PSCU CEO: Debit Still Wins With The Resilient Consumer

A year like no other draws to a weary close.

In a year marked by unpredictable events, high unemployment, business closures and, of course, a global pandemic, the U.S. consumer is still standing — but how they pay has changed with the times, both out of necessity and out of convenience.

Looking ahead, PSCU President and CEO Chuck Fagan told Karen Webster, some of the trends that have been a hallmark of the last several months will prove long-lasting.

To get a sense of how bad it might have been: Traditional financial institutions (FIs), credit unions (CUs) among them, had been forecasting that returns on assets (ROAs) would have been within the range of 60 basis points to 75 basis points, dipping to 30 basis points in 2021.

“But the more I talked to [the CUs], the more comfortable they are about this year’s performance — and they are getting more confident about 2021,” he told Webster.

That confidence has taken root even though delinquencies may grow a bit, especially across credit portfolios, but they’d be coming off of a low base of around 2 percent.

At the same time, in a nod to what will keep things humming for CUs, Fagan stated that these institutions have seen increases in their deposit balances, which means consumers have been judicious about building savings, paying down debt and building a buffer against what financial shocks may be coming down the line.

The combination of manageable credit delinquencies and a growing position points to FIs having a healthier year than might have seemed apparent just a few months ago — even as consumers navigate getting vaccines and returning to everyday life.

Debit Wins Out

The overall cautiousness and sense of financial prudence, he said, can be seen in the fact that consumers are embracing debit transactions over credit, using cash on hand rather than choosing to build their liabilities on a credit card. Fagan noted that payment networks such as Visa and Mastercard have been recording steep dips in credit card activity, where the shift has favored debit payments. Part of that shift has been driven by the fact that many businesses do not accept cash, and consumers are opting to eschew bills and coins with public health concerns still top of mind.

“I think debit ultimately wins out,” Fagan continued. “That’s what the millennial and younger consumer prefer to use.”

And with the traction that Amazon and other platforms have gained (where consumers are getting what they need delivered, rather than making trips to the stores where they are part of loyalty programs), more consumers have made debit spend part of their everyday transaction flows.

Fagan said that beyond the pandemic, there may be some tightening between credit and debit activity, particularly as credit rewards programs continue to proliferate and international travel to vacation destinations picks up again.

As credit spending closes at least some of the gap with debit, maintained Fagan, CUs remain well-positioned on card issuance, and a greenfield opportunity exists, as credit card penetration has been only about 17 percent among members.

“The programs the CUs have introduced, over the last several years, have done a good job consolidating down to low-rate cards and rewards cards,” Fagan noted. “They’ve simplified their offerings to include straightforward, very competitive products.”

Other credit vehicles that are likely to receive attention from CUs include installment plans (buy now, pay later or BNPL). Those have seen some pushback from players such as Capital One, which has said it banned BNPL on its cards, but they represent a new revenue stream for CUs.

BNPL still only represents 2 percent of transactions, said Fagan, “but it is something to pay attention to. And we’re certainly looking at ways to keep credit unions competitive.”

BNPL, noted Webster, also presents a way for individuals with thin credit files to build up their credit profiles.

Beyond individual consumers, CUs are also eyeing the financial needs of small- to medium-sized businesses (SMBs), which have been hard-hit by the pandemic, as documented in a series of PYMNTS reports on Main Street. Fagan noted that CUs have granular insight into how Main Street is faring, due to longstanding and close ties with their communities.

There have been anecdotal pockets of strength among smaller firms, perhaps the local retailer, for example, who is seeing demand from last-minute shoppers in the waning days of the holiday shopping season.

Despite some isolated cases of strength, SMBs are still struggling, said Fagan. CUs have long offered cards targeting SMBs to help them navigate the financial headwinds of the pandemic.

But getting to the other side of it all, so to speak, will take some time. Amid ongoing stimulus talks on Capitol Hill, Fagan said, “I hope the government does something. It’s needed, especially with what we’ve seen in [coronavirus] numbers. The vaccine distribution is not going to keep pace for a while.”

The pandemic and the pivot to contactless payments have shown that consumers are open to using technology to conduct daily financial life. Even boomers and older generations have adapted to the new way of paying across digital conduits.

From here on out, CUs must take note that there is no one-size-fits-all approach to bringing apps to end users. CUs wishing to accelerate and broaden digital transformation must be willing to make the investments needed, even with financial pressures in place, said Fagan. And data remains critical in understanding consumer preferences and making financial services easily accessible from devices and phones.

Yet Fagan said he’d give the CUs only a B- if grading the digital-first achievements of the industry in general, although the picture is decidedly brighter when looking at what comes next.

CUs are becoming more effective in their digital initiatives, even if they don’t have the IT budgets of larger banking institutions.

“They have to find partners [such as PSCU], and then they have to integrate utilizing the API sets and libraries that exist to create a seamless experience that brings it all together,” Fagan told Webster. “Scale matters.”