JPMorgan’s credit card customers spent 40% less after
Covid-19 hit, according to a study by its internal think tank. That sounds dire
for a lender that has one-sixth of its loans out on plastic. In reality, though,
it’s not that simple. America’s almost-$1 trillion credit card habit, like the
pandemic itself, is a story of haves versus have-nots.
In normal times, serving the rich versus the poor is a
trade-off. Simplistically, wealthier customers get lower interest rates –
Citigroup’s own-brand cards yield 11% in interest, where its less-elite
white-label cards command 18% – and they pay off their balances more regularly.
Much of what the wealthy generate in transaction fees also goes back to them as
rewards and cashback, which away three-quarters of JPMorgan’s so-called
interchange fee income in 2019, and almost all of Citi’s.
But where they fall short on rate, they make up for it in
other places. Richer customers have on average more credit card debt in absolute
terms, skip payments less often, and also spend more liberally on non-essential
things like travel and eating out. That’s problematic for affluence-chasing
issuers like Citi, JPMorgan and Bank of America because those activities are
now on indefinite hiatus. The JPMorgan Institute study showed card spending
fell fastest for the wealthiest customers.
That doesn’t make the rich less covetable. As their spending
falls, so will the freebies card issuers lavish on them, reducing the impact on
revenue. Meanwhile poorer borrowers may only get less appealing. JPMorgan found
that lower-income cardholders rely more on plastic to buy essential items, and
the Federal Reserve has shown that their debts are bigger relative to their
incomes – suggesting they are more likely to overextend in a crisis. Late fees
that help compensate for higher delinquencies are becoming harder to extract,
as banks offer to waive penalties for those affected by Covid-19.
Banks are coy when it comes to disclosing the nitty-gritty
of credit cards – for example, how much they make in penalty fees in normal
times. That’s understandable, since nobody wants to be seen profiteering from a
deep recession. But if the lesson issuers take from the crisis is that the rich
bounce back while the poor become less profitable, the have-nots will end up
with even less.
CONTEXT NEWS
– The average household cut credit card spending by a 40%
year-on-year by the end of March as the Covid-19 pandemic hit, according to the
JPMorgan Institute, which conducted a study of 8 million families who actively
use cards issued by its parent group JPMorgan.
– The study showed a slightly bigger percentage drop in
spending for higher-income households. It attributed this in part to a higher
weighting of non-essential items, which made up 70% of the wealthiest
quartile’s overall spending in April 2019, compared with 61% for the least
wealthy.
– Other credit card issuers including Bank of America,
Citigroup and Capital One warned at their first-quarter earnings of a steep
fall in spending by credit card customers, as they increased their reserves to
cover future bad loans.
