As consumers have been hit hard by the economic effects of the COVID-19 pandemic, card issuers have seen a sharp impact to their business. In the immediate aftermath of the pandemic that pushed workers into indefinite furloughs and unemployment, credit card transaction volumes plunged by 30 percent.
A small bit of good news, Elan’s Senior Vice President of Strategy Jeff Chernivec told PYMNTS in a recent conversation, is that those figures have shown some signs of rebounding as economies have opened up in recent weeks, and credit card sales have shown a slight recovery. The less good news, he noted, is that declines are leveling off at roughly 20 percent below last year — an incredibly sharp drop in volume that has engineered a massive wave of uncertainty among issuers about their immediate and longer-term futures.
“What the new normal will be is an unknown at this point,” he said. “The biggest impact from the drop in spend is on interchange revenue, and the diminished spend is resulting in a lack of balance growth. A lot of issuers are seeing balances run off, as spend has dropped precipitously.”
The hope, said Chernivec, is that a vaccine will quickly be introduced, and that consumers will feel safe returning to the spending habits they’d developed pre-pandemic – but that reality is far from a sure thing. The timing of a vaccine remains a big unknown, as does whether consumers will robustly embrace their old behaviors — most notably travel, dining and entertainment.
Issuers have even more changes ahead as they – alongside their customers – embark into a vaccine-free period of recovery and prepare for the post-vaccine world.
Protecting Consumer Bases
The last several weeks, Chernivec noted, have seen issuers of all sizes looking inward and thinking about their current customer base and how best to serve them overall, with many of them choosing to pull back on new account marketing and doubling down on servicing their existing customers.
Their focus has been on helping those who have been most financially impacted, working to avoid delinquency — and keeping communication open.
“A lot of issuers implemented skipped and deferred payment options,” Chernivec said. “Other issuers went a step further by waiving fees and stopping interest accruals, and some have gone so far as to not report delinquent cardholders to the credit bureau. There has been a tremendous focus on forbearance activities.”
And, Chernivec noted, many financial institutions (FIs) have focused their efforts on improving their digital capabilities. Consumers are looking for increased digital card controls, more access to contactless form factors, and a greater ability to provision cards into digital wallets and manage them more easily. Issuers will need to build out “robust servicing capabilities in both web and mobile formats,” he pointed out.
But just building it will not be enough, Chernivec said — issuers need to find a way to effectively market and cross-sell via digital interactions. That can be a challenge for smaller financial institutions (FIs), which are more reliant on face-to-face, in-branch interactions than their larger national counterparts that have more robust digital channels.
“A lot of banks and credit unions have relied on that face-to-face interaction, but that may never come back to pre-COVID levels,” he said. “So how do you market and cross-sell your products in the digital environment? I think that's where a lot of issuers, banks and credit unions might lag behind the largest issuers in terms of a digital acquisition strategy.”
And digitizing, Chernivec noted, is not the only upcoming challenge issuers will face — particularly smaller and medium-sized ones — going forward.
The Rocky Road To Recovery
As difficult as things have become, Chernivec noted that we have not actually seen the worst from an issuer’s perspective. While issuers can offer forbearance on billing for a limited time, this is not an indefinite solution — particularly when there is likely to be more financial hardship down the line for consumers.
“The industry will not see peak losses for some time. Unemployment benefits have increased and stimulus packages have been delivered, but those are really not sustainable,” he said. “Issuers need to consider how forbearance activities are impacting the timing of delinquencies and future losses.”
And, he said, they must determine how they will respond. That might mean proactively cutting back credit lines, tightening up credit requirements to seek out more stable borrowers and even reducing rewards offerings to recoup some lost revenue. Those moves must all be carefully considered with an eye toward striking a balance — particularly in a world where large issuers are ramping up marketing efforts with robust card offers.
Much of what comes next in the world of banking, said Chernivec, is reliant on what happens outside the world of banking. The timing of a vaccine and how it affects consumer behavior remains a huge unknown — and without that piece of data, the future recovery is very hard to predict.
“We all want to believe this is a temporary blip, but we don’t yet understand what the new normal is going to look like,” he said. “Card losses have historically correlated strongly to unemployment rates, and the quicker the economy rebounds and jobs return, the faster the recovery of overall card program returns."