Payment Trend Reports from Co-op Solutions and PSCU Show Shift Away from Debit Cards
By Roy Urrico
Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.
Highlighted here are two June payment reports.
The June Payment Trends Report, from Rancho Cucamonga, Calif.-based Co-op Solutions, which provides a financial technology ecosystem for credit unions, revealed that despite a strong jobs report for the month, most other economic indicators pointed directly toward an economic slowdown.
Co-op’s June credit union card portfolio data showed flattening month-over-month results across most categories in both credit and debit, with a continued shift away from debit spending as consumers seek to hold on to cash in their deposit accounts in anticipation of the “rainy day” that’s almost here.
The Co-op report disclosed “June showed unexpectedly strong job gains of 372,000, keeping unemployment at a low 3.6%, identical to May’s level. Wages also climbed by 5.1% on an annualized basis. However, other economic indicators are not as encouraging. Retail sales slowed by 0.3% in May, and consumer sentiment fell to its lowest level in 70 years. In perhaps the biggest news, inflation jumped up to a 9.1% annual rate in June, hitting a new 40-year high.”
The Trends Report suggested as members continue to shift their spending from debit to credit, credit unions should take a prudent approach to analyzing their members’ credit line usage patterns to best meet their needs. “Experts caution that credit quality may decline as the economy slows down, especially if inflation remains high. Credit unions have always taken a ‘people helping people’ approach to member relationships, and this provides an opportunity to support their members’ financial wellness.”
Co-op Solutions capsulized key spending trends:
· Merchant subscription services: According to Co-op’s month-over-month credit union portfolio data for June, spending on subscription services fell by 4.7% in debit and 3.5% in credit. This comes as no surprise, as “subscription fatigue” is weighing on growth in the category. Merchants are taking notice of consumer preferences and are offering their subscribers more flexible options. According to the PYMNTS Subscription Commerce Conversion Index, the number of merchants that allow subscribers to pause rather than cancel their subscriptions has risen by 40% since May 2021.
· Shortages turn to oversupply in furniture and appliances. Supply chain issues have been a recurring theme over the past year, as disruptions like the pandemic, the war in Ukraine, and the “Great Resignation” have affected the ability of manufacturers and distributers to meet rising consumer demand for durable goods. However, the script flipped in recent months. According to Co-op’s month-over-month credit and debit portfolio data, spending on furniture fell by double digits in June, and computers also declined from the prior month. Part of this may be consumer frustration with months-long delays in receiving delivery on orders, combined with less appetite for discretionary purchases in light of rising inflation.
· Credit shift continues. The growth in credit portfolio balances continues to accelerate, as consumers shift their spending from debit to credit to preserve cash in their deposit accounts. For June, balances grew 1.36% month over month, and were up 9.55% year over year.
“Issuers indicate that credit spend is increasing, especially on those cards with robust rewards programs,” said Beth Phillips, director at Co-op Solutions. “Plus, as inflation continues, consumers will be more conservative with cash spending, opting to shift to credit as they try to navigate inflation and manage their balance sheet.”
John Patton, Co-op Solutions senior payments advisor, said in the report, “If the economic landscape continues to deteriorate, we expect consumers to open more credit cards as a fallback strategy to supplement their livelihood, as we observed in the last slowdown.”
Patton added, “Debit will continue to be used for small and everyday spending in categories like groceries, eateries and gas, while credit will be used for higher-priced transactions or to earn rewards.”
St. Petersburg, Fla.-based payments CUSO PSCU in its July edition of the PSCU Payments Index reported purchasing activity remained strong with the continued outpacing of credit card growth over debit cards.
In its deep dive section, PSCU looked at performance within the discretionary spending sectors of travel and entertainment, “In the Labor Department’s July 13 update, the Consumer Price Index (CPI) increased 1.3% during the month of June, bringing the 12-month rate of inflation to 9.1% – the highest level in more than 40 years, increasing the challenges for the Federal Reserve.”
The Index stated that the top growth sectors included gasoline, food and shelter and weighed in on jobs and consumer confidence as well. “Job creation is down from the nearly 500,000 jobs that were added monthly over the past year. As the unemployment rate approaches the pre-pandemic level of 3.5%, nearing full employment, this lower job creation number will be a welcomed sign to the Federal Reserve, given their efforts to slow the economy with higher interest rates due to widespread inflation.”
The PSCU Index noted that consumer concerns continue to be based on overall inflation and its direct impact on gasoline and food prices. Nevertheless, the index anticipates consumer spending poised to remain elevated with summer vacations in full swing; the added federal holiday of Juneteenth observed on June 19; and the July sales events promoted by Amazon and other retailers. In addition, a glut of goods at many retailers portends larger discounts coming soon to move merchandise.
· Consumer spending on cards remained strong, with credit purchases up 16% and debit purchases up 7% year over year. Current inflationary pressures are keeping growth in purchases outpacing growth in transactions. For June, growth in overall credit transactions were up 12% and debit transactions were up 3%.
· The Consumer Price Index for All Urban Consumers (CPI-U) increased on an annual basis to 9.1% in June, which was a 1.3% increase from May and heightens the pressure on the Fed to reign in the highest level of inflation since 1981.
· While discretionary spending in the travel and entertainment sectors remains strong with year-over-year credit purchases up 26% and debit purchases up 7% for the combined sectors, transaction growth is now an important metric to watch, looking beyond the inflationary impacts to understand shifting consumer trends. For June, transaction growth for the overall travel and entertainment sectors was up 26% on credit and up 19% on debit as compared to June 2021. Notable transaction growth within this grouping includes movie theaters (up 147% for credit and up 96% for debit) and air travel with non-U.S.-based carriers (up 104% for credit and 42% for debit). Transaction growth for U.S.-based airlines was down 1% on credit and down 20% on debit, all compared to June 2021.
· The average credit card balance for June 2022 was $2,733, up 3.5% (or $93) year over year. June marked the fourth consecutive month in which year-over-year growth was over 2%. The credit card delinquency rate for June was 1.54%, 20 basis points lower than pre-pandemic June 2019 levels.
“While overall consumer spending remained strong throughout June, current inflationary pressures are keeping growth in purchases outpacing growth in transactions. With another record Consumer Price Index increase announced this month, the Federal Reserve is under continued significant pressure to tame soaring inflation,” said Brian Scott, senior vice president, chief growth officer at PSCU. He added, “In this month’s Deep Dive, we explore the Travel and Entertainment sectors where spending has rebounded over the past year – but is beginning to soften, signaling a potential slowdown in discretionary spending amid the rising threat of an impending recession.”