A new report from Deloitte asserts an overreliance on rewards, the rise of digital payments and young consumers’ habits have hurt the card industry. Here’s why I disagree.
“The credit card market, while still profitable, is facing significant headwinds,” the report begins. It details these key threats:
“Many issuers have relied too much on rewards to attract and retain customers”
“Millennial and Gen Z consumers may pose the biggest challenges to the credit card market”
“Digital payments and the slow death of plastic”
See related: How the Fed’s rate cut will affect credit card users
Why I’m not concerned about card issuers’ profitability
I don’t think rewards costs are a major concern. To me, they’re a necessary cost of doing business, and one of two main differences between credit and debit cards (the other is the ability to carry debt on a credit card).
Debit card rewards virtually disappeared after federal legislation severely capped debit card interchange fees beginning in 2010. Credit cards were unaffected, and one could think of credit card rewards as a revenue-share agreement of sorts (merchants pay interchange fees to card companies every time the customer uses his or her card, and then the credit card issuer shares some of that money with customers to entice him or her to use the card).
The credit card rewards craze peaked in 2016 when the Chase Sapphire Reserve hit the market with a 100,000-point introductory bonus worth at least $1,500 toward travel after meeting minimum spend requirements. The following year, Chase halved the bonus, and the bank recently raised the annual fee from $450 to $550. Rewards aren’t as generous as they once were, but they’re still a great perk of using credit.
Bank analyst Charles Peabody told The Wall Street Journal that major card issuers, including Chase, were paying 15% higher rewards costs in late 2018 than they were a year earlier. Over the past couple of years, I’ve noticed card issuers pulling back on sign-up bonuses in favor of long-term value that encourages customer loyalty. That includes higher payouts on habitual spending such as dining, transportation and streaming services.
Some issuers, such as American Express, view annual fees as a key lever to combat card churners.
“Approximately 70% of our new card members are choosing fee-based products, which help to drive 17% growth in subscription-like fee revenues for the year,” American Express chairman and CEO Stephen J. Squeri explained during the company’s most recent earnings call.
The other key difference between credit and debit cards, of course, is that credit card holders can carry balances from month to month. And credit cards charge hefty interest rates. The national average is currently 17.25%, but many people are paying 20%, 25% or even 30%, especially if they have lower credit scores.
Those high rates are another reason I’m not concerned about card issuers’ profitability. Credit card rates have fallen slightly from their mid-2019 peak, but they’re still up about two percentage points since 2017.
About 60% of active credit card accounts revolve debt from month to month, according to the American Bankers Association. From the card issuer’s perspective, earning 17% when paying 1%, 2% or 3% in cash back or travel points is a great business model. (From the cardholder’s perspective, you should strive to pay in full and avoid interest – if you can’t, give a 0% balance transfer card a try.)
See related: Can you earn rewards with a balance transfer card?
Young adults will come around to credit cards
While Gen Zers and millennials have been slower to adopt credit cards than their older counterparts (partly due to the CARD Act, which made it more difficult to get a credit card before age 21), I fully expect them to climb on board as they get more established in their careers and as they get married, buy homes and have children. Older millennials are already doing so.
Deloitte isn’t as certain, citing the emergence of alternative lenders such as “buy now, pay later” companies (e.g., Affirm, Afterpay and Klarna) and changing societal trends (such as the sharing economy, high student loan debt burdens and the lasting effects of having come of age during the Great Recession).
Digital payments are an opportunity for card issuers, not a threat
Deloitte also cited mobile payments as a threat to credit cards. In China, technology companies such as Alibaba and Tencent dominate the mobile payments space, and they’re doing so outside the traditional banking structure.
But in the U.S., largely due to a stricter regulatory environment, mobile payments are simply another way to use a credit (or debit) card. We load cards into Apple Pay, Google Pay and Samsung Pay – but in the end, that account belongs to an issuer such as Chase or Citi. It processes through a traditional network such as Visa or Mastercard. Even Apple Card is backed by a couple of long-standing financial titans (Goldman Sachs and Mastercard).
Deloitte makes interesting points that mobile payments are stickier than card-based payments, and the mobile payments provider owns the payments experience more than the card issuer. You could say that being “top of app” is the new “top of wallet,” and it’s arguably even more important because it’s harder to change that habit.
Still, I don’t think “a slow death of plastic” is a significant near-term concern. Heck, even cash won’t die. If anything, I see the rise of mobile payments as an opportunity for credit card issuers. By offering rewards and the ability to carry balances if needed, they’re providing a compelling alternative to debit cards.
“General purpose credit card purchase volume was $3.7 trillion in 2018, nearly double its prerecession high,” the Consumer Financial Protection Bureau reported last August.
With three distinct revenue streams – fees paid by merchants, fees paid by consumers and interest paid by consumers – I think the credit card market is strong.
Have a question about credit cards? Email me at email@example.com and I’d be happy to help.