The strongest and toughest creature out there, and maybe the smartest one, that no one has been able to subdue yet, the inexplicable American consumer has hit a wall. And it showed up in a prosaic but ugly 8-K filing by Visa.
Credit cards are a true anomaly in these crazy times of ours. The yield on 10-year treasury notes swooned to a new record low of 1.61%. Interest rates on savings accounts and most CDs are so close to zero that you can’t see the difference on your statements once you round to the nearest dollar. 30-year mortgages come with rates of under 4%. And yet, credit card interest rates are where they’ve always been: high. In many cases well into the double digits.
Consumers have struggled with them. Before the Great Recession, when credit was unlimited and easy, consumers charged the cost of improving their lifestyle to the future to make up for the long decline in real wages—that haven’t kept up with inflation since the wage peak of 2000.
Then it all ended. Consumers defaulted on their credit cards or paid them down or off and cut them up, and the smart ones were able to roll their balances into a home-equity line of credit and then let it go into foreclosure, thus getting rid of debt in the Goldman Sachs kind of way, and overall credit card balances dropped. Transactions shifted to debit cards, which appeared to be the more prudent way, and banks pushed them because they could squeeze higher fees out of merchants. But declining credit card debt drove the Fed ragged; the last thing it wanted was for consumers to get out of debt. So it must note Visa’s 8-K with relief; consumers appear to be back on track to becoming life-long debt slaves whacked on a monthly basis by high-interest credit-card debt.
Visa’s aggregate payment volume was down 3% in the US for April and stagnated through May 28, compared to the same periods last year. Behind the aggregate, bad as it was, hid an astounding shift: credit card purchases actually jumped 8% in April and 10% through May 28; but debit card purchases dropped 12% in April and 8% in May.
Media pundits, in trying to explain away the shift, fingered new regulations—the infamous Durbin amendment—that decimated the debit-card fees Wells Fargo, Bank of America, JPMorgan Chase, Citi, and hundreds of other banks charged merchants. And so, the pundits explained, the industry responded to the loss of revenues with new pricing plans (Visa’s plan is currently causing some rumpled eyebrows at the Department of Justice), and consumers responded to these new pricing plans by plowing back into high-interest credit card debt. Here is one that made the rounds (American Banker):
The sluggish performance was driven by declines in debit-card purchases, which have taken a hit in recent months from new regulations governing how card networks such as Visa and MasterCard handle debit transactions.
A mind-boggling non sequitur. Even the inexplicable American consumer can’t see the fees merchants are charged for credit and debit card transactions. When consumers whip out a card, they choose between borrowing at high interest rates (avoidable only by always paying off the entire statement balance) and having the amount taken out of a checking account in real time. But the fees that the merchant pays don’t show up in this decision process as they’re unknown to consumers and don’t impact them directly.
To account for such a drastic shift, a deeper, gloomier pattern emerges. The inexplicable American consumer, pushed to the max, with checking accounts dry and debit cards useless, is trying to hang on by the fingernails to a lifestyle that is edging out of reach. In grasping for it, they’re using every means they can, even high-interest credit-card debt which will haunt them for years to come. A return to this scheme is not exactly a bullish sign for the economy, though it’s good for the banks (until the inevitable write-offs start wreaking their havoc).
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