Consumer Spending Shifts From What They Could Spend To What They Can Spend

If there was one certainty that was the hallmark of the consumer’s propensity to spend, it was uncertainty.

As the pandemic hit our shores with a vengeance, as businesses large and small were forced to close down, and as the unemployment rate spiked to double digits, banks, credit unions (CUs) and other financial services firms took billions of dollars of loan loss reserves onto their books. They were anticipating the worst. Lenders set up forbearance and payment deferral programs, and there were predictions that we’d see mass defaults across all types of obligations, from mortgages to auto loans.

Yet the financial health of the consumer remained robust, helped in no small part by those same programs geared toward pausing or lowering payments – and, overall, a judicious approach to spending. Continuing concerns about how and when the economy (and the consumer) will fully recover are understandable. Depending on where you look, the virus has been spiking, the economy may not fully recover until much later in the year, and unemployment remains stubbornly high.

But Chuck Fagan, president and CEO at PSCU, recently told Karen Webster that consumer confidence has been buoyed by the chance to bolster their cash cushions, in part with stimulus checks, helping them handle the challenges that may still be on the horizon. The overall philosophy has been to spend with an eye on what’s on hand, rather than how much they could spend via credit. That confidence may last well into this year and beyond, noted Fagan.

“I’ve had numerous conversations with CUs, and they are still, from a financial institution perspective, flush with the cash from consumer deposits,” he said. The typical CU customer has been “lower on debt and higher on savings” than might have been seen traditionally (that lower credit debt burden speaks to the more sparing use of credit cards).

And to get a sense of how confidence has been reinforced by the tools CUs have given them to manage household flow, one need only turn the calendar back to November 2020. The pandemic had just begun its second deadly surge. Retailers online and offline were headed into the uncertainty of a holiday season that had been frontloaded by its biggest players. It could have been, as the balance of 2020 was, a test of the fabric of the U.S. economic system. But PSCU’s data show that individuals and families have been willing to spend through months scarred by COVID-19 and macroeconomic headwinds.

Spending Through The Holidays  

Spending across CUs’ membership, as measured from Nov. 2 through Dec. 27 of last year, saw debit transactions gain by more than 26 percent and credit increase by 18 percent. The question remains as to whether the increases will stick – or whether pent-up demand coming into the holidays has largely receded.

Many of the forbearance agreements will soon come due, Fagan noted, so it will bear watching what continued unemployment might mean for those who will have to start picking up payments. (One “tell,” he said, will be whether members remain current on mortgage payments, since shelter is critical and mortgage bills tend to get paid first).

For the CUs themselves, some things remain unchanged – including their dedication to investing in digital channels. Continuing to train and develop staff to support the customer will still be important, said Fagan. Budgets can be fluid, so as the pandemic lingers, there will be periodic “gut checks” from CU executives to see what else might need prioritization. “It is going to be a year of transition, I would say,” Fagan remarked about CUs’ 2021 journeys.

There will be some near-term tells about whether consumers’ financial situations will improve, stay the same or take a hit. Each of those scenarios has implications for CUs’ own balance sheets and profit and loss statements, said Fagan. Executives seem incrementally more sanguine about returns on assets this year, looking toward 70 basis points for 2020 and a range of 40 to 50 basis points this year.

“A lot of that was just the reserves they built up in the event that delinquencies were to accelerate, but so far it looks like the intelligence of the consumer and how responsibly they prepared will be a positive for financial institutions as these kinds of deals and restructurings expire,” predicted Fagan. Releasing those reserves will help boost returns, he added.

What Will Change

The shock of 2020 only deepens a trend that had been seen since 2008, where the younger generations watched their parents deal with the Great Recession and have become a bit averse to credit. Looking ahead, Fagan said, credit spending may recover a bit from recent lows, especially as travel and entertainment (the live, not streaming, kind) re-emerges.

“Credit’s the natural vehicle to make those types of purchases,” he continued. “But the shift to debit, and the sheer volume of debit purchases, will stick. We’ll even see a rebound in brick-and-mortar transactions, though it’ll be different than had been seen pre-pandemic, marked in part by contactless options. Restaurants will get creative with take-away meals that can be prepared at home.”

Buy now, pay later (BNPL) options will likely remain in demand, which Fagan likened to a spending vehicle where users finance purchases with funds on hand, via their checking accounts, in a responsible way (to that point, PSCU said this month that it will provide a new installment payments product in the near future, in tandem with Fiserv). CUs will need to observe these spending shifts and financing preferences – and even anticipate them, said Fagan.

And time is of the essence. “If you’re a financial institution, if you’re waiting until the end of the pandemic [to innovate], you’re going to be in a period where it’s very difficult to catch up,” he told Webster.