From lingering pandemic-era supply chain issues, rising inflation, and ongoing Fed rate increases, to the war in Ukraine, tech company layoffs, and a volatile stock market, 2022 was a year to remember (and for many, a year to forget).
Predictions are always fraught, even more so when societal, geo-political, and economic signals are mixed. But Co-op's SmartGrowth experts are up to the challenge! To help your credit union plan for the year ahead, here are our five spending predictions for 2023:
- Consumers solidify their shopping habits: In last year's predictions, we predicted the return of brick-and-mortar retail as pandemic-era restrictions eased and the widespread availability of COVID vaccines helped consumers feel more comfortable returning to in-person shopping.
But as 2022 wore on, the emergence of vaccine-resistant COVID variants, along with a particularly devastating flu and RSV season, has caused a portion of the shopping public to remain cautious. Furthermore, many consumers became accustomed to curbside pickup and delivery services as a convenient alternative to in-store, leading to an expectation for brick-and-mortar stores to make them a part of their service models.
So, while many consumers have eagerly anticipated returning to the in-store shopping experience, others have decided to stick with e-commerce and other touchless forms of engagement. For those retailers dependent on in-store traffic, this may ultimately reduce overall transaction volume.
"For grocery and other retailers, the reduction of in-person shopping is problematic," says John Patton, Senior Payments Advisor at Co-op, "as the order-ahead crowd is less apt to purchase on impulse, thus reducing average ticket sizes."
Whereas many were hopeful of a resurgent holiday shopping season in 2022, with the National Retail Federation (NRF) predicting growth of 6% to 8% in U.S. holiday sales over 2021, the early returns have been less rosy. Sales fell in November by a seasonally adjusted 0.6% from October 2022, representing a significant drop-off.
- Digital wallets accelerate the convergence of lending and payments: According to research by McKinsey & Co., two-thirds of U.S. consumers expect to be carrying a mobile wallet within two years. Many tried digital wallets like PayPal, Apple Pay, and Google Pay for the first time during the pandemic. They appreciated the speed and convenience of contactless payments at the point of purchase.
This growing adoption of digital payments is accelerating one of the most important long-term trends in consumer finance: the convergence of payments and lending.
Already, we've seen a revolution in payment behaviors over the past three years, with buy now, pay later (BNPL) programs becoming one of the fastest-growing payment methods on the market today. Digital wallet-embedded BNPL offerings like Apple Pay Later and PayPal's Pay in 3 are changing the game for consumers, giving them the power of instant credit at the point of sale—whether online or at the cash register.
And this convergence won't be limited to the physical or online store. The emergence of IoT, wearables, and connected devices means that consumers are increasingly able to make purchases using their smart speaker, refrigerator or vehicle anytime and anywhere they find it most convenient. Juniper Research projects there will be 2.7 billion pay-enabled and IoT connected smart home devices worldwide.
"As technology advancements continue to encroach on all aspects of our lives, from wearable devices to voice-activated smart speakers, digital wallet innovations are sure to follow," says Beth Phillips, Managing Director, Strategic Portfolio Growth at Co-op.
- Subscription model matures: Once strictly the domain of cable TV and glossy magazines, subscriptions have taken over virtually every area of commerce in recent years, from streaming services and beauty boxes to meal kits and exercise apps.
Globally, the subscription market is forecasted to grow from $72.91 billion in 2021 to reach $904.2 billion by 2026. Yet, the industry is being forced to adapt quickly as consumer preferences evolve.
One of the subscription providers' biggest challenges is keeping customers for the long term, beyond the initial low-cost trial periods and renewal anniversaries. To combat this, providers are testing new ways to keep customers in the fold.
Streaming services are a case in point. As powerful media companies have grown through consolidation, they are increasingly looking to bundle their streaming services in an effort to make it more difficult for subscribers to leave. For example, Disney bundles its Disney+, Hulu, and ESPN+ channels at a discounted rate. And HBO is doing the same with its HBO Max and Discovery brands.
Bottom line, the services are becoming more costly for subscribers, and like with cable subscriptions of the past, consumers are finding it more difficult to "cut the cord." But to keep subscribers on board for the long term, subscription services must continue demonstrating superior value. That begins with offering a better, less frustrating payment experience.
"Subscriptions are going to continue to grow," Patton says. "But providers will need to evolve and introduce innovative ways to entice people to continue as subscribers on the service platform."
- Credit spending will remain robust, for now: Co-op's client credit union portfolio data through November 2022 shows that credit transactions grew by 10% year over year, while debit transactions were down by 1.4% over the same period. This trend reflects consumers' increasing willingness to use credit for everything from travel and entertainment to department and discount stores, as pandemic-era stimulus checks ran out and cash on hand declined amidst rising prices.
"Looking at Co-op client credit union portfolio balance data, credit balances grew by 14.42% from November 2021 to 2022, and by 2.05% from October to November 2022, posting the tenth consecutive month of credit balance growth in 2022," Phillips says. "This reflects credit union members' willingness over the past year to use credit and to carry those balances month over month if need be."
But that reliance on credit may be short-lived, as preferences are gradually shifting toward debit use, especially among younger consumers. According to a 2022 survey conducted by 451 Research (part of S&P Global Market Intelligence), 56.2% of respondents prefer debit, versus 39.5% that prefer credit. The preference for debit skews toward younger and lower-income households, with the cutoff around $75,000 in household income.
- New healthcare delivery models: Big-box pharmacies like CVS and Walgreens continue to expand their services, focusing on providing in-store clinical services that offer unique synergies to traditional pharmacy and over-the-counter drug sales. Post-pandemic, new firms are entering the health sector, a ripe area for innovation in delivery, technology, and client service.
For example, CVS Health is looking to aggressively expand its home health services, as highlighted by its recent purchase of Signify Health Inc., which offers health risk assessments, value-based care and provider enablement services. Meanwhile, in July, Amazon purchased One Medical, a primary-care clinic operator.
"With consumer spending in the sector going through the roof, healthcare services delivery will continue to evolve in 2023," says Patton. "As the boundaries between clinical care and pharmaceutical retail continue to blur, it will mean more choice and access for healthcare consumers."
Where to Focus in 2023: All Things Digital
It's important to remember that digital transformation is a marathon, not a sprint. Credit unions must continue to focus on collecting, handling, cleansing, normalizing, storing, securing, and responsibly leveraging data to capitalize on strategic growth opportunities and enhance member financial wellness.
"No matter what stage of the marathon you are in, stay the course," Phillips says. "Keeping pace with the market is key – whether that's implementing a data management strategy, adopting cloud-based solutions, or deploying transformational personalization technologies. Digital payment adoption continues to soar, increasing consumer demands for seamless experiences that will lead them to choose organizations that deliver on their digital expectations."
The growth in digital is due, in large part, to upstart fintechs entering and disrupting the marketing. This is a key part of why credit unions need to assess their current business model and fee structures in terms of account minimums and fees to better support the needs of their current and future members. Mobile wallets are now a part of the fabric of the payments landscape, increasing access to financial services across all populations. Credit unions must adopt the "new normal" expectations of minimal fees, deposit requirements, and ease of access (from mobile wallets to BNPL) to achieve long-term payments success.
Optimize Your Digital Payment Strategy With Help from SmartGrowth:
Make 2023 the year you "level up" your digital payment strategy! Co-op SmartGrowth Consultants are here to help you delve deep into your member data to reveal new opportunities for growth. Contact us to learn more.