What’s in store as we enter a new year during a global pandemic?
2020 has been a doozy – but that is old news. Nearly every facet of life has been upended in some way – beneficial to some and negative for others. However, as a society we have found ways to work and adjust to the ‘next normal’ and are ready to move ahead to the new year. In this blog series we will be looking at the world of financial services specifically and the mixed bag of evolutions as we plan and prepare for 2021.
First up is credit cards. In a year of uncertainty and strapped budgets credit card issuers were quick to adjust terms to attract prospects and keep cardholders spending. This came in the form of lower APRs, increased acquisition premiums and an emphasis on balance transfers. Specifically, at the close of Q3 20201:
- Year-over-year the APR for new offers among credit cards for people with excellent credit dropped by 142 basis points from 14.45% in Q3 2019 to 13.03% in Q3 2020.
- The number of miles/points bonuses on credit cards increased by almost 5.7% relative to the previous quarter of the year and by 7.4% year-over-year.
- Credit card companies are emphasizing balance transfers over new-purchase financing, offering 0% intro rates for 14% longer. This discrepancy began to emerge in Q4 2013; however, balance transfer fees have gotten 10% more expensive since then.
For 2021 we can expect credit card terms, offers and benefits to continue to evolve as card issuers work to mirror the needs of consumers.
Key Trends Happening Today Sets the Stage for 2021
Spending on Essentials Heats Up
In the face of the Covid-19 pandemic consumers quickly changed their focus to the essentials and what was absolutely needed – and yes, toilet paper topped the list. When this shift to essentials occurred credit card issuers were quick to amend their earn rates with a focus on grocery, gas and drug stores. Some cards even shifted their rotating quarterly categories with a stronger focus on essential shopping. Take the case of the Chase Freedom Flex and Chase Freedom Unlimited cards that in Q3 2020 layered in an additional 5% cash back on grocery store purchases (up to $12,000 in the first year).
In 2021 we expect this showcase of essential spend to continue and advertising will highlight limited offers and high earn on these more ‘everyday’ purchases.
Travel Programs Pivot
When we look back at 2020 one of the hardest hit industries was travel- whether it was by rail, air or sea they all bared the brunt of pandemic restrictions and shifting consumer behaviors. This ultimately led to a much harder sell for travel co-brand cards as those miles earned were much less appealing since you could not really use them.
Rather than being restrictive with travel rewards and programs, some issuers are allowing travel credits and mileage earn to be repurposed for other uses when travel simply is not accessible(2):
- Chase Sapphire Reserve: Through June 30, 2021, Chase Sapphire Reserve cardholders can use their $300 travel credit toward grocery and gas purchases. Cardholders will earn 3x on up to $1,000 in monthly grocery store purchases between Nov. 1, 2020, and April 30, 2021. From now through Dec. 31, 2021, Sapphire Reserve cardholders will get up to $120 in statement credits to cover monthly Peloton Digital ($13) and All-Access ($39) memberships.
- Citi Prestige Card: Through the end of 2020, Citi Prestige cardholders can use the up to $250 travel credit at supermarkets and restaurants.
Chase and Citi are examples of issuers identify a need to change and acting quickly. Other card issuers are less flexible today and may find the need to pivot at the start of 2021 as travel continues to wane.
Look to Loyalty (or Lack Thereof)
In the face of a weak economy consumers have also appeared to be less discerning with brands with a growing preference to the best deal rather than the associated brand name. With continued pressure on household income, consumers are trying new brands and channels, seeking both better value and convenience. Compared to last year, consumers are more than three times as likely to trade down to lower-cost brands or retailers when shopping a standard basket of goods (3). This impacts credit card usage in two keyways:
1) Lowered discretionary spend and a decrease in revolving credit is possible with a preference for lower-priced essentials.
2) Credit cards themselves can build loyalty and will be tasked with creating relevant programs to create stickiness and top of wallet preferences.
What to Expect at the Start of 2021?
1. A Focus on Relevant Benefits
With many cardholders experiencing changes in their lives resulting in a shift in their spending it is imperative to respond in-kind and offer flexible terms and perks with credit card offers. This could mean expanded earn categories, a focus on grocery and drug store rewards or the ability for the cardholder to select their prefer reward earn categories.
This is especially important as younger consumers – Millennials and Gen Z in particular – are beginning to embrace credit cards over debit cards and exploring the perks that can be received. A recent TransUnion study found that credit cards (50%) were the most common financial product held by Gen Z, ahead of student loans (39%), auto loans (25%) and unsecured personal loans (4%). And these younger consumers are also showing responsibility with finances with half of the active credit users are prime or above (Vantage Score 661+).(4)
So, what makes rewards relevant?
- They are useful and showcase a tangible financial benefit for the cardholder
- They consider macro trends – such as the impact of travel restrictions and lockdowns (i.e. trading restaurant spend earn for grocery spend earn)
- They are flexible to potential life changes of cardholders
2. How low can the APR go?
In response to the state of the broader economy, credit card issuers have staled rate increases or even reversed recent APR hikes. In fact, Creditcards.com points to the fact that the average APR on brand-new cards is currently down by 1.3 percentage points from a year prior. Many issuers have cut rates even more sharply, with several issuers advertising lower rates than they have advertised in years. (5)
The markedly lower rates on most credit cards are primarily due to federal interest rate cuts, rather than issuer-led activity. However, many credit cards have matched the Federal Reserve’s rate changes, pushing rates down by the same amount. The Federal Reserve’s benchmark interest rate, the federal funds rate, is currently as low as it can go and is unlikely to go up anytime soon, thus keeping APRs at attractive low rates.
3. Increase in Balance Transfer offers
Based on data from a Creditcards.com’s annual long-term debt survey, more than half of Americans with credit cards (59%, or 110 million people) entered the coronavirus pandemic carrying credit card debt. Of those, about 40% had been carrying that debt for three or more consecutive years. Just over half (55%) had been carrying a balance for just over one year.(6)
What this means then is that there is a tremendous amount of ‘open credit’ that can be shifted through attractive balance transfer offers. Card issuers may find that balance transfers are easier to procure with financially weary cardholders and can present a win-win for both the issuer and the card holder. We expect to see an uptick in promo balance transfer offers, especially following the 2020 holiday season.
Building the Right Mix – Where ENGINE Comes In
All in all, we expect that the foundational trends of 2020 will continue to build and refine through the start of 2021. This will task credit card issuers with being highly observant and responsive to consumer key segments.
2020 has set the stage for credit card evolutions, focused on responding to the needs of current and potential cardholders. At ENGINE we understand the credit card landscape and the needs of issuers and networks to maintain and build offers in the next normal.
Designing the right card features – We work with clients to build insights programs that are focused on building the right feature mix for card offers. This can be a mix of primary, secondary and strategic industry research to define and refine card offers and terms.
Keeping an eye on the competition – Businesses do not exist in a silo and it is important to stay close to the industry and competition to expose whitespace opportunities. Our competitive intelligence programs are built to specific client needs with a clear focus on actionability. Our credit card tracking portal is just one example of how we stay close to the industry.
Understanding your target cardholder – In a very dynamic environment it is imperative to understand your customers and prospects – who they are, what they live, what they like, etc. These are often not easily answered, and it takes clearly defined insights initiatives to get to know your target segments to build products and marketing programs that speak to them.
Amber McCullough, VP Business Advisory
- “Credit Card Landscape Report.” WalletHub. October 12, 2020.
- “Why Amex should change its airline fee credit right now — and how they can do it.” The Points Guy. November 8, 2020.
- “Survey: US consumer sentiment during the coronavirus crisis.” McKinsey. October 20, 2020.
- “50% of Gen Z has a credit card and a prime credit score—and they’re more credit active than millennials were.” CNBC. August 27, 2020.
- “Average credit card interest rates: Week of November 11, 2020.” Creditcards.com. November 11, 2020.
- “Poll: Long-term credit card debt looms large in the face of coronavirus outbreak.” Creditcards.com. March 30, 2020.