For some time, the US credit card business has struggled with burgeoning costs and decreasing profitability.
Now a range of factors – including rising inflation, a weakening economy and increased competition in the consumer lending space – are weighing on the profitability of credit products.
Despite these woes, a new survey from J.D. Power claims credit card issuers are experiencing sizable gains in customer satisfaction and trust.
However, credit cards’ overall share of consumer spend has decreased significantly, with customers citing increased financial stress and interest in alternatives such as Buy Now, Pay Later (BNPL).
John Cabell, director of banking and payments intelligence at J.D. Power, said: “Cardholders are increasingly turning to other channels such as debit cards, BNPL and cash.
Card issuers need to improve value and boost support for a growing segment of financially stressed customers in the next phase of the economic cycle.”
“Card issuers need to boost support for financially stressed customers in the next economic cycle”
BNPL looks attractive – for now…
More than half (57 percent) of US credit cardholders are now classified as financially unhealthy, up four percent from a year ago.
Likewise, 22 percent of consumers say they are worse off financially in 2022 than the year before, and 49 percent say they are carrying revolving debt on their primary cards, up from 43 percent in 2021.
In this context, BNPL has emerged as an attractive alternative, especially for larger purchases.
When making a large purchase, 44 percent of US credit card customers say they would consider other financing options, such as BNPL, flexible financing/instalment loans or personal loans.
BNPL is the most popular of these lending alternatives, considered by 28 percent of customers entertaining a large purchase. Credit cardholders say BNPL’s perceived reasonable fees and competitive interest rates are driving their choices.
PCM SAYS: the BNPL bubble is bursting…
In recent months, our online news service has covered the massive rise in UK credit card spending, which rose by a net £740 million in June 2022 alone for the biggest annual increase since October 2005.
At the same time, we have seen some erosion in confidence regarding BNPL market darling Klarna, which saw losses quadruple to SKr6.2 billion ($581 million).
It seems we are witnessing a reversal of the old adage, “when the US sneezes, Europe catches a cold” – in this case, European markets are reacting against BNPL just as the US market seems to be catching fire.
Upcoming regulation in the EU, UK and elsewhere could be a serious blow to BNPL, a payments phenomenon that has grown too fast, too soon.