The U.S. government’s debt-negotiation struggles and the resulting stock market chaos following Standard & Poor’s Aug. 5 downgrade of the country’s sovereign debt likely will cause a “hiccup” in consumer credit card spending just as it was beginning to recover, a First Data Corp. executive tells PaymentsSource.
“We’re likely to see a step back from recent gains in credit card spending because of the events of recent days, but it is more likely a hiccup than a long-term crisis of confidence,” Ed Kountz, a director at First Data Advisors, a global information and analytics unit the processor established in October to track consumer payment trends.
U.S. consumer credit card spending, which declined during 2009 and was relatively flat last year, has been showing healthy growth signs this year as consumers have returned to “a new normal that will put credit card spending not at the manic highs of 2007 and 2008 but not at the manic lows of 2009,” Kountz says.
Indeed, new Federal Reserve Board data on Aug. 5 showed that consumer revolving debt increased for the second consecutive month after two years of declines (
Consumer revolving credit, 98% of which is tied to credit cards, surged $5.2 billion to $798.3 billion in June from $793.1 billion in May, the Fed said in its monthly G.19 report.
The recent S&P downgrade and financial anxiety probably will cause consumers to hesitate a bit in spending, which could put the brakes again on revolving credit growth, Kountz suggests.
“We might see an interruption in (revolving credit growth), but credit card spending overall is definitely recovering gradually over the long haul,” he says.
But card issuers should remain cautious in planning for credit card spending growth, Kountz advises.
“There is no doubt consumers are feeling more confident than they were during the depths of the recession, and a number of them are returning to credit card usage again, but it is not quite as solid as it would appear,” he says.
The cost of gas, commodities and food also has risen this year, which has contributed to a spike in credit card spending, Kountz notes.
“While consumers are pulling out their credit cards more often, they are doing so with a very value-conscious attitude, keeping a close eye on their cash,” he says.
For issuers, the mixed signals on spending will be tricky to navigate for profitability, Kountz says.
“It will be a complicated route back to profitability for card issuers, given the ups and downs of the market,” he says. “But issuers should avoid getting stuck in a head-down posture because of the various dislocations going on in the credit card industry and the economy.”
Analysts say card issuers’ profits were hurt by the recession and restrictions on credit card interest-rate increases, which the Credit Card Accountability, Responsibility and Disclosure Act required when it went into effect last year, (
Moreover, issuers should stay focused on the fact that broad sectors of the economy are still healthy, and consumers have demonstrated a willingness to return to using credit after the recession battered household finances and dampened overall credit card use, Kountz advises.
Issuers can keep their momentum going by taking a multifaceted approach to reach customers, he says.
“They need to be at the forefront of card technology to make sure that as mobile payment evolves, credit is a big part of it,” Kountz says, noting issuers also should give mainstream consumers good reasons to continue using cards by providing strong loyalty programs. “And they need to find an aligned approach to reach younger consumers with credit card products that suit their needs.”
The momentum in credit card spending is gradually returning, and despite recent setbacks, card issuers should be in a position to continue driving growth if they deliver the right incentives in the right context to the right audiences, Kountz says.
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