Subprime and Prime Consumers Weather Inflation Shock as Synchrony Purchase Volumes up 17%

By now, it’s becoming a familiar refrain.

Across banks and issuers, spending on cards remains healthy. Despite the economic pressures that have been the hallmarks of 2022, and taken as a whole, U.S. consumers are in relatively good shape.

One wonders, though, about whether that sanguine outlook extends to lower income consumers, the ones who may find access to credit relatively tight.

Turns out that right now, the consumers who might be more vulnerable to economic shocks are navigating the challenges with aplomb.

First thing’s first. Synchrony Financial’s latest earnings results mirror other financial services firms — chiefly the big banks, so far — in announcing double-digit percentage gains in card spend and growth in new account openings.

In Synchrony’s case, purchase volumes were up 17% year on year to more than $40 billion, driven by double-digit growth in the digital, health, wellness and home and auto platforms.

The continued traction of digital payments — and engagement — are evident here. Supplemental materials from the company showed that, as measured in loan receivables, that metric was up 11% to $21.1 billion, and purchase volumes in the segment were 20% higher. Accounts on the digital platform gained 10% to 19 million.

Customer spend reflected strong cross-generational growth. Millennial and Generation Z spend increased 23% year over year, and Generation X and baby boomers spend increased 15%, management said on a conference call.

The read across here, then, is that digital channels appeal to younger consumers, and credit is a payment method that holds appeal in an inflationary environment, as so many of us live paycheck to paycheck.

Read more: Credit Cards Being Used as Defense vs Inflation in Paycheck-to-Paycheck Economy

CEO Brian Doubles said on the call that in digital channels, the company “experienced greater customer engagement, including higher active accounts and higher spend per active [customer].”

Against that backdrop of higher spend, and as has been seen with financial enterprise peers, the company has boosted reserves. Its allowance for credit losses as a percent of loan receivables was 10.96%, up 20 basis points from the 10.76% in the fourth quarter.

But it could be the case that the move may be unwarranted (although only time will tell). Chief Financial Officer Brian Wenzel said on the call that of borrowers emerging from forbearance programs with other lenders, with “excess savings due to stimulus, modified spending behaviors and widespread forbearance, these borrowers manage their personal balance sheet well through the pandemic, and therefore, have a lower probability of default.”

Consumers with savings balances of $2,500 or less have remained relatively flat, management said.

Given the fact that at the end of the first quarter of 2022, approximately 40% of the company’s balances represented super prime customers, another 35% came from prime and the remaining 25% came from non-prime, the general state of the consumers with lower credit scores seems relatively healthy. Even with inflation, where, for example, spending on gas is 22% higher than it was a year ago.

For now, at least, as Doubles said, “the customer is really starting at a point of strength. They absolutely have excess liquidity.”