Has BNPL killed the Credit Card?

Interview transcript

David Jones: Hello, my name is David Jones from the team here at illion, over the past 4 years illion has produced a series of reports on credit cards. It’s my very great pleasure to introduce someone who has been at the heart of all that work, Michael Landgraf from the Data, Analytics and Insights team. Hello Michael.

Michael Landgraf: Hello David, how are you?

David Jones: Very good thank you.

Michael Landgraf: That’s good.

David Jones: So, you have been looking at credit cards over this long period of time, you’ve got this lovely benchmark of 4 years, what have you been particularly interested in?

Michael Landgraf: We’ve been doing a credit card nation which is the project that you’re referring to now for 4 years since late 2018 and we have looked at a number of insights on the credit card portfolio over those years, but the one consistent thread that we found with each of those reports was the flight away from the credit card by Australia’s population. We found that the flight away has been at the rate of 2 cards to every 1 card that’s opened and during Covid times it actually got as bad as 5 cards being closed for every 1 opened, so what we thought was we will do our 4th generation of credit card nation as a means of seeing whether that was continuing, or whether in fact that has started to improve.

David Jones: Ok, and what have you found in this latest report Michael?

Michael Landgraf: In this latest report, and it’s probably worthwhile just referring to this diagram very quickly, here what we found is that there are actually the beginnings of a flight back to the credit card product. Whereas in the earlier period here pre-Covid, during Covid and even post the initial lockdown there was a significant flight away from the card, which I just talked to, since about the middle of the last year we have seen improvement where overall there is still a flight away, but flight away from the card is now much lower than it was then. So, as I said, at its peak or at its worst, people were closing 5 accounts, 5 credit cards for every 1 that was opened, but now we’re looking at more like 1.4 cards being closed for every 1, so it’s not perfect yet, we’re not getting the true growth yet, but at least that flight away, that bleeding from the product is reducing.

David Jones: And why were they walking away Michael do you think?

Michael Landgraf: A lot of Australians were walking away to reduce their exposure overall, so if you think about the credit card product, when you want to take out a new credit facility, the fact that you hold a credit card can actually work against you in terms of your serviceability requirement. So, people had in general looked to close their cards so that it enabled them to more easily take on more credit facilities. We found that 4 in 5 consumers who closed their credit card did not initially open another credit facility and that was the reason. Of the remainder, we actually found, however, that 16% of those people that moved away from their credit card actually opened a new credit facility with the different lender. So, there was this attrition issue as well, and in a fair proportion of cases, in fact 50% of cases, people opened a home loan with another organisation, so we found that there was an issue for the existing lender not just in terms of just losing the card income stream, but also potentially in much higher-value income streams from the home loan as well.

David Jones: And who was most affected Michael?

Michael Landgraf: So, the people who were most likely to walk away were actually what I call working-class Australia and also those in the mortgage belt of Australia, so we’re talking about the outer suburbs of Sydney, Melbourne, in fact of each of the capital cities, for people who know Sydney, it is really the outer-west, the outer-southwest, and for Melbourne it’s the outer-north, the outer-west, and the outer-southeast. We also found it in what I call some of the major regional centres and also again in the working-class parts of those regional centres, that people moved away, so for example the outer suburbs of Newcastle and Geelong, and what we found was, because it was working-class Australia, these were the consumers that were most likely to be revolvers, they are most likely to be the consumers that are going to be interest income earners for the banks and they moved the way to be able to get home loans more easily and also to get cheaper credit, or what was originally cheaper credit in the form of BNPL facilities.

David Jones: My last question is, what does it really mean for bankers and lenders?

Michael Landgraf: This initial flight back to the credit card, especially by the young demographic in Australia, it’s very important that lenders look to design their credit card product going forward so that they can actually take advantage of that initial flight back, there’s an opportunity here and they’ll want to reap the rewards from actually maximising that opportunity. To be able to get that younger cohort, they will need to price the product differently from the way they did before, they will need to price it more closely or more aligned to a BNPL product with lower interest rates, lower fees etc. But what that also means is because they’re possibly going to write more risk, they need to be able to price for that risk, so rate-for-risk pricing or risk-based pricing might become more important in the credit card sector, so that’s one tier that lenders need to be aware of, to price their product effectively. For them to be able to implement things like risk-based pricing, information is going to be vital, so information that they store internally on their consumers, but also that’s available externally, so looking at how these consumers perform on their other credit facilities, looking at their spending patterns, looking to see whether that lender is actually the primary or secondary lender to that person is going to be very important. And that’s where both internal data and organisations like illion, credit bureau providers, and also spend analytics providers can actually help their customers.

David Jones: Wonderful, Michael Landgraf always a pleasure to talk to you, thank you for your insights today.