October 5, 2021
In mid-summer of 2021, there was near triumphant messaging coming from the White House (and many other institutions) regarding the status of COVID-19 in the United States. The public, in general, felt that the pandemic was starting to ease off significantly, or even be practically over. Official data reported by the New York Times seemed to back those sentiments up. On June 20th, 2021, the country's most widely-circulated newspaper reported just 4,063 new COVID cases across the entire country. It was a number that had not been seen since the very earliest days of the pandemic. Unfortunately, it would not stay that low for long.
COVID-19 was not content to remain only in its original form and strike fear and illness in the population in just one limited way. Instead, it did what all viruses do and mutated. DW.com reported on some of the preliminary information that we began to hear about the Delta variant earlier this year:
The earliest documented COVID-19 case caused by the delta variant (B.1.617.2) was found in the Indian state of Maharashtra back in October 2020. The variant has since spread widely throughout India and across the world. The World Health Organization (WHO) labeled it a "variant of concern" (VOC) on May 11.
Little did many of us realize that the Delta variant would soon sweep into the United States and bring with it additional pain, suffering, and a major blow to consumer confidence. NPR reported on July 19th, 2021 that a big drop in the major stock indices could be at least partly attributed to increased fears from investors that the Delta variant was going to lead to increased economic instability. Indeed, many have looked at the economic picture as it stands now and is unsure about what to make of it. The employment situation is questionable, and increased inflation has become a prominent worry for many economists.
There is naturally a lot of concern and focus on debtors during an economically turbulent time. One must also ask what creditors intend to do about their own portfolios when things start to get a little shaky. The increased concerns about the economy have meant that many debtors have pulled back on their credit card usage, and most are paying down their current balances. It turns out that this is a unique reaction to an economic shock (more on this below).
Interestingly, new data reported by the Consumer Financial Protection Bureau shows that credit card utilization balances continue to decline compared to pre-pandemic levels, even though this has not always been the norm during any period in American history:
Utilization rates remained low through April 2021, with only a small seasonal increase around the December holidays, followed by continued decreases in 2021. To some extent this decrease in utilization rates is to be expected, given the decrease in average balances documented above. However, this decrease is remarkable given that prior research has shown that utilization rates are remarkably consistent over time: even during the depths of the Great Recession, with huge shocks to income and reductions in access to credit, average utilization rates were essentially unchanged.
The atypical adjustment in utilization rates has left some creditors flat-footed and uncertain of what to do next. If their borrowers are going to pay down existing debt, then they do not have the ability to obtain as much profit as they normally would from their accounts.
The concerns from creditors go beyond a drop in credit utilization. They are also fearful of the fact that retail spending dropped 1.1% in July 2021 according to Bloomberg.com. This was a larger number than expected, and it appears once again to point to a shaken faith on the part of consumers about the state of the economy. Additional reporting showed that popular restaurant reservation website OpenTable saw a 9% decline in reservations in that same month. If consumers are too afraid to spend money, then creditors will have a very challenging time getting them back in the door to increase borrowing. It is a cycle that could lead to prolonged periods of creditors having difficulty achieving the kinds of profits that they have come to expect.
Adaptation to the marketplace is the only chance for survival at any point in time, and even more so when the economy is as uncertain as it is right now. Thus, creditors need to think about strategies for balance sheet expansion and growth right now. A few of the options open to them are:
Although credit utilization is declining and balances are shrinking, there is still plenty of debt to be serviced in the economy. It may not be as profitable on average as it once was, but there is still some revenue to be made. Besides, many are betting on credit utilization rising once again as consumers adjust to the whims of the pandemic yet again, and there are already some signs that this is happening. Thus, it might prove wise to invest in additional credit revenue streams now on the chance that these streams will bounce back and once again be highly profitable.
It is always a good time to have solid partnerships in business, and there are credit originators out there who may be willing to strike some deals with you. You may decide to partner up to form a team that can get credit out to more consumers who are asking for it. Tapping into the existing customer base that a credit originator has is yet another helpful boost to your business operations.
Purchasing interest-producing assets are always nice, but there is something to be said for cutting losses and getting away from less than ideal assets as well. Thus, some have taken to selling off the parts of their portfolio that just aren't performing for them anymore. If they sell those assets in favor of others, they are saving money and ridding their balance sheets of a few headaches along the way.
Garnet Capital is capable of working with any business (or individual) who wants to create a strategy for retooling approaches for making money in the pandemic world we all now live in. The three strategies mentioned above are among the most popular at the moment, but there may also be some unique options specific to your operation as well. To learn more about the buffet of options available to get through these challenging times, please contact us and schedule a meeting to discuss your future and strategy.