For credit card issuers, 2023 ends with a boom. The trick will be to ensure 2024 does not end with a bust.
When Measured on Portfolio Growth, Credit Card Managers Will Hit Their MBOs
A recent WSJ article, “Credit Card Spending Piles Up as Savings Dwindle,” noted:
- For many consumers, maintaining their lifestyles while grappling with inflation and rate increases means relying more on credit cards and other products. Some are loading up on installment loans offered by buy now, pay later players as grocery bills remain elevated, and mortgage rates sit at around 7%.
- Credit card spending increased in Q3 at major banks, including 9% at JPMorgan Chase, the nation’s largest bank, and 15% at Wells Fargo. Citigroup’s credit card spending was up only 2%, partly because the measure includes store credit cards, which consumers have used as they favor other forms of credit.
- When JPMorgan reported its Q3 earnings in October, CEO Jamie Dimon said while consumers’ financial pictures remain generally healthy, it is clear they are spending their savings. Deposits dropped 3% compared to a year ago in JPMorgan’s consumer segment. At Citigroup, deposits declined 5% in the personal banking unit and 2% in wealth management.
Time to Pay the Piper?
Javelin has been sounding the siren since early 2023. While many are sounding trumpets on increased credit card volume, we say, “Take a beat and look at the risks.” Back to the WSJ:
- Credit card loans, or unpaid balances on accounts, jumped nearly 16% in the quarter at JPMorgan compared to a year ago, which means consumers are taking longer to pay their bills. Meanwhile, they jumped 14% at Wells Fargo and 11% at Citigroup.
Instead, we focus on the Federal Reserve numbers, most recently covering Q3 2023. The total delinquency rate was 2.98%, the seventh consecutive quarterly rise. Charge-offs, the bane of credit card revenue, popped up to 3.49%, following a similar pattern. Even worse, though, is the impact on smaller credit card issuers. Top issuers charged off at 3.57%, and smaller issuers ran at 8.50%.
This means that top-tier banks lost $3.57 of every dollar outstanding for every credit card dollar; small banks lost $8.50 on the same metric.
2024 Will Not Be Pretty for U.S. Credit Cards
Expect credit card revolving debt to continue its growth path. The growth is less likely due to terrific card marketing than it is an unsteady economy. People can’t keep up with inflation and interest rates, so more debt gets carried over. More carried-over debt is a beacon of stressed budgets. (See our early view: Inflation: Keep an Eye on the Consumer Budget)
Losses will rise substantially. Our early read is that the 3.49% will hit 6% in 2024, and as regulators keep clamoring on late fees, we call them contractual commitments and say if you want to tighten lending, keep messing with the card revenue model. (See our perspective: Late Fees: A Regulatory Hot Button, Not a Junk Fee
In 2024, expect a less profitable year with tighter lending and more selective card issuance as the U.S. navigates the current business cycle. And do what we do: spend less, save more!