Like many lending lines, credit card portfolios took a hit in 2020 as the pandemic raged and consumers hunkered down. But there is cautious optimism that credit unions could see an uptick in that business this year.
The industry’s credit card balances declined $3.1 billion, or 4.9%, to $60.7 billion, according to third-quarter data from the National Credit Union Administration, the most recent figures available.
Some of the biggest credit card lenders in the credit union business have been among the hardest hit.
The $3.2 billion-asset Nusenda Credit Union in Albuquerque, N.M., had approximately $119 million in credit card loans as of Sept. 30, 2020, down 6.2% from a year earlier. Credit cards make up 5.5% of the company's total loans and leases.
This economic downturn has been odd compared to previous recessions, said Adam Heying, senior vice president of lending at Nusenda, with very high member savings rates, low delinquencies and a large reduction in credit card spending – something not normally seen when the economy sours.
"We expect member spending to pick up later this year and balances to eventually normalize as people increase their spending, start to travel more and the economy shifts toward reopening," Heying said. "Of course, card balances and spending patterns could all be impacted by future government stimulus and the deployment of the vaccine."
Heying is not alone in that guardedly optimistic outlook.
Dennis Dollar, principal partner at the consulting firm Dollar Associates and a former NCUA chairman, said the prospect of a growing credit card market has some institutions getting back into that business 10 years after selling their portfolios. Last year’s stimulus checks —and those likely coming this year — have caused credit unions to seriously consider expanding their credit card marketing efforts and dusting off some of their old promotions, Dollar said.
"A lot of folks with good credit and stable jobs still got stimulus checks and largely used them to pay down credit card debt,” Dollar said. “The upside in the credit card market is a topic of much conversation among financial institutions today.”
Credit card spending was one of the first sectors to take a hit as the pandemic began, falling nearly 20% in April, according to CO-OP Financial Services, as consumers eliminated nonessential spending and shifted into stay-at-home mode. While some credit card use did return as the year progressed, reductions in spending on travel and entertainment – two of the biggest sectors for credit card transactions – minimized growth opportunities.
“Consumers responded to economic conditions by going into saving mode, with debit cards becoming top of wallet and rewards taking a backseat,” said John Patton, senior payments adviser at CO-OP. The firm expects the year ahead to be similar to 2020 in many regards, though after nearly a full year of consumers ordering all manner of goods and services online, many merchants now have members’ cards on file, which could help boost digital payments volumes. However, credit card transactions won’t fully return to normal, he said, until dining, sporting events and entertainment fully reopen.
“These merchant categories will drive a resurgence of credit card transactions as consumers readopt some pre-pandemic traditions and behaviors,” Patton said.
Many executives say it will be a good while before things change.
George Nahodil, president and CEO of the $5.7 billion-asset Members 1st Federal Credit Union in Mechanicsburg, Pa., said credit card lending will probably be stuck in a holding pattern until the worst of the pandemic passes – in other words, summer at the earliest.
"People will be hesitant to take on more debt with credit, but in terms of lending volume it should be about the same or slightly up over 2020," he said. "There are so many unknowns with regards to timing and variants of the virus right now."
Members 1st had approximately $247 million in credit card loans on the books at the close of the third quarter, a 4.8% decrease compared to one year earlier. Credit cards make up about 6.5% of the company’s total loans and leases.
On top of the pandemic, a return to growth in this sector is complicated by the fact that large banks hold the majority of the market and high-profile tech companies – including Apple, which launched a card in 2019 – are all competing to make their way to the top of consumers’ wallets.
COVID-19 may have also had the long-term effect of shifting consumer behaviors away from credit card use. Tony Desanctis, senior director at Cornerstone Advisors, noted that 2020 saw a significant migration from credit to debit as a result of the pandemic and government-issued stimulus checks.
Demographics also pose challenges in the credit card space – specifically that younger consumers are heavier debit card users than older generations, he said. That’s made even more difficult by the fact that with most travel on hold, the pandemic effectively devalued many credit cards’ travel rewards programs.
"Credit unions are in a great position to compete despite these headwinds because the product offering is less about travel perks and rewards and more about cash back, which most of them offer," said Desanctis. "We don’t see the market returning to normal anytime soon and are unsure if some things will ever return. We see things like order-ahead food and grocery, as well as digital payments, becoming primary spend categories."
So when can credit card lenders expect a return to normal? Heying said the credit union is pinning its hopes on the late summer and fall.
"A normalization in credit card balances all depends on the effective deployment of the vaccine and the potential impact of any future government stimulus, but we generally expect spending to pick up later this year to pre-COVID levels somewhere in the second half of 2021," he said.
