The chief financial officers for the card companies American Express and Discover Financial Services say credit metrics and payment rates may be permanently changed, with a healthier financial profile for customers, in the wake of the COVID-19 pandemic.
Many consumers were able to increase their savings amid the global health crisis, with help from government aid, and they’ve been gainfully employed, with U.S. unemployment rates hovering around record lows. That led credit card delinquencies and write-offs to fall.
Despite the two companies having different types of customers, Amex and Discover CFOs this week said their cardholders remain healthy. Amex CFO Jeff Campbell, speaking Monday at the Barclays Global Financial Services Conference, said he’s commonly asked when New York-based Amex will see credit metrics return to pre-pandemic levels.
Amex caters to premium-oriented consumers with its annual fee products, while Discover's cardholder base includes more customers who typically let balances carry over each month.
“Our view has been, well, we’re certainly not getting back anywhere near them this year, and I don’t know if we ever get back,” Campbell said during a webcast of the presentation. He chalked that up to Amex’s product mix today, including more premium offerings than it had pre-pandemic.
Amex’s latest figures, filed Aug. 15 with the Securities and Exchange Commission, show U.S. consumer cardholders delinquency and write-off rates were at 0.7% and 0.8% as of July 31. One year earlier, those figures were 0.6% and 0.7%, respectively.
Amex’s difference versus the industry on credit metrics “has actually grown” compared to three years ago, Campbell said.
“When you look at the credit profiles of the people we’re bringing into the franchise right now, they’re actually stronger than the average of what we were bringing in pre-pandemic, which makes sense, if you think about the more premium mix of products,” Campbell said.
He also mentioned the premium market, especially in the U.S., “has really become the fastest growing part of the card market on the consumer side.”
Discover CFO John Greene, speaking Tuesday at the same conference, called the payment rate among Discover’s customer base “remarkable.” Consumer behavior in both sales activity as well as payment rate “have been super high and above expectations,” he said.
There have been some signs of change across the industry, however, as inflation stresses consumers and their pandemic savings dwindles. The Federal Reserve Bank of New York said Monday that the “average perceived probability of missing a minimum debt payment over the next three months increased by 1.4 percentage points to 12.2%, its highest reading since May 2020.”
Discover’s latest figures, filed Monday with the Securities and Exchange Commission, show rates are ticking up. As of Aug. 31, the charge-off rate was 1.86% and the delinquency rate was 1.96%. That’s compared to 1.73% and 1.42% the same period one year earlier.
“We do expect that to begin to normalize through the rest of this year and into next year, although I’ll tell you, this one’s been tough to call,” Greene said during a webcast of the presentation.
He speculated the Riverwoods, Illinois-based company is benefiting from some payment substitution. Where consumers previously used cash for small purchases at coffee shops or convenience stores, more have turned to contactless transactions amid the pandemic, he said.
“We do believe the decrease in the level of cash has probably increased sales by a percent to two, and we also think it’s impacted the payment rate,” Greene said.
And although Discover’s customer base is typically prime revolvers, meaning cardholders who carry a balance rather than pay it off each month, Greene noted a shift there. As more consumers use credit cards for a bigger share of purchases, they’re paying off balances rather than letting them accrue interest, Greene said. “We think maybe that is 100 to 200 basis points on that payment rate,” he said.
He attributed that to salary growth among its customer base, as well as Discover’s use of analytics in customer acquisition targeting.
The payment rate for Discover is about “500 basis points higher than we were pre-pandemic,” he said, and it’s been persistent. “We think maybe it will be 100 to 200 basis points higher on a permanent basis,” he added.
Greene also addressed the internal investigation of Discover’s student loan practices that was announced when the company shared second-quarter earnings results in July. Greene said Discover’s pausing of its share buyback program at that time “became a matter of securities law” and the company took “a conservative approach.”
“My hope is that by the end of the year, this’ll be behind us and we’ll be able to resume share repurchases,” he said. That will “be subject to the board’s review and conclusion of the work they’re doing on this,” he added.