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.
Summarized below are two recent payments reports, from PSCU and Co-op Solutions.
PSCU Finds Continued Softening of Purchasing Activity
In the May 2023 edition of its Payments Index, the St. Petersburg, Fla.-based payments credit union service organization (CUSO) PSCU reported that while overall payment growth is still positive, April 2023 data revealed extended weakening of consumer spending and lower average purchases for both credit and debit cards.
The Index took note of the Consumer Price Index (CPI) increase by 0.4% in April and the annual rate of inflation dropping from 5.0% through March to 4.9% through April. “While this is the tenth consecutive monthly drop in the annual rate from the peak of 9.1% in June 2022, it is still much higher than the Fed’s target annual inflation rate of 2.0%. The largest contributor to inflation was again shelter, followed by used cars and trucks, which offset the decline in the gasoline index, ” observed the PSCU report.
In addition, the Consumer Confidence Index fell in April to 101.3 (1985=100), down from 104.0 in March. PSCU noted the job market remains strong with the Bureau of Labor Statistics (BLS) reporting that 253,000 jobs were added in April, boosted by the continued trend of increased jobs in professional and business services, health care, leisure and hospitality and social assistance. Also, the Federal Reserve increased rates by 25 basis points on May 3 and “signaled a potential pause in rate hikes,” with its next meeting scheduled for June 13-14.
In its monthly Deep Dive section, PSCU highlighted contactless card payments. “While contactless adoption is still behind other regions, we expect that contactless card volume in the U.S. will continue to grow quickly,” said David Albertazzi, director, retail banking and payments, at Aite-Novarica Group. “The acceptance infrastructure is already available, with Apple Pay now accepted at more than 90% of U.S. retailers. The recent introduction of SoftPOS, aka tap-to-pay, enables merchants to accept contactless payments on a regular smartphone. SoftPOS will further drive the migration from cash to card, as well as the shift to contactless as the preferred payment method at the point of sale.”
Other PSCU Payments Index highlights:
For April, transactions grew at a higher rate than purchase dollars, for both credit and debit cards, for the second consecutive month. Credit and debit transactions were up 4% year over year. Credit purchases were up 2% and debit purchases were up 3%. For credit purchases, the largest growth contributor was the services sector (1.0 percentage point of growth) while the goods sector offset that with a 0.8 percentage point reduction. For debit purchases, three sectors generated the highest growth, with restaurants, money services and food and groceries each contributing 0.8 percentage points of growth.
The Consumer Price Index for All Urban Consumers (CPI-U) decreased on an annual basis from 5.0% to 4.9% in April. For the third consecutive month, shelter accounted for the majority of the all-items inflationary increase.
Contactless tap-and-go transactions remained strong in April, with credit transactions up 9.6 percentage points and debit transactions up 11.7 percentage points compared to a year ago. Growth in tap-and-go was strongest in the food-related sectors, as well with the younger age demographics.
Growth in non-discretionary spending slowed on both credit and debit cards with credit up 1% and debit up 2% year over year. Discretionary spending grew at a greater rate than non-discretionary spending, with credit up 4% and debit up 8%.
The credit card delinquency rate for April finished at 1.81%, above the March 2019 pre-pandemic level by 0.13%. Total credit card balances were up 13.9% for April compared to a year ago, while the average credit card balance for active accounts was $2,946, up 8.7% (or $235) year over year.
Co-op Solutions: Consumers Pull Back as Economy Wavers
The consumer spending trends findings for April 2023 from Rancho Cucamonga, Calif.-based CUSO Co-op Solutions, which provides a financial technology ecosystem for credit unions, showed spending increased substantially across all merchant categories despite mixed economic trends.
Co-op conveyed nonfarm payrolls grew by 253,000, and unemployment remained low at 3.4%. Industry sectors including professional and business services, health care, leisure and hospitality, and social assistance all trended higher for the month. “However, the ongoing spate of layoff announcements continued at prominent tech firms including Intel and Microsoft (as well as at its subsidiary, LinkedIn),” the Index reported.
Overall, Co-op spending data reported year-over-year transaction volume was up slightly across both the debit and credit portfolios.
Co-op’s SmartGrowth advisors, who work with credit unions, are closely watching the following key spending trends this month:
1. Consumers seek discounts on everyday goods: Consumers are pulling back on everyday grocery and retail spending, seeking out deals wherever they can. Even though grocery prices were down 0.3% in March and 0.2% in April, they remain more than 7% higher than a year ago.
“Consumers are reserving their hard-earned dollar to spend on staples in lieu of luxury goods,” said Co-op Solutions Senior Payments Advisor John Patton. “We expect discount stores, along with generic grocery and household brands, to continue to do well as long as this economic uncertainty lingers.“
2. Consumers pivot to debit on Amazon purchases: Amazon spending grew year over year across both Co-op’s client credit and debit portfolios. But the growth was much sharper in debit with an increase of 65.7% from April 2022 to April 2023, compared with just 30.0% in credit.
“We’re seeing a mindset shift in how shoppers are using debit online,” said Beth Phillips, director, Co-op Solutions. “Consumers that fit a ‘budgeter’ profile tend to use credit more than debit. But this recent trend in Amazon spending highlights that recent economic trends – coupled with a growing comfort level in using debit online – is beginning to infiltrate across multiple member personas, including those with budgeter and non-budgeter behavior tendencies.”
3. Credit balances continue to rise: Cash-strapped shoppers increasingly allow their credit card balances to carry over from month to month. According Federal Reserve data, annualized revolving debt grew by 17% in March 2023, a big jump from February’s 5.7% gain.
Following small declines in total credit card balances at the start of 2023, Co-op customer credit balances restarted their upward ascent in March and April, rising by 1.13% and 2.38%, respectively. Year over year, credit balances were 15.13% higher in April 2023 than April 2022.
4. Subscriptions and delivery models begin to shift: DoorDash reported 40% revenue growth in the latest quarter, spurred by increases in both total orders and order value. Warner Bros.’ direct-to-consumer unit, which includes HBO Max and Discovery Plus (now combined as Max), reported adding 1.6 million subscribers in the first quarter of 2023.
“Services like subscriptions and food delivery that really took off during COVID-19 are continuing to do well,” said Patton. “Consumers have gotten used to the convenience of ordering online from the comfort of home, and are willing to pay a little more for these services.”
What Credit Unions Should Do Now
“Faced with multiple economic headwinds, including high prices for groceries, gas and rent, rising interest rates and an uncertain job market, many credit union members are struggling to meet their loan obligations alongside their monthly household needs. Credit unions are in a unique position of trust to support their members through these turbulent times ahead,” advised the Co-op report. Credit unions should offer members low-rate incentives to transfer high credit balances to their cards, the report suggested.
Co-op also recommended that a robust rewards program is also important, “so now is a good time for credit unions to conduct a review of their current loyalty program to see if it is meeting members’ needs. Determine, for instance, if cash back is a more compelling offer than travel rewards in the current climate. In addition, consider developing a relationship rewards program as a way to entice members to move their deposit accounts, mortgages, installment loans and other key products to their credit union.”
Lastly, Co-op suggested credit unions analyze which relationships are struggling, looking at key warning signs like late credit card or loan payments, high revolving balances, or an increased incidence of overdrafts on checking. “Help them achieve their financial wellness goals,” the report noted.