Author: Amanda Reed

By: Brian Scott, SVP, Chief Growth Officer at PSCU

The July edition of the PSCU Payments Index finds that while overall consumer spending remained strong through June, growth in purchases continues to outpace growth in transactions, largely due to ongoing inflationary pressure.

The Bureau of Labor Statistics (BLS) reported the June 2022 unemployment rate was unchanged from the prior three months, at 3.6%, as 372,000 jobs were added to the economy last month – almost at the pre-pandemic level of 3.5% and nearing full employment. This lower job creation number, down from 500,000 jobs added monthly over the past year, will be a welcome sign to the Federal Reserve, given their efforts to curb inflation with higher interest rates.

The Consumer Confidence Index decreased in June to 98.7, its lowest level since February 2021. Consumers continue to be concerned about overall inflation and its impact on gasoline and food prices. While still high, national gasoline prices have dropped to $4.77 per gallon and are up by 53%, or $1.65, from a year ago.

Summer vacations are in full swing and consumer spending is poised to remain elevated, with the added federal holiday of Juneteenth observed on June 19. The volume of passengers screened by TSA for the Independence Day holiday period outpaced 2019 and 2021, despite airlines having record levels of flight cancellations and delays due to weather and staffing shortages. Amazon and other “big box” retailers have their Prime Day and related sales events in July, and with an overstock of goods at many large retailers, discounts could be larger than expected to move merchandise.

Key takeaways from our July report, which features a Deep Dive on the Travel and Entertainment discretionary spending sectors, include:

• Consumer spending on cards remained strong, with credit purchases up 16% and debit purchases up 7% year over year. Current inflationary pressures are keeping growth in purchases higher than growth in transactions. For June, growth in overall credit transactions were up 12%, while debit transactions were up 3%.
• The Consumer Price Index (CPI-U) increased on an annual basis to 9.1% in June, which was a 1.3% increase from May, heightening pressure on the Fed to reign in the highest level of inflation since 1981. Top growth sectors included Gasoline, Food and Shelter. The Fed will meet on July 26-27 to evaluate future interest rate hikes, with the hopes of creating a soft landing from inflation and ultimately avoiding a recession.
• While discretionary spending in the Travel and Entertainment sectors remains strong, with year-over-year credit purchases up 26% and debit purchases up 7% for the combined sectors, transaction growth is now an important metric to watch, looking beyond the inflationary impacts to understand shifting consumer trends. For June, transaction growth for the overall Travel and Entertainment sectors was up 26% on credit and up 19% on debit as compared to June 2021.
  • Notable transaction growth within this grouping included movie theaters and rentals (up 147% for credit and up 96% for debit). The average credit purchase was $27, up 17% over June 2021, and the average debit purchase was $23, up 16% year-over-year.
  • Air travel with non-U.S.-based carriers also grew, with transactions up 104% for credit and 42% for debit. Transaction growth for U.S.-based airlines was down 1% on credit and down 20% on debit, all compared to June 2021. This lower transaction growth could signal fewer bookings for the fall influenced by higher ticket prices and the erosion of consumer confidence in U.S. airlines.
  • After coming to a stop during the pandemic, purchases and transactions within the Cruise industry remain strong despite the rise of inflation. Cruise purchases were up 157% on credit and up 133% on debit, with transactions up 185% on credit and up 132% on debit.
  • The largest portion of purchases in the Travel sector was in Lodging, which includes hotels, motels and merchants like Airbnb, Vrbo and Vacasa. These purchases represent 42% of all credit card Travel sector purchases and 41% of all debit card purchases. Lodging credit purchases were up 19% and debit purchases were down 8%, while credit transactions were up 11% and debit transactions were down 9%.
• The average credit card balance for June 2022 was $2,733, up 3.5% (or $93) year-over-year. June marked the fourth consecutive month in which year-over-year growth was over 2%. The credit card delinquency rate for June was 1.54%, 20 basis points lower than pre-pandemic June 2019 levels.

Looking Ahead

The Payments Index continues to evolve along with consumer preferences and behaviors. With the ongoing impacts of inflation, transaction growth will be an important metric we will continue to watch as a key indicator of shifting trends. We hope our credit unions are able to use these insights to help make informed, strategic decisions.

Brian Scott, SVP, Chief Growth Officer at PSCU, oversees a large and diverse group of our most critical client-facing teams. He partners with industry leaders in payments and community credit unions to create competitive payments programs. Scott joined PSCU in December 2015 as SVP of Vendor Alliances with more than 22 years of experience serving credit unions.

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Buy Now, Pay Later (BNPL) offerings are popping up everywhere, from big banks to retailers to fintechs. While consumers enjoy the flexibility afforded by installment payment options, credit unions have an enormous opportunity to leverage this growing trend to improve their member relationships.

According to a report from Financial Technology Partners, the total market potential for installment-type programs is $5 trillion in the U.S. alone. Worldwide, the channel will account for over 4% of payment transaction volume by 2024, a 100% jump from 2020.

The market is currently dominated by fintech upstarts like Affirm, Klarna, Afterpay and Zip. Big banks including Citibank, JP Morgan Chase, Citizens Bank and American Express have also introduced installment pay programs in recent years. The latest to enter the BNPL market: Apple just launched its Apple Pay Later program with Goldman Sachs as its partner lender. The convenience of financing a purchase at the point of sale right from your iPhone will certainly be attractive to many consumers.

But unique among financial services providers, credit unions are in the perfect position to get in the installment payment game.

“It is important for credit unions to have a BNPL offering, mainly because of the expectation that BNPL will become a standard banking tool,” said Tom Church-Adams, SVP-Pay Products, Co-op Solutions. “Just as credit unions have had to expand into digital wallets and contactless payments, they will need to offer this payment and lending option to remain competitive. Many consumer segments are expected to shift their borrowing style to BNPL. Whether credit unions want to switch to BNPL or not, the consumer trends indicate they are going to have to move if they want to meet member expectations.”

“It is important for credit unions to have a BNPL offering, mainly because of the expectation that BNPL will become a standard banking tool. Just as credit unions have had to expand into digital wallets and contactless payments, they will need to offer this payment and lending option to remain competitive.”

TOM CHURCH-ADAMS, SVP-PAY PRODUCTS, CO-OP SOLUTIONS

Co-op is developing a BNPL offering called Co-op Pay-Over-Time Transactions for credit unions that will allow members to make purchases using their go-to, top-of-wallet credit card, and then choose how they pay it off within their existing credit union banking app.  The solution involves an API-based product that works with a credit union’s existing mobile banking app.

“Credit unions that elect to offer CO-OP Pay-Over-Time Transactions will have access to our integration team, which will work either directly or indirectly with the CU’s mobile banking provider to deliver the BNPL experience through existing digital channels,” Church-Adams explained.

Most current payment plan programs are offered by independent companies partnering with a retailer to offer point-of-purchase financing. Consumers typically don’t have a relationship with these companies and may have never even heard of them.

By contrast, Co-op’s Pay Over Time Transactions product is not at the point of sale, but post-sale as are most products delivered by credit unions.

“Our product is built into an existing card agreement with credit union members, so there will be no additional enrollment necessary,” said Church-Adams. “Members gain all of the benefits of paying for their purchase over time, in regular installments, at a low interest rate and within their trusted credit union relationship without the need to sign up for a new account. We are focused on a seamlessness and friction-free experience.”

A Matter of Trust

For members, working within their trusted credit union’s digital ecosystem they have the control, flexibility, and confidence to use a BNPL solution to manage their finances.

One of the biggest benefits of the credit union-driven Co-op Pay-Over-Time Transactions is streamlined money management. Compared with most installment programs, borrowers won’t have to manage multiple accounts and worry about setting up recurring payments or transfers from one institution to another. Co-op Pay-Over-Time Transactions would be set up under the member’s current credit line, so it would not generate any new inquiries that could affect the member’s credit.

For credit unions, Co-op Pay-Over-Time Transactions offers new opportunities and benefits, including:

• Manage risk:  Co-op Pay-Over-Time Transactions can help mitigate and diversify risk in your loan portfolio. Installment loans present lower delinquency and loss rates because borrowers tend to pay them back more quickly than revolving balances.
• Retain existing members: If you charge an annual fee for your credit rewards programs, card cancellation rates always peak at annual renewal. But if the cardholder is midway through paying for their new refrigerator from Home Depot using Co-op Pay-Over-Time Transactions, they are less likely to close out their credit line and more likely to keep it top of wallet.
• Grow membership: BNPL programs are proving attractive to shoppers across the demographic spectrum, from Gen Z to Boomers, and credit unions can attract new members by offering new, innovative programs through the digital channel. An estimated 45 million Americans are active users of BNPL loans, according to a September 2021 Accenture study commissioned by Afterpay, while an astounding 80% of BNPL transactions were done by people ages 19 to 34.
• Increase spend: Two-thirds of respondents to a LendingTree survey of 1,040 Americans said that using an installment payment service caused them to spend more than they would otherwise. Adding Pay-Over-Time Transactions as a feature within your comprehensive credit payment program provides members with an additional option for financing post-purchase, leading to higher usage and larger transactions.

Now is the Time to Begin Your Pay-Over-Time Transactions Journey

Co-op Pay Over-Time-Transactions will be available to our full-service credit clients initially, and credit unions still have time to include it in their portfolio of products designed to deepen and personalize the member experience.

Also, make sure to coordinate this project with your digital banking provider, as Co-op Pay-Over-Time Transactions is designed to be incorporated seamlessly into the digital channel via application processing interfaces (APIs).

Co-op has listened to you – our partners in the cooperative movement – and added Co-op Pay Over-Time-Transactions to our product roadmap to meet an urgent and growing need in the financial marketplace. This solution is built specifically for credit unions and designed to help your members achieve their financial fitness goals. We look forward to supporting credit unions as you grow your foothold in the exciting and dynamic digital payments experience.

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Instant, easy and responsible: buy now, pay later program continues to expand and reinforces commitment to consumer protections 

Mastercard has welcomed a raft of new global partners to its innovative Mastercard Installments program and is expanding it further to support small businesses in the U.S. Illustrating the demand for powerful buy now, pay later (BNPL) experiences from familiar and trusted brands, several new partners are providing support for the program, including HSBC, J.P.Morgan and NatWest in the U.K.; Cross River Bank, Evolve Bank & Trust, Jifiti, Live Oak Bank, MOCA Financial and WebBank in the U.S.; and Saudi National Bank (SNB) in Saudi Arabia. The program taps the power and scale of the Mastercard network, which connects to more than 90 million merchants globally, to instantly support secure BNPL payments at checkout, both in-store and online. 

In addition to delivering more payment choice, Mastercard Installments is built on responsible lending practices and supports shoppers with an enhanced set of consumer protections, data transparency and insight-driven programs. Through technology, data and insights, and its consulting expertise, Mastercard is creating a more intelligent way to provide installment lending at scale. 

“We believe no matter how you pay, a foundation of strong protections must be in place,” said Craig Vosburg, Chief Product Officer at Mastercard. “Trust is the currency of innovation. Using a Responsible-by-Design approach ensures that we stay ahead of consumer, merchant and bank needs and expectations, continuously building confidence in the payments ecosystem by providing choice at scale.” 

A Responsible, Intelligent Way to Offer Installment Lending  

According to new global consumer research from Mastercard’s World Payments Advisory™Mastercard’s World Payments Advisory™,Mastercard’s World Payments Advisory™ nearly a quarter of respondents across 50+ markets have used a BNPL product in the past six months.i For BNPL users, “forgetting the payment was due” was the leading reason for missing an installment payment, while concerns about “hidden charges” were cited as a leading barrier to consumer adoption overall. Mastercard Installments addresses these concerns with a suite of unique, innovative services that increases transparency and helps protect consumers and businesses. These services include: 

• Cutting-edge insights and analytics: Merchants and lenders are able to access a comprehensive set of data dashboards to better understand how their products are performing. Mastercard Test & Learn® technology can also pinpoint where to prioritize efforts and resources that enhance the user experience and drive successful loan repayment. 

• Mitigating repayment risk with open banking and AI: In the U.S., using consumer-permissioned data and open banking technology, lenders can identify behavioral patterns to reduce the risk of failed payments while artificial intelligence can adjust models more quickly and accurately for success.

• Dedicated and embedded consumer protections: To participate in the Mastercard Installments program, lenders agree to follow applicable laws and network guidelines on responsible lending practices and data usage practices, among others. Consumers and U.S. small businesses enjoy the peace of mind that they get today from any other Mastercard product – including tokenization, dispute resolution, and zero fraud liability.

Empowering U.S. Small Businesses 

Mastercard research shows that over 70% of small business owners who have used personal installments are likely to adopt business installments products if they become available.ii Meeting this demand in the U.S., Live Oak Bank, the nation’s leading small business lender, will support the program, with the goal to make Mastercard Installments available to its 7,000 small business customers.iii This builds on Mastercard’s ongoing commitment to Main Street America, delivering products and services that help improve operational efficiency, manage cash flow and maximize customer connections with financial tools. 

Learn more about Mastercard Installments and its range of benefits for consumers, merchants and acquiring banks, lenders, as well as wallets and BNPL players. 

Madhu Kejriwal, Group Head, Unsecured Lending & Partnerships, HSBC Wealth & Personal Banking, said, “Customer expectations have evolved as the payments landscape has advanced, so banks need to find appropriate solutions. Buy-Now-Pay-Later (BNPL) lies at the intersection of payments and lending; it can provide customers with a seamless payment option. However, it’s important to realize that it’s very much a form of credit. HSBC is fully committed to responsible lending, and providing transparency to customers is of utmost importance to us. We want to clearly position any BNPL payment plan as part of a customer’s approved credit line. Our partnership with Mastercard is a crucial element of HSBC UK’s responsible lending strategy, as it enables us to provide customers with access to trusted payment options when they want to budget for larger purchases with affordable payment plans.” 

Huntley Garriott, President of Live Oak Bank, said, “Live Oak knows small business customers need flexible financial products that provide security, transparency and scalability so they can grow their business at the pace that suits their needs. We are excited to partner with Mastercard to explore lending solutions through the Mastercard Installments program as it allows us to deliver innovative products from a trusted source while aligning with our mission to be America’s small business bank.” 

Martin Wise, Managing Director, Short-Term Borrowing at NatWest, said, “There’s a clear demand for buy now, pay later and we are determined to make it better and safer for our customers. By working closely with Mastercard, we are ensuring responsible measures such as clear affordability checks and useful tools, such as payment reminders to help customers budget, are at the heart of our solution.” 

Majed Hamdan Al Ghamdi, Chief Executive Officer of Retail Bank at the Saudi National Bank, said, “Flexible payment options benefit everyone in the ecosystem, and our partnership with Mastercard enables us to connect people in Saudi Arabia to the seamless benefits of Mastercard Installments. Through this initiative, we are providing consumers with enhanced ways to pay when and where they want and in line with their budget needs. Underpinned by the renowned security of the Mastercard network, Mastercard Installments opens up new shopping experiences to consumers across the Kingdom while offering them reassurance, confidence and peace of mind.” 

Sources: 

1. Mastercard World Payments Advisory. “The Explosive Growth of “Buy Now, Pay Later Report.” Quarterly online survey of 53,500 adults in 50+ countries. Conducted April 30-June 14, 2022.  

1. Mastercard & Kaiser Associates, Small Business Installments Analysis, 2021 

1. Source note: #1 SBA 7(a) lender by dollar amount for FY 2021. The data supplied by the SBA reflects 7(a) highest dollar volume during FY 2021.

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