The Impact of Consumer Spending Trends on the Financial Sector

Overview of Current Consumer Spending Trends

Current consumer spending trends show a focus on affordability and meeting consumer needs (MCD), a shift back to services and entertainment (TGT), regional variations with weaker spending in Europe (AMZN), balancing price and value to attract higher-income consumers (WMT), and the impact of economic conditions and uncertainties (COST).

"I think the sharp point and Chris mentioned this is just we've got that opportunity on affordability, and we're really laser-focused on making sure we can meet the need that consumers are expressing in the current context, but we feel really good about all the other aspects of the experience and how we're delivering against what customers are expecting." --- (MCD, earning call, 2024/Q1)

"In addition, business trends continue to reflect a normalization in spending patterns that first emerged more than 2 years ago, a pattern where consumers are remixing their spending back into services and entertainment outside of their homes after curtailing those activities during the pandemic." --- (TGT, earning call, 2025/Q1)

"As part of our guidance considerations, we also continue to keep an eye on consumer spending and macro level trends, specifically in Europe, where it appears to be a bit weaker relative to the US." --- (AMZN, earning call, 2024/Q1)

"So I guess the question is and this is happening at a time when other retailers are maybe doubling down on opening price point and are not seeing a stable consumer. So I guess my question is, how do you maintain the balance of being known for price and value and convenience too, but also welcoming these higher income consumers? And is that a delicate balance that you think about?" --- (WMT, event transcript, 2024/06/07)

"These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real" --- (COST, press release, 2024/07/10)

Impact on Retail Banking Operations

Retail banks are adapting to consumer spending trends by enhancing operational efficiency, expanding services, and optimizing deposit strategies. Citigroup focuses on mitigating headwinds and improving value, Wells Fargo targets growth in consumer and small business banking, and U.S. Bancorp leverages its distribution network. JPMorgan Chase and Bank of America invest in new products and financial centers to capture market opportunities.

"We feel good about our position as a prime and lend-centric issuer. We will continue to take mitigating actions to manage through the headwinds, [lap] (ph) the credit cycle, and drive more value from retail banking and retail services, while improving the overall operating efficiency of the business, all of which will ultimately result in a higher returning business over the medium-term." --- (C, earning call, 2024/Q1)

"In the commercial Bank, we are focused on growing our treasury management business, adding bankers to cover segments where we are underpenetrated, and delivering our investment banking and markets capabilities to clients and believe we have significant opportunities in the years ahead.And we continue to see significant opportunities for consumer, small and business banking franchise to be a more important source of growth." --- (WFC, earning call, 2024/Q2)

"And so, we've taken some opportunities to exit some high-cost deposits and we've really utilized our distribution network, whether that's on the retail side, the branch network, our app capabilities, really taking advantage, and our partnerships really taking advantage of our national bank reach and really growing in deposits in areas that have a lower cost." --- (USB, earning call, 2024/Q2)

"Over the last 5 years, we've increased the number of checking accounts geared toward younger and lower income customers by over 50% and continue to strengthen our secure banking product. For affluent clients, we've grown private client relationships that have deposits and investments with us by 50% as we've added banker and advisor capacity and launched new offerings such as premium deposit." --- (JPM, event transcript, 2024/05/20)

"A few examples, while we have the leading retail deposit share in America, we continue to invest and have opened 11 new financial centers this quarter -- in this first-half of the year and renovated another 243. This is an investment in both our expansion markets and" --- (BAC, earning call, 2024/Q2)

Credit Card Usage and Debt Trends

Credit card usage is stabilizing, with American Express and Capital One noting improved credit performance and stabilization of domestic card trends. Synchrony Financial observes a return to pre-pandemic spending behaviors, while Discover Financial Services highlights cautious consumer spending. Visa focuses on expanding acceptance locations, indirectly influencing usage trends.

"And we can be targeted and specific around those customers that we know have about close to 75% of their lending on other cards in their wallet and use the product, the value proposition to encourage them to move that lending on. As a result, when you filter that through, it translates into industry leading credit performance that is not only industry leading pre COVID, but as you saw, we've widened that lending gap between us and our industry competitors." --- (AXP, Investor Day, 2024/04/30)

"Our consumer payment strategy is focused on growing credentials as we are doing across all the partnerships I just mentioned and increasing acceptance locations. And wallets are a great example of where this comes together, where Visa can be a funding source, an embedded credential, and an accepted form of payment by wallet merchants." --- (V, earning call, 2024/Q3)

"The relative pace of payment rate moderation has continued to slow from both a generational and credit grade perspective, which, when combined with the spending trends we've observed, reinforces our view that borrowers are generally reverting to spending and payment behaviors that are more consistent with pre-pandemic norms." --- (SYF, earning call, 2024/Q1)

"Domestic Card credit trend continue to stabilize and auto credit trends remained stable and in line with normal seasonal pattern." --- (COF, earning call, 2024/Q1)

"Discover card sales were down 3% compared to the prior year, spending at restaurants, which is a large category for sales volume declined sequentially as a result of being included in the 5% promotion during the first quarter. Accounting for the influence of promotional categories, sales trends are relatively stable. We continue to see a cautious consumer, evidenced by less card member" --- (DFS, earning call, 2024/Q2)

Changes in Investment Behaviors

Investment behaviors are shifting due to portfolio repricing, macroeconomic uncertainties, and market fluctuations. Companies like Morgan Stanley and Goldman Sachs highlight the impact of these factors on net interest income and asset prices. T. Rowe Price and Charles Schwab note changes in client cash flows and investment cash alternatives, while BlackRock focuses on reporting adjustments to reflect economic impacts.

"The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio. Therefore third quarter NII will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter." --- (MS, earning call, 2024/Q2)

"If uncertainty and concerns about geopolitical tensions and the economic outlook remain elevated or grow, including those about central bank policy, inflation, the commercial real estate sector, and potential increases in regulatory capital requirements, it may lead to a decline in asset prices, a decline in market-making activity levels, or a decline in investment banking activity levels, and net revenues and provision for credit losses would likely be negatively impacted." --- (GS, sec filing, 2024/Q1)

"Such changes result from many factors, including, among other things: client-related cash inflows and outflows in our products, performance fees, capital allocation-based income, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new investment products, and changes in retirement savings trends relative to participant-directed investments and defined contribution plans." --- (TROW, sec filing, 2024/Q1)

"of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again. Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond." --- (SCHW, earning call, 2024/Q2)

"The Company presents investments, as adjusted, to enable investors to understand the economic portion of investments that is owned by the Company as a gauge to measure the impact of changes in net nonoperating income (expense) on investments to net income (loss) attributable to BlackRock." --- (BLK, sec filing, 2024/Q1)

Demand for Mortgages and Personal Loans

Demand for mortgages and personal loans is influenced by refinancing trends and economic conditions. PFSI highlights opportunities in refinancing and second lien mortgages as rates decline. WFC notes a decline in mortgage banking, while BAC reports growth in mortgage lending. PFSI also sees increased streamlined refinances due to lower rates.

"This population of loans consists primarily of recently originated purchase mortgages where the underlying borrowers will undoubtedly look to refinance when rates decline from their current levels. We have also been very successful providing second lien mortgages to our customers that have secured a low coupon first lien mortgage and wanted to access the equity in their home in a more economic transaction than a cash out refinance. As rates decline, this population of borrowers may also seek to reduce their cost with refinance to consolidate their loans, presenting an additional opportunity for our consumer direct." --- (PFSI, earning call, 2024/Q2)

"This growth was partially offset by a decline in mortgage banking, primarily driven by our efforts to simplify the home lending business as well as lower deposit related fees reflecting our efforts to help customers avoid overdraft fees. Expenses declined 3% from a year ago and included the impact of our efficiency initiatives, which have resulted in $10,000,000,000 of gross saves over the past 3 years." --- (WFC, event transcript, 2024/04/30)

"Average loans were up 2% year-over-year, driven by strong growth we're seeing in custom lending and a pickup in mortgage lending. Both Merrill and the Private Bank continue to see good organic growth, and they produced strong assets under management flows of $58 billion since last year's second quarter, which reflects a mix of new client money, as well as existing clients putting more of their money to work." --- (BAC, earning call, 2024/Q2)

"And so and we're also very covered on mortgage loans. I just point out on our commercial on our consumer mortgage loans, we've had virtually no losses for about 5 years now." --- (JPM, event transcript, 2024/05/21)

"Higher volumes in the channel were driven primarily, by an increase in streamlined refinances of government loans, as mortgage rates declined from their recent highs, providing us with an opportunity to lower mortgage payments for borrowers, who previously locked in higher rates." --- (PFSI, earning call, 2024/Q1)

Effects on Financial Services and Products

Consumer spending trends are impacting financial services and products by decreasing revenue from value-added services and merchant loan originations (PYPL), driving demand for seamless and accessible financial products (FIS), increasing service revenue through better card benefit utilization (V), and boosting transaction volumes in the gig and subscription economies (MA).

"Revenues from other value added services decreased $11 million, or 2%, in the three months ended March 31, 2024 compared to the same period in the prior year due primarily to a decline in the revenue share earned from an independent chartered financial institution and interest and fee revenue on our loans receivable portfolio driven by a decrease in merchant loan originations, mostly offset by an increase in interest earned on certain assets underlying customer account balances." --- (PYPL, sec filing, 2024/Q1)

"This is no small deal. Consumers want their financial products and services to be as readily available as their streaming services. They want their user experience to be as simple and seamless as their smartphones." --- (FIS, event transcript, 2024/05/07)

"Now let's review our third quarter financial results. I'll start with the revenue components. Service revenue grew 8% year-over-year versus the 8% growth in Q2 constant dollar payments volume, with revenue yield improving sequentially and versus last year due to improving utilization of card benefit." --- (V, earning call, 2024/Q3)

"And specifically, what I'm talking about is, if you think about the gig economy, if you think about subscription services, if you think about delivery services which are taking place, very often what happens is what used to historically be $1 or spend with one transaction has now got a multiplier effect where it's emanating into multiple transactions with significantly more volume." --- (MA, conference, 2024/05/29)

"If these conditions continue or worsen, they could adversely impact our future financial and operating results." --- (PYPL, sec filing, 2024/Q1)

Technological Innovations in Response to Spending Trends

IBM and Microsoft are heavily investing in emerging technologies and adapting their product strategies to align with dynamic market conditions, reflecting the financial sector's response to evolving consumer spending trends.

"We continue to invest in emerging technology as well, bringing new innovations to the market." --- (IBM, earning call, 2024/Q1)

"Industry Trends Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models." --- (MSFT, sec filing, 2024/Q3)

"We continue to invest in emerging technologies, bringing new innovations to market." --- (IBM, sec filing, 2024/Q1)

"At Microsoft, it is very much a product strategy role. So we spend a ton of time assessing market conditions, working with our engineering teams to find product market fit, doing a lot with sales enablement." --- (MSFT, conference, 2024/05/29)

"That was up $600,000,000 year to year. So I think what you're seeing is the confidence in a repositioned IBM around those 2 transformative technological shifts and a very different investment thesis for IBM, higher revenue growth, higher operating margin, strong free cash flow yield and a higher return on invested capital." --- (IBM, conference, 2024/05/20)

Future Economic Outlook and Predictions

Goldman Sachs and JPMorgan Chase highlight the potential for economic downturns to impact asset prices, credit losses, and net revenues. Both firms emphasize strategic preparation for various economic scenarios, focusing on balance sheet management, expense efficiency, and future investments to navigate potential economic challenges.

"In the future, if market and economic conditions deteriorate, it may lead to a decline in asset prices, or investors transitioning to asset classes that typically generate lower fees or continuing to withdraw their assets, and net revenues in Asset & Wealth Management would likely be negatively impacted." --- (GS, sec filing, 2024/Q1)

"We are very focused on executing our tech strategy to prepare the firm for the future. We are actively managing the balance sheet and we are prepared for a range economic as well as capital scenarios." --- (JPM, event transcript, 2024/05/20)

"Statements about our expected provision for credit losses are subject to the risk that actual credit losses may differ and our expectations may change, possibly materially, from that currently anticipated due to, among other things, changes to the composition of our loan portfolio and changes in the economic environment in future periods and our forecasts of future economic conditions, as well as changes in our models, policies and other management judgments." --- (GS, sec filing, 2024/Q1)

"So as we execute this strategy, we believe we'll continue to deliver the results you expect, highlighted by our rigorous focus on expense and capital efficiency and strong earnings and returns while we make the critical investments in our future." --- (JPM, event transcript, 2024/05/20)

"While we use the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used." --- (GS, sec filing, 2024/Q1)