COVID Crisis Devastates Transactor Economics
The credit loss bubble will not be the only impact of COVID-19 on credit card issuers, changes in consumer spend behavior are also suppressing interchange revenue. This is especially true for high-end transactor products, despite being poorly understood by the very banks experiencing this decline.
At AQN, we focus on “Spend Margin,” the margin issuers make on every dollar spent on credit cards after accounting for gross interchange, network economics, and the rewards that issuers provide consumers. Spend Margin is unfortunately not a standard field in your accounting system (yet), but it should be. With a deeper understanding of interchange dynamics, issuers can make strategic decisions around product development, marketing, and overall valuations with greater speed and certainty. Issuers must understand the underlying impacts driven by changes in spend behavior and form strategies that mitigate the downside risks.
Shifting spend behavior may seem insignificant compared to rising losses, but these changes will directly suppress issuers’ ROAs, particularly in rewards-rich spender portfolios. Given the macro trends, including decreased spend, merchant mix shifts, and Consumer/SB/Commercial spend share changes, AQN expects issuers will see a 10-20bps drop in spend margin. This issue is exacerbated as the ratio of purchase volume to assets increases in a given portfolio. The chart above shows that for high transacting accounts, the percentage of ROA that is contributed by spend margin can be 70% or more; this phenomenon cannot be ignored.
While there are adjustments issuers should make to quickly stem the immediate downside impact, they must also consider positioning themselves for long-term success. Issuers need to thoughtfully launch initiatives that bolster a portfolio's spend margin without endangering “first-in-wallet” relationships. We have observed many issuers that have tried to manage their rewards and product offerings without these key insights, and they are often sacrificing millions of dollars.
Over the past few years, AQN has crafted strategies to make our clients’ portfolios more resilient and we have helped many issuers enhance their performance through a multi-faceted approach of:
Optimizing interchange dynamics
Aligning rewards structures more effectively;
Helping to negotiate enhanced network relationships.
AQN's Payments Intelligence practice specializes in developing bespoke strategies for our partners, pairing a bottoms-up, transactional analysis alongside an unparalleled view into the market.