Card lenders trust US consumers as they seek new borrowers

Major U.S. credit card lenders are signaling confidence in the U.S. consumer, stepping up marketing efforts to attract new borrowers even as the economy slips into a technical recession.

After rising 47% in the first quarter, the volume of paper and digital mail solicitations sent by U.S. credit card issuers rose again in the second quarter, according to preliminary data from marketing research firm Competiscan, putting it on track to reach a record level. This year.

The wave of deals follows an 85% increase last year from depressed 2020 levels and comes as many major card issuers said during their second quarter earnings reports this month. they were increasing their marketing spend.

JPMorgan Chase, the largest card issuer in the United States, highlighted the fierce competition for borrowers by attributing rising customer acquisition costs to the 45% drop in card profits in the second quarter. Capital One, the second-largest issuer, said its quarterly marketing spend was up 62% from last year’s levels and vowed to remain aggressive.

“We continue to see opportunities to book accounts and loans that can generate resilient and attractive returns and we continue to look at marketing to drive growth,” Capital One Chief Executive Richard Fairbank said, qualifying competition from “more intense than pre-pandemic levels”. .

The increase in marketing activity is particularly noticeable at this stage of the business cycle. In 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 bring down the highest rate of inflation in more than four decades, credit card lenders believe they have an opportunity to increase the size of their loan portfolios as unemployment is low and consumer balance sheets look healthy.

Credit card balances held by the seven largest issuers — JPMorgan, Capital One, Citigroup, Bank of America, American Express, Discover and Synchrony — rose 13% to $739.8 billion from the previous year. last year, but remain about 9% lower than they were. end of 2019.

American Express last week raised its already optimistic revenue outlook for the year as it reported higher-than-expected profits and said its annual marketing spend would top its previous forecast by $5 billion.

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

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

Many marketing efforts target so-called “revolvers,” or borrowers who carry a balance from month to month 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 allow consumers to consolidate debt on a credit card without interest for a period of time, Competiscan said. The conditions also become more generous. The interest-free period has increased to an average of 16 months this year compared to 14 months in 2021.

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

“If you’re in credit card debt right now, or you’re going into debt for a big upcoming purchase, interest rates are high, they’re going up,” Rathner said. “It can get out of control pretty quickly.”

To complicate the task of lenders, it is difficult to assess the impact of government stimulus and debt forbearance programs on consumers over the long term.

“You saw a dislocation between what had been highly correlated metrics,” said Brian Doubles, chief executive of Synchrony, the largest U.S. in-store credit card issuer, which increased its marketing spend 18% in the past. last quarter, in line with the pre-pandemic period. levels. “It’s really because of the effects of the stimulus and the subsequent abstention.”

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

Many lenders now analyze factors such as education, work history and checking account balances in addition to traditional credit score to determine creditworthiness, increasing the pool of potential borrowers, Megan Cipperly said, Senior Director of Client Services at Competiscan.

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

“It reduces their risk of having bad debts, and then it creates a positive customer-lender relationship,” Cipperly said. “It’s a great strategy if we’re heading into a recession.”

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