Like the three years before it, 2023 proved to be an eventful and unpredictable year.
Conflicts in Gaza and the Ukraine led the headlines, while feel-good pop culture stories like “Barbie-heimer” and the massive Taylor Swift and Beyonce tours have drawn consumers back to movie theaters and concert venues in force.
The initial shock of the COVID pandemic is in our rearview mirror, although variants of the virus are still circulating and remain a concern to many, along with seasonal viruses like RSV and flu.
On the economic front, concerns with inflation and supply shortages lessened and the Federal Reserve raised rates aggressively through the first half of the year, in an effort to keep the economy on a smooth glidepath.
Looking forward, economists anticipate a softer labor market in 2024 which coupled with moderating inflation should allow the Fed to begin cutting rates later in the year.
Whereas consumers are finally feeling closer to “normal,” anticipated volatility in U.S. presidential and congressional elections, geo-political turmoil, and a still-fragile economy will keep shoppers on edge, and cautious.
“More news suggests a slowdown on consumer spending after the holiday season,” says John Patton, Senior Payments Advisor at Co-op. “I anticipate a bigger pullback as we move forward into 2024.”
Co-op’s SmartGrowth experts have polished up their crystal balls, and are ready to share their thoughts on the year ahead! Here are Co-op’s five spending predictions for 2024:
Credit card spending growth to continue:
According to the Federal Reserve’s G-19 Consumer Credit Report, credit card balances nationwide grew by 1.45% from September to October, the only loan type to show growth for the month. Credit card lending was up by more than 19% year over year for the third quarter of 2023, with credit unions capturing 6.4% balance share, representing solid growth from their 5% share a decade ago.
“Looking at Co-op’s client credit union portfolio balance data, credit balances grew by 15% to nearly $82 billion in 2023,” says Ryan Prentice, Director, SmartGrowth Consulting Services at Co-op. “Members were more willing to pull out their credit cards for holiday shopping this season, and we expect this trend to continue well into 2024.”
eCommerce to dominate, fueled by embedded payments:
According to Pew Research, online shopping has continued to grow in popularity, accounting for 14.9% of all retail sales through the first three quarters of 2023. eCommerce tends to surge during the busy holiday shopping season, with online purchases accounting for 16.3% of all sales in the fourth quarter of 2022, for example.
2023 proved to be no exception, with more than 1 in 4 consumers shopping exclusively online on Black Friday. Moreover, eCommerce is becoming ingrained in the shopping habits of U.S. consumers, particularly as payments become increasingly embedded in the online activities that households engage in every day.
Whether you are shopping your Pinterest board, playing online games, engaging with social media or ordering a Venti latte from your car, the ability to pay for such services fully within the digital experience is now expected. Increasingly, such embedded online shopping experiences are reducing the need—or desire—for consumers to spend time driving to the store and pulling out their credit or debit card at the point of sale.
Faster payments to gain traction:
Now that FedNow has become a reality, 2024 will be a pivotal point in the widespread adoption of faster payments.
Although only about 3% of financial institutions have signed for FedNow to date, expect that number to increase in 2024 as more banks and credit unions get comfortable with the service. According to Fed officials, many of those institutions that have adopted the service are taking a cautious approach, allowing their customers or members to accept payments through FedNow, but not initiate instant payments.
According to Jon Budd, CEO of Juniper Payments, a PSCU company in a recent episode of PYMTS TV, the use cases for FedNow and other faster payments methods such as The Clearing House’s RTP® Network are poised to expand in 2024, but for long-term success to take hold, “a lot is going to rely on further education to consumers and businesses.”
Budd identifies several opportunities that are “low-hanging fruit” for faster payments, including payouts to gig economy workers like ridesharing and delivery drivers. He also cites real-time auto loan disbursements as a compelling scenario that will help both auto dealers and lenders.
“This is where the market for instant payments is going to go first because that is what is going to drive new business.”
BNPL brings opportunity for credit unions:
One of the biggest trends of 2023 was the rise of Buy Now, Pay Later (BNPL) plans, especially among younger generations.
Over the five day Black Friday to Cyber Monday period, BNPL represented 7.2% of all online sales, an increase of 25% over the same period last year, according to Adobe. Moreover, BNPL seems to be contributing to the declining popularity of store credit cards.
The BNPL arena remains a bit of the Wild West, as new providers like Klarna and Affirm are to this point less regulated than traditional lenders, and use credit risk models that rely less on traditional credit checks.
“As Affirm and other BNPL offerings continue to gain in popularity among merchants and consumers, banks and credit unions will be forced to play catch-up,” Patton says. “The credit risk models of incumbent financial institutions make it harder for them to offer BNPL without requiring a bureau pull, which these providers don’t require.
“Yet, I believe more issuers will deploy installment payment services with a bureau check as part of the process to manage credit risk (per the CFPB’s rules around ability to pay). As delinquencies increase, merchants’ profits will suffer, and new rules will be imposed, helping to level the playing field among providers, merchants and financial institutions.”
Card delinquencies on the rise:
Speaking of delinquencies, 2023 already saw an increase in cardholders struggling to make their minimum monthly payments. We expect this to continue in 2024.
Public data from both Discover and Capital One show that charge offs and delinquency rates rose in the latest quarter. As of November, Discover reported a charge off rate of 4.7% and delinquencies of 3.8%, both markedly higher than the 2.4% posted in each category in November 2022.
Similarly, Capital One reported a 30-day delinquency rate of 3.7% as of the end of the third quarter, up significantly over the third quarter of 2022.
These delinquency trends reflect an increase since the start of the pandemic, and credit unions should act now to address any credit weaknesses in their portfolios.
“According to PSCU, July 2023 delinquency rates were above the July 2019 pre-pandemic level by 29 basis points,” says Prentice. “This is a canary in the coal mine, and credit unions need to keep a careful eye on their credit portfolios as we enter 2024 to ensure their members aren’t struggling to keep up with their obligations.”
Where Credit Unions Should Focus in 2024
Embedded payments is a trend to watch, and credit unions need to get in the game. Empower your members to easily set up your cards in their favorite subscription services, retailer apps and online shopping sites, by deploying digital card issuance at account opening. Also, ensure your credit and debit cards stay top of wallet by enabling digital provisioning into leading wallet apps, like Google Pay™, Apple Pay®, Samsung Pay™, Fitbit Pay™ and Garmin Pay™.
Credit spending will continue to rise in 2024, so it’s time to optimize your loyalty programs with the rewards that your members value most. Analyze your member spending data, and incent your members to continue using your cards within their preferred merchant categories.
Lastly, be there to help those members who may have spent beyond their means during the busy holiday shopping season. Consider offering a low-rate balance transfer offer or short-term skip-a-pay program to help alleviate stress this time of year. And make sure those who are struggling the most with their financial wellness are getting the counseling and support they need.
New Year, New You, With SmartGrowth:
2024 is here, and there’s no better time to optimize your credit union’s payment portfolio! SmartGrowth is available to support you as you kick off the New Year in style. Co-op’s SmartGrowth Consultants will help you dig deep into your spending data, unearthing new opportunities for growth and profitability. Contact us to learn more.