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Viewpoint
201 Boston Post Road West, Suite 301 | Marlborough, MA 01752
www.mercatoradvisorygroup.com |phone 1-781-419-1700 |email: info@mercatoradvisorygroup.com
NOVEMBER 2021
2022 Outlook: Credit
Positioned for a strong year, but watch out for external risks.
By Brian Riley,
Director, Credit Advisory Service
Introduction Critical 2021 metrics for delinquency, receivable growth, revenue, and transaction volume suggest that 2022 could be a record year for credit card issuers. Still, the economy remains fragile, with unsteady unemployment, looming inflation, and the likelihood of increased interest rates. Delinquency continues at record low levels. Receivables rebounded after a $136 billion decrease during the early days of COVID-19. With $1 trillion in revolving debt reported in August 2021, interest-bearing receivables are now on par with pre-COVID volume. Profits for 1Q2021 were substantial, boosted by over-reserved loan losses during 2020, but stress remains on interest revenue lines. Transactions continue to increase, and e-commerce growth pushes more transactions to payment cards, creating a healthy downstream opportunity. The U.S. credit card business has the competence, infrastructure, and relevance for a strong 2022, but macroeconomic factors will play a role in operational performance. If economic events disrupt the American household budget, expect reduced spending, weakened consumer confidence, and stressed repayment ability.
2022 Outlook: Credit
2021: Resilience and
Some Luck
Revolving debt, the key to credit card interest as Current Expected Credit Loss (CECL). Under
revenue, hit a peak in February 2020, registering CECL, top issuers could release more than $20
$1.02 trillion, but by January 2021, the metric billion in funds held to cover anticipated credit
fell $136 billion to $961 billion. The shortfall losses that never materialized. (For more
continued through May 2021, when portfolios information on CECL, please see Mercator
began to grow. By August 2021, revolving debt Advisory Group’s recent paper, CECL: Proven
crossed the trillion dollar mark again, landing at in the Field and Ready for Prime Time.)
$1.001 trillion. The indication is that consumer
and lender confidence is on the rise. Credit card issuers competed to build their
portfolios. American Express enhanced rewards
Downward pressure on interest revenue on their Gold and Platinum cards. Bank of
coupled with shifts in consumer purchasing America launched their Unlimited Cash Reward
trends that affected interchange revenue created card. Chase launched an innovative no-frills,
a challenging environment for credit card issuers no-rewards card and a series of reward incentive
in 2021. However, charge-offs were at record low cards. Citi presented the Custom Cash Card with
levels, and at mid-year were 2.54% of portfolio adaptive rewards. U.S. Bank added a secured
value, 135 basis points better than the loss rate rewards card engineered to attract first-time
recorded in 2020, at 3.89%.i This improvement credit card users and help rebuild tarnished
in charge-offs did more than save operating credit reports. Wells Fargo launched their 2%
expenses. It justified the release of loan loss Active Cash Card. Many other issuers made
reserves under the accounting standard known similar moves to ensure their offerings matched
the competitive market.
JPMorgan set aside $10.47 billion to prepare for
a wave of loan defaults. This quarter, the bank
continued to free up pandemic loan-loss reserves,
releasing another $3 billion and boosting its bottom
line.
-Wall Street Journal, July 13, 2021
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2021 Mercator Advisory Group, Inc.2022 Outlook: Credit
Seven Positive Trends
That Will Shape Cards
in 2022
The current environment positions credit card However, U.S. credit cards index interest to
issuers for strong risk and revenue performance the prime rate,iv with terms such as "prime rate
in 2022. The seven trends highlighted below will (3.25%) plus 12.00% to 17.50%,” so existing
influence portfolio and revenue growth. Expect margins will not fall short. With anticipated
to see higher consumer spending, persistent interest rate increases during 2022, holding
card offers driven by rewards, low but slightly the interest margin at a comfortable 1250
rising charge-offs due to account buildups, and basis points is an appropriate move in the current
modifications to the structure of revolving credit market environment, assuming the potential for
with product enhancements such as installment deterioration in the charge-offs.
lending, digital capabilities, and retail banking
cross-sells. The worst-case scenario would be an Reduced Delinquency Creates Capacity to
increase in interest rates, sharp rises in inflation, Reinvest in Operations
and disruptions in unemployment. Though the
first two events are likely, unemployment should Low delinquency volumes translate into staffing
hold. opportunities due to lightened collections
workloads. Rather than reducing staff,
Issuers Are Battling on Card Features, operational units would be better off cross-
not Pricing training collections staff to build strength in
customer service, dispute units, and recoveries.
The average interest rate for accounts assessed Decreasing volumes also create an opportunity to
interest dropped from 15.09% in February 2020 reappraise collection strategies and test dunning/
to 14.52% in May 2020 and it remained in that billing strategies. Releasing staff because of low
range, ending August 2021 at 14.54%.ii With the delinquency volumes would be a poor strategy.
prime at 3.25%, the indication is that an interest Now is a time to build infrastructure, raise
rate margin (the cost of funding versus lending) competence, reinvest in staff, and keep a keen
of less than 1250 basis points is profitable for eye out for operational deterioration in 2023.
issuers under current portfolio conditions. This
year, credit card issuers are not pushing their Better FICO Scores Widen Acquisition
interest rates down any further and are cautious Pool
about potentially rising interest rates. Instead, the
battle will be on features, with a particular focus
With low credit losses trending, card issuers have
on balance transfer offers and reward incentives.
a window of opportunity to carefully lower credit
standards to increase portfolio volumes.
Baseline interest rates will likely rise in 2022,iii
Consumer credit scores rose with reduced
which will force all credit card pricing upward.
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2021 Mercator Advisory Group, Inc.2022 Outlook: Credit
purchasing caused by lower credit line utilization. Fraud Technologies Evolve
According to Experian, 66% of consumers
were considered prime borrowers in 2020; the 3D Secure still has a long way to go before it is
number grew to 70% in 2021. Similarly, subprime considered a universal solution, although the
borrowers represented 34% in 2020 and now sit payment brands are progressing slowly but
at 30%. Improved credit scores will justify surely. As a critical factor in customer
underwriting new accounts outside the usual performance, Visa presents Zero Liability,
lending realm, allowing credit card issuers to supported by chip technology, predictive fraud
focus beyond the mass affluent and into Gen-Z analytics, transaction alerts, device ID, point-
and the elusive millennial segments. to-point encryption, Verified by Visa, and
tokenization.ix Mastercard has similar
Yes, the Card Industry Is Nimble protections,x and FICO Falcon Fraud Manager
remains a relevant, dominant fraud tool, with a
Credit card issuers have a long history of reacting recently added Scam Detection Score.xi
quickly to regulatory changes, such as the CARD
Act of 2009,v which gave the industry less than New and Revitalized Issuers
a year to refine marketing and pricing strategies.
Buy Now, Pay Later (BNPL) provided an example Credit card issuers persistently hone their offers.
of how quickly financial institutions can regear There are often reward wars, where American
their businesses when consumer preference leans Express offers "x," and Citi counters with "x plus
towards new or revitalized lending products. y." Watch for developments by Wells Fargo, who
While some fintechs claim banks are sluggish and recently overhauled their card rewards program
unresponsive, developments by Mastercardvi and with features such as a $200 spend reward, 0%
Visavii networks and payment platform providers APR for 15 months, and 2% cash rewards.xii In
such as FIS, Fiserv, and TSYS illustrate that bank addition, U.S. Bank has an aggressive play with
technologies can move quickly and create Secured Cards, which promises a graduation
convenient options to meet fintechs head-on. program to a general-purpose card after six
months and a 650 FICO score.xiii Secured cards
e-Commerce Continues to Grow are an area that some issuers, such as Chase,
avoid, but other options exist with Bank of
Sheltering at home accelerated e-commerce America, Citi, and Discover.
growth. With a surge in online purchasing,
e-commerce measured 15.7% of total retail sales Goldman Sachs is another issuer to watch, not
in 2Q2020. The metric slid to 13.3% of sales in only for the Apple card but also for its entry into
2Q2021 but is back on a steady growth pace.viii co-brands, after acquiring General Motors'
Continued e-commerce sales translate into more credit card from Capital One for $2.5 billion in
card-based payments, which will add scale to late 2020. Additionally, Capital One’s recent
credit cards. overhaul of the Spark Cash Plus product for
small businesses and 2% Cash Plus product for
consumers indicate that 2022 will be an active
year for credit card solicitations.
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2021 Mercator Advisory Group, Inc.2022 Outlook: Credit
Three Risks to 2022
Credit Card Profitability,
and One Wild Card
Despite the seven positive trends above, the significant minimum due requirements. 2%
credit card industry must consider external inflation has been the order of the day since
factors that will impact the industry. Depending 2016, however, recent indications are that the
on how the metrics move, these impacts may inflation rate is escalating. In September 2021,
be positive or negative. At the heart of the the Bureau of Labor Statisticsxvii reported a 5.4%
matter are the household budget and the rise in the Consumer Price Index. On October 14,
consumer savings rate. The household budget the Social Security Administrationxviii announced
consists of the debits and credits of income and that "benefits for approximately 70 million
expenses. The savings rate is “the percentage Americans will increase 5.9% in 2022," which the
of disposable personal income that a person New York Times cited as "the biggest boost in 40
or group of people save rather than spend on years."xix With the median salary increase
consumption.”xiv U.S. consumers are not known expected at 3% across all employment
for their ability to save. In the past eight years, categories,xx household budgets, and the
personal savings ranged from 5.9% to 9.5% but ability to service consumer debt, may soon
spiked as the CARES Actxv payments flooded be disrupted.
consumer bank accounts. The metric peaked at
19.3% in June 2020, but by August 2021 fell to Interest Rates: Likely to Rise; Moderate to
9.4%xvi as CARES Act payments expired. With the High Consumer Impact
2021 year end, it is likely to expect the metric to
fall back below 6%, which is a sign of consumer The prime rate locked at 3.25% on March 16,
budget stress. 2020; this is 200 basis points lower than it was
two years prior. Although the Federal Reserve
Inflation, interest rates, and employment are does not set the prime rate, the Federal Reserve
factors that affect the consumer’s ability to repay, sets the underlying federal funds rate through the
which are outside industry control. Federal Open Market Committee. Banks set the
prime rate, which is typically 3% higher than the
Inflation: Highly Likely; Broad Impact on federal funds rate.
Household Budgets
Recent inflation increases coupled with the desire
Inflation disrupts the household budget. On a to push away from COVID's emergency
transactional basis, credit card portfolios will stimulusxxi will likely cause an increase in
naturally rise as consumers pay more, but the the funds' rate, which will affect a variety of
downside is that the household has less cash to consumer-facing expenses. As a result, variable
spend. Less money to spend means higher credit card rates will rise, affecting virtually all
delinquency rates as households toil with more U.S. credit cards. This rise will increase minimum
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2021 Mercator Advisory Group, Inc.2022 Outlook: Credit
due payments and lower credit scores because Unemployment: A Wild Card-Running at
of late payments and higher utilization of credit Acceptable Levels, but Indirect Challenges
lines. With an average credit card debt of $5,315,
Ahead
a 100-basis point rise amounts to only $5 per
month. Still, the household budget risk adds up
when another debt is considered, such as an Unemployment rates remain steadily below
average of $37,792 in student loans, $16,458 in 5%xxiii and should hold through 2022. However,
personal loans, or $208,185 in average the Department of Labor cautions that supply
mortgages.xxii chain shortages, rising inflation, and “supply-side
dynamics” could affect the employment market
in the coming year, according to the Wall Street
Journal.xxiv
2022 Expectations
Our outlook for U.S. credit cards is favorable for income due to increased revolving debt and
2022. We expect revenue lines to improve as account openings. Non-interest fee revenue
new accounts book and transaction volumes might be down slightly with improved collection
continue to grow. In addition, as Figure 1 results, but incremental interchange will offset
illustrates, anticipate improvements in interest the shortage.
Figure 1: 2022: Cautiously Optimistic, but Watch Out for Interest and Inflation
Source: Mercator Advisory Group
Rebuilding portfolios, and growing loan books, interest rates will add stress to the household
brings moderate risk. There is room to increase budget, as will inflation. While Jerome Powell, the
volume by underwriting slightly weaker chairman of the Federal Reserve, calls inflation
FICO score ranges. With the trend of lower “transitory,”xxv the term remains vague and the
delinquency and charge-offs, there is a window breadth is uncertain. The challenge credit card
of opportunity to broaden the customer base, but managers face lies in how well households can
it is essential to keep an eye on market factors budget under increased financial stress as
beyond the venue of card issuing. A rise in consumers attempt to normalize their spending.
7
2021 Mercator Advisory Group, Inc.References Related Research CECL: Proven in the Field and Ready for Prime Time (October 2021) In Search of a Profit: 2020 Credit Card Return on Assets Slipped During COVID but Remain Strong (September 2021) 2021 Mid-Year Credit Card Health Checkup: Strong Performance but Watch Headwinds (August 2021) 2021 Credit Outlook (December 2020) End Notes: iCharge-Off Rate on Credit Card Loans, All Commercial Banks (CORCCACBN) | FRED | St. Louis Fed (stlouisfed.org) iiCredit Card Loan Rates | FRED | St. Louis Fed (stlouisfed.org) iiiFed Tees Up Taper and Signals Rate Rises Possible Next Year - WSJ ivPredictable Credit Card Rates: Fuggedaboutit - PaymentsJournal vCredit Card Accountability Responsibility and Disclosure Act of 2009 (ftc.gov) viMastercard Installments - A Buy Now Pay Later (BNPL) Program viiVisa Installments | A New Way for Consumers to Pay | Visa viiiec_current.pdf (census.gov) ixVisa_Security_Infographic_081718_JC_v25 xMastercard Zero Liability Protection Policy | Zero Fraud Liability xiFICO Attacks Push-Payment Fraud With the Latest Version of Its Falcon Fraud Manager – Digital Transactions xiiCredit Cards - Apply for Visa® Credit Cards Online | Wells Fargo xiiiSecured Visa Credit Card to build credit | U.S. Bank (usbank.com) xivSavings Rate Definition (investopedia.com) xvCovid-19 Economic Relief | U.S. Department of the Treasury xviPersonal Saving Rate (PSAVERT) | FRED | St. Louis Fed (stlouisfed.org) xviiSeptember Consumer Price Index: Inflation Rises - The New York Times (nytimes.com) xviiiPress Release | Press Office | SSA xixSeptember Consumer Price Index: Inflation Rises - The New York Times (nytimes.com) xxUS Salary Increase Budgets for 2022 | The Conference Board (conference-board.org) xxiAs the Fed holds rates near zero for now, what that means for you (cnbc.com) xxiiAverage U.S. Consumer Debt Reaches New Record in 2020 - Experian xxiiiThe Employment Situation-September 2021 (bls.gov) xxivTight Labor Market, Supply Constraints Point to Persistent Inflation - WSJ xxvThe Inflation Fight Could Easily Go Too Far - The Washington Post
Copyright Notice External publication terms for Mercator Advisory Group information and data: Any Mercator Advisory Group information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate Mercator Advisory Group research director. A draft of the proposed document should accompany any such request. Mercator Advisory Group reserves the right to deny approval of external usage for any reason. Copyright 2021, Mercator Advisory Group, Inc. Reproduction without written permission is completely forbidden. Brian Riley, Director, Credit Advisory Service briley@mercatoradvisorygroup.com 1-781-419-1720 Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver a unique blend of services designed to help clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Advisory Services. Unparalleled independent and objective analysis in research documents and advice provided by our Credit, Debit and Alternative Products, Prepaid, Merchant Services, Commercial and Enterprise Payments, Emerging Technologies, and Global Payments practices. Primary Data. North American PaymentsInsights series presents eight annual summary reports based on primary data from Mercator Advisory Group’s bi-annual surveys of 3,000 U.S. adult consumers to determine their behavior, use, preferences, and adoption of current and emerging payment methods and banking channels to help our clients identify and evaluate business opportunities and make criti- cal business decisions. Two other Mercator survey series—Small Business PaymentsInsights and Buyer PaymentsInsights—each receive coverage in three reports annually. Consulting Services. Services enabling clients to gain actionable insights, implement more effective strategies, and accelerate go-to-market plans. Offerings include tailored project-based expertise, customized primary research, go-to-market collateral, market sizing, competitive intelligence, and payments industry training. PaymentsJournal.com. The industry’s only free, analyst-driven, online payments and banking news information portal delivering focused content, expert insights, and timely news. For additional copies of this report or any questions, contact Mercator Advisory Group at 781-419-1700.
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