Cautious Consumers: A Double-Edged Sword for Credit Card Lenders

As the world emerges from the COVID-19 pandemic, consumers have adopted a more cautious approach to credit, leading to a significant impact on the growth and profitability of credit card lenders. According to TransUnion's Q4 2020 Industry Insights Report, enquiries for credit products associated with discretionary spending, such as credit cards and unsecured revolving lines, were down year-on-year (YoY) in Q4 2020. This decline was most pronounced in the unsecured revolving line (-35.7%) and credit card (-27.1%) categories. Originations, which measure new accounts opened, also fell YoY in the third quarter of 2020 across all major consumer lending categories. This decrease in originations and the negative impact of consumer pessimism on credit utilisation led to a fall in outstanding balances for most credit products, with the exception of mortgages. Outstanding balances for unsecured revolving lines, typically used for discretionary spending, recorded the largest YoY decline in outstanding balances (-36.2%) and enquiries (-35.7%) and the second largest drop in originations (-30.8%). This decline is reflective of the general fall in retail spending and may also be driven by the relatively higher interest rates charged on these products as consumers take a more cautious approach to their finances, leading them to pay down outstanding credit lines and focus on more affordable products.



Credit card lenders have employed several strategies to adapt to changing consumer behavior and maintain their market share. These strategies include repricing and portfolio repricing, credit card lending in collaboration with national banks, offering promotional offers, forbearance programs, targeting younger generations, debt consolidation loans, and adapting to the "new normal." These strategies have helped credit card lenders adapt to changing consumer behavior and maintain their market share, despite challenges such as rising delinquencies and a changing economic landscape.

Interest rates and fees have evolved in response to the consumer's selective approach to credit, with lenders adjusting their pricing strategies to mitigate risks and maintain profitability. According to the Federal Reserve, the average interest rate on credit card accounts has been increasing since 2016. In 2022, the average interest rate was around 16.5%, up from 15.1% in 2016. This increase can be attributed to lenders' efforts to offset higher delinquency rates and maintain profitability in the face of changing consumer behavior. Lenders have also increased late fees and other penalties to discourage delinquency and recoup losses. For instance, the average late fee for credit cards increased from $28 in 2016 to $39 in 2022. This trend reflects lenders' attempts to incentivize timely payments and offset the costs associated with higher delinquency rates. Lenders have adopted repricing strategies to manage risks and maintain profitability. For example, in 2011, Capital One raised interest rates on some of its credit card accounts by as much as 10 percentage points, citing increased risk and higher delinquency rates.

The impact of these changes on the industry's overall performance has been mixed. Lenders have generally maintained or even increased their profitability by raising interest rates and fees. For instance, in 2021, the top five U.S. credit card issuers reported a combined net income of $37.5 billion, up from $32.5 billion in 2020. However, higher interest rates and fees have led some consumers to become more selective about their credit usage, opting for lower-interest alternatives or paying off balances more quickly. This shift in consumer behavior has contributed to a decline in overall credit card balances and a slowdown in the growth of credit card debt. The industry's repricing strategies have drawn regulatory scrutiny, with some critics arguing that lenders are exploiting vulnerable consumers. In response, regulators have implemented stricter rules and guidelines for credit card pricing and disclosure practices. For example, the Consumer Financial Protection Bureau (CFPB) has proposed new rules aimed at preventing abusive practices and ensuring fair competition in the credit card market.

In conclusion, the cautious approach of consumers to credit post-pandemic has significantly impacted the growth and profitability of credit card lenders. Lenders have adapted to changing consumer behavior by employing various strategies and adjusting their pricing strategies to mitigate risks and maintain profitability. While these changes have contributed to increased industry profitability, they have also led to shifts in consumer behavior and regulatory scrutiny. As the impacts of pandemic-era stimulus and post-pandemic inflation growth fade, credit card lenders are expected to adapt to the "new normal" by slowing the rate of growth of card debt and stabilizing serious card delinquencies.