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 recent payment reports, from PSCU and Co-op Solutions, that reveal concern for economic pressures heading into the holiday season.
Both reports noted jobs grew by 261,000 in October 2022. Although this represented solid growth, it was nevertheless the smallest monthly increase since December 2020. As a result, the unemployment rate rose slightly to 3.7%. “In addition, these figures were released prior to the widespread tech sector layoffs that hit in early November, which are likely to push unemployment higher over the coming months,” said PSCU. Meanwhile, consumer demand for goods and services has not yet abated, contributing to a continuing high inflation rate of 7.7% in October.
In addition, PSCU and Co-op Solutions directed some attention to the Federal Reserve’s efforts to combat rising prices and strong consumer demand with its 0.75% rate hike on November 2, 2022 its sixth rate increase of the year. “The benchmark Fed Funds rate is now in a range of 3.75% to 4.00%, the highest seen since the Great Recession begin in 2008. Moreover, the Federal Open Market Committee (FOMC) is widely expected to make one last adjustment for the year in December,” acknowledged Co-op Solutions. “The Fed previously forecast rates to rise to a range of 4.5% to 4.75% next year, before easing.”
Here is a breakdown of the two payment reports:
St. Petersburg, Fla.-based payments credit union service organization (CUSO) PSCU in its November Payments Index stated “With the holiday shopping season upon us, fears of a recession are top of mind as the U.S. economy continues to face high, albeit softening, inflation.”
PSCU reported in October that consumer purchasing growth for debit remained in the mid-single digits, as it has for most of the year, while credit card growth rates continued to outpace debit cards. Yet, credit card growth began to show signs of softening, with October posting the lowest growth rates of 2022. “Holiday spending appears to be off to a slow start, with fewer purchases in clothing and sporting goods showing shifts in consumer spending.”
Some key takeaways from the November 2022 report include:
· Consumer spending on payment cards remained strong in October. “Credit card results have slightly softened as the year progressed, while debit card growth remained lower than credit cards, which has been consistent throughout 2022.” For October, credit purchases were up 10% and debit purchases were up 5% year over year. Year to date through October, credit purchases were up 17% and debit purchases were up 6%. Inflationary pressures continue to contribute to growth in purchases, outpacing growth in transactions. For October, growth in overall transactions was up 8% for credit and 3% for debit.
· The Consumer Price Index for All Urban Consumers (CPI-U) decreased on an annual basis to 7.7% in October, influenced by higher prices in energy and food and lower prices in used vehicles, medical care, apparel and airline fares. The Fed meets next on Dec. 13-14, with a fifth straight interest rate increase almost certain, although anticipated to be less than the recent 0.75% bumps.
· Holiday spending, which kicked off with the second Amazon Prime Day, appears to be off to a slow start, with fewer purchases in clothing and sporting goods showing shifts in consumer spending. Growth in purchases for the overall goods sector was up 4.1% for credit and 2.9% for debit year over year in October. Amazon, with its second Prime Day of the year on Oct. 11-12, posted stronger growth numbers than other featured retailers with credit purchases up 15.7% and debit purchases up 10.1%.
· The October average credit card balance per active account was $2,826, up 6.4% (or $171) year over year. Credit card balances surpassed the September 2020 results of $2,787 for the second time since the decline in card balances that began in early 2020. The credit card delinquency rate for October was 1.79%, 14 basis points lower than pre-pandemic October 2019 levels.
“In some good news, despite economic concerns, consumers are looking forward to the holidays; however, many have ‘tightened their belts,’” said Casey Merolla, managing director, Accenture, which had its holiday shopping research also covered to some extent in the PSCU report. Accenture revealed that just over one-third (35%) of all consumers said they will try to stick to a holiday budget, and 45% are shopping at different times this year in search of the lowest prices. Added Merolla, “We are seeing an uptick in promotions and discounting from retailers as they work to earn their share of consumer spend. Holiday success for retailers will likely come from four key areas: enticing in-store experiences, meeting consumer demands for virtual goods and services, effectively processing returns in the face of ongoing supply chain and delivery partner challenges, and attracting and retaining additional workers for the busy holiday shopping season.”
The Payment Trends Report for October 2022 from Rancho Cucamonga, Calif.-based Co-op Solutions, which provides a financial technology ecosystem for credit unions, disclosed mixed economic signals leaving consumers feeling uneasy ahead of the holiday shopping season.
October spending trends showed strong monthly increases in both debit and credit in categories including Amazon/bookstores, entertainment and giving/political. Sports and recreation, as well as campers and camping, declined as temperatures began to fall. Overall, credit spending was up 4.3% for the month, while debit showed a slight increase of 0.8%.
Key spending trends being watched this month by Co-op include:
1. Signs point to slower sales growth this holiday season. The National Retail Federation is expecting slower growth this holiday shopping season. The industry trade group recently predicted sales will rise between 6% and 8% to between $942.6 billion and $960.4 billion from Nov. 1 through Dec. 31. Despite this year’s slower growth versus 2021, which saw spending rise by over 13% compared with the pandemic-burdened 2020 season, this year’s anticipated sales total would still represent a record. “Retailers are trying their hardest to extend the holiday season this year,” said John Patton, Co-op senior payments advisor. “They kicked off very early sales to entice cautious shoppers onto the sales floor. Although these early events – like Amazon’s extra Prime Day in October – did not achieve the level of sales that retailers were hoping for, by the end of December most will likely see lifts over last year.”
2. Travel spending remains resilient. While inflation is dampening consumers’ gift-buying intentions this year, it has affected their appetite for travel. According to major travel and lodging firms like Royal Caribbean, Hyatt and Hilton, bookings are up, and people are willing to spend more on experiences now than during the height of the pandemic. This is supported by Co-op’s credit union payment portfolio data. October credit spending in the Travel merchant category is up 3.1% in debit month over month. And year over year, the category is up by 45.1% in credit and 15.8% in debit. “We expect travel spending continuing into November with positive month-over-month growth, before flattening out in December and January,” said Beth Phillips, director, Co-op Solutions. “This points to a surprisingly resilient sector, thanks to a pandemic-weary public that has pivoted to seeking out experiences over purchasing home goods, furnishings, toys, autos and other tangible goods.”
3. Credit card debt returns to pre-COVID levels. Many consumers may be shifting from high-end department stores and boutiques in favor of discount retailers, but those who continue to spend are increasingly dipping into their savings and borrowing on credit to do so. According to the Wall Street Journal, overall credit card debt has for the first time returned to pre-pandemic highs, pushing total card balances to $916 billion in September. Some observers are seeing slowing growth in credit card usage as a harbinger of consumers’ worries about impending recession in the new year. “Balances have gone up on credit cards and there's this perspective in the marketplace that suggests that consumers are trying to hold some cash back in reserve,” said Patton.
Co-op Solutions suggested, “Holiday shopping season is here! Now is the time for credit unions to activate their ‘spend and get’ campaigns to maintain top of wallet status. Focus on those key merchant categories where members are most likely to spend in November and December, including department stores, discount stores and digital goods.”
Co-op also noted subscriptions continue to stay hot across many services, from weekly meal kits to streaming services and even digital plans offered by automobile manufacturers. “For issuers, this amounts to recurring interchange revenue that is incredibly ‘sticky,’ as consumers will typically ‘set it and forget it’ once they add their card as the payment method for the service. Look to offer special incentives to members to encourage them to provision their credit union-issued credit and debit cards in their subscription apps.”