Card lenders show confidence in US consumers as they seek out new borrowers

Major US credit card lenders are signaling their confidence in the American consumer by stepping up marketing efforts to attract new borrowers even as the economy is sliding into a technical recession.

After increasing 47% in the first quarter, the volume of paper and digital mail requests sent by US credit card issuers increased again in the second quarter, according to preliminary data from market research firm Competiscan, putting it on its way. to reach a record high this year.

The wave of offers follows an 85% surge last year from the depressed levels of 2020 and comes as many large card issuers said during this month’s second quarter earnings reports that they were increasing their marketing spending.

JPMorgan Chase, the largest card issuer in the United States, highlighted the ferocity of competition for borrowers when it blamed higher customer acquisition costs for a 45% drop in card profits in the second quarter. Capital One, the second largest broadcaster, said its quarterly marketing spend was up 62% from last year’s levels and has pledged to remain aggressive.

“We continue to see opportunities to account for accounts and loans that can generate resilient and attractive returns, and we continue to lean on marketing to drive growth,” said Capital One CEO Richard Fairbank, calling the competition “more intense than pre levels. -pandemic”. .

The credit card balance line chart in the US grew 9% from last year, but still remains below the record level of 2019, showing that household credit card debt has yet to return to levels. pre-pandemic

The increase in marketing activity is particularly noteworthy at this stage of the business cycle. During times of uncertainty, lenders typically send fewer card offers, targeting potential borrowers with the highest credit scores, and focus on selling premium cards or other offers to current customers.

However, even as the Federal Reserve raises interest rates to lower the highest inflation rate of the past four decades, credit card lenders believe they have room to increase the size of their loan books because unemployment is low. consumer budgets look healthy.

Credit card balances held by the seven largest issuers – JPMorgan, Capital One, Citigroup, Bank of America, American Express, Discover and Synchrony – increased 13% to $ 739.8 billion from last year, but remain roughly 9% lower than before. at the end of 2019.

American Express last week raised its already bullish revenue outlook for the year as it reported higher-than-expected earnings and said its annual marketing spend would be higher than its previous forecast of $ 5 billion.

“I do not see [a recession] in my issue, “CEO Stephen Squeri told Yahoo Finance.” It’s really hard for me to understand that we’re going to have a big slowdown in the third or fourth quarter. ”

To attract new customers, broadcasters are adopting flashy tactics. Last month, Amex launched a limited-edition card made from scrap metal from retired aircraft. Travel-related sign-up bonuses have gotten more generous, although consumers so far show a preference for cashback cards.

Many of the marketing efforts are aimed at so-called “revolvers,” or borrowers who carry a month-to-month balance instead of paying their statements in full.

During the first quarter, there was a 62% increase in the volume of balance transfer offers that would have allowed consumers to consolidate debt on an interest-free credit card for a period, Competiscan said. The terms are also becoming more generous. The interest-free period has risen to 16 months on average this year from 14 months in 2021.

Sara Rathner, an analyst at NerdWallet, a personal finance website, said the combination of rising balances and rising interest rates could get consumers in trouble.

“If you currently have credit card debt, or are taking on debt for an upcoming large purchase, interest rates are high, they’re going up,” Rathner said. “He can lose control pretty quickly.”

Complicating the task of lenders is the difficulty they face in assessing the long-term impact of government incentives and debt tolerance programs on consumers.

“You’ve seen a dislocation between what were very related metrics,” said Brian Doubles, chief executive officer of Synchrony, the largest store credit card issuer in the United States, which increased its marketing spend by 18%. last quarter, in line with the pre-pandemic levels. “This is really because of the effects of the stimulus and the tolerance that comes with it.”

Lenders say new targeting tools and data analytics have made it easier to lend during a recession without incurring outsized losses.

Many lenders now analyze factors such as education, work history, and checking account balances in addition to the traditional credit score to determine creditworthiness, which increases the pool of potential borrowers, said Megan Cipperly, senior director of Competiscan customer services.

Incentives such as rate discounts for setting up automatic payments or for making multiple consecutive on-time payments are also becoming more popular for unsecured loans.

“It reduces their chances of defaults and therefore creates a positive relationship between customer and lender,” Cipperly said. “This is a great strategy if we are heading into a recession.”

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