more income will help expand card programs while protecting against charge-offs and unsecured credit on the balance sheet.
As the credit card space grows more competitive and complex, banks will find it increasingly difficult to stay at the top of consumers’ wallets. At a time when they should focus on growth and adding accounts, economic pressures and the potential for rising charge-off rates steepen the risk. While all card issuers will face headwinds in this environment, many banks will be at a greater disadvantage because they often lack the resources to support a modern card strategy. Gone are the days of offering one low-rate card. Consumers want innovative technology, robust rewards, and card options that meet their needs. To compete in this market, banks now need a credit card strategy that balances profitability and risk, which a focus on mobile technology and robust products.
TDM/SNE
