The major credit card networks all experienced significant double-digit growth in the fourth quarter of 2022, according to their earnings reports, with Visa’s revenue growing 12 percent to $7.9 billion, Mastercard’s revenue rising 12 percent to $5.8 billion, and American Express’ revenue jumping 17 percent to $2.3 billion. Clearly, the recessionary fears doing the rounds didn’t negatively impact the card networks’ earnings.
“We ended 2022 with record revenues, which grew 25 percent from a year earlier, and earnings per share of $9.85, both well above the guidance that we provided when we introduced our long-term growth plan at the start of last year, despite a mixed economic environment,” said American Express CEO Stephen Squeri in an investor news release.
If we are to evaluate these growth numbers, it’s essential to be mindful of a slower fourth quarter growth trajectory for all three card networks as compared to all of last year. For instance, Visa grew 22 percent over the fiscal year 2022, compared to a lower 12 percent last quarter. The flatter growth in the recent period is understandable, as the previous year’s massive spike came from the significant market recovery from the COVID-19 pandemic’s severe damages.
In general, we can attribute the industry-wide buoyancy to the recovery in cross-border payments and travel spending that started picking up recently, except for China.
“As we look at the broader economy, we see the continued recovery of cross-border travel, with volumes up 59 percent versus a year ago,” said Mastercard CEO Michael Miebach in an investor news release. “We’re encouraged by Asia opening up further. While macroeconomic and geopolitical uncertainty persists, consumer spending has been remarkably resilient.”
December's credit card metrics extended their long, gradual return to the pre-pandemic level of delinquencies and net charge-offs. This doesn’t appear surprising if we evaluate it against the backdrop of the withdrawal of the pandemic era’s fiscal relief programs.
Based on TransUnion's credit forecasts, credit card and personal loan delinquency rates are expected to amplify further in the coming period. They expect the rise to reach the highs we’ve not seen since 2010, when the 90-day delinquency rates exceeded 13 percent, immediately following the Great Recession.
"Rapidly increasing interest rates and stubbornly high inflation combined with recession fears represent the latest in a series of significant challenges consumers have faced in recent years," said Michele Raneri, TransUnion vice president and head of U.S. research and consulting. Raneri said, "It's not surprising then to see pronounced increases in delinquency rates for credit card and personal loans, two of the more popular credit products."
While the current situation based on the performance of the credit card giants appears to be positive, merchants need to be cautious.
Some Wall Street analysts expect a challenging environment for consumer finance company fundamentals in 2023. This could manifest with a squeeze in consumer spending, driven by rising interest rates and fears of a recession.
On the contrary, while possessing a negative outlook on rising credit card delinquency rates, TransUnion is optimistic about the demand for most lending products. They expect it to remain high relative to pre-pandemic levels, with the number of consumers securing auto and home equity loans increasing annually. However, they expect credit card originations to drop from 87.5 million in 2022 to 80.9 million in 2023. This decline may mean prospects of declining revenue or at least weakened revenue growth for eCommerce merchants, whose sales are primarily routed via credit cards.
However, there are bright spots expected in the recessionary environment. Some personal finance experts have expressed ongoing optimism for the travel segment, predicting travel credit cards' continued popularity in 2023.
Further, the prospect of the Durbin 2 legislation making its way through Congress may foster greater competition among the credit card networks when routing transactions in the near future. This would hurt the earnings of the largest credit card networks (i.e. Visa and Mastercard), but it would make processing credit card transactions cheaper for merchants and positively impact their bottom line.
Despite the economic headwinds, Visa, Mastercard, and American Express demonstrated resilience with double-digit growth in the fourth quarter. Nevertheless, merchants should be cautious of the future amid fears of recession.
This doesn’t necessarily mean a uniformly rough time for all. There’s much optimism from leading market observers who expect consumer travel spending and increased cross-border expenditure to grow at a healthy pace. Furthermore, if the Durbin 2 bill makes its way through Congress, there would likely be a positive bottom line for merchants due to reduced card transaction fees. In short, it will be an exciting year ahead.
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