Today, PSCU published the May edition of the PSCU Payments Index, the goal of which is to provide information and insights to help financial institutions navigate the evolving financial landscape to make informed, strategic decisions for their organizations and members.

 This month’s report finds continued softening of consumer purchasing activity amidst contracting inflation. While overall payment growth is still positive, April 2023 data revealed extended weakening of consumer spend and lower average purchases for both credit and debit cards. This month’s Deep Dive highlights strength in contactless card payments, led partially by generational differences, as well usage concentrations in certain sectors.

In the Labor Department’s May 10 update, the Consumer Price Index (CPI) increased by 0.4% in April. The annual rate of inflation dropped from 5.0% through March to 4.9% through April. While this is the tenth consecutive monthly drop in the annual rate from the peak of 9.1% in June 2022, it is still much higher than the Fed’s target annual inflation rate of 2.0%. The largest contributor to inflation was again shelter, followed by used cars and trucks, which offset the decline in the gasoline index. The Federal Reserve increased rates by 25 basis points on May 3 and signaled a potential pause in rate hikes, with their next meeting scheduled for June 13-14. The current Fed Funds Rate is 5.25%, compared to 0.5% a year ago.

The Consumer Confidence Index fell in April to 101.3 (1985=100), down from 104.0 in March, while the job market remains strong. The Bureau of Labor Statistics (BLS) reported in its April 2023 jobs report that 253,000 jobs were added for the month, with the continued trend of increased jobs in professional and business services, health care, leisure and hospitality and social assistance. This is stronger than the 180,000 new jobs that were expected by economists in a recent WSJ poll. The overall unemployment rate for April finished at 3.4% or 5.7 million people, which is now the lowest since 1969.

Taking center stage in Washington, D.C. in the coming weeks will be the battle to increase the debt ceiling, with the Treasury Secretary indicating that the U.S. Government will default on or about June 1. The White House estimates that a protracted default would have a devastating impact on the economy, with potential job losses at over eight million, raising unemployment by five percentage points and dropping GDP by over six percentage points. One of the immediate impacts would likely be a delay of social security benefits and military staff payments.

“While contactless adoption is still behind other regions, we expect that contactless card volume in the U.S. will continue to grow quickly,” said David Albertazzi, Director, Retail Banking & Payments at Aite-Novarica Group. “The acceptance infrastructure is already available, with Apple Pay now accepted at more than 90 percent of U.S. retailers. The recent introduction of SoftPOS, aka Tap to Pay, enables merchants to accept contactless payments on a regular smartphone. SoftPOS will further drive the migration from cash to card, as well as the shift to contactless as the preferred payment method at the point of sale.”

A sampling of key takeaways from the May report includes:

• Transactions in April grew at a higher rate than purchase dollars, for both credit and debit cards, for the second consecutive month. For April, both credit and debit transactions were up 4% year over year. Credit purchases were up 2% and debit purchases were up 3%. For credit purchases, the largest contributor to growth was the Services sector (1.0 percentage point of growth) while the Goods sector offset that with a 0.8 percentage point reduction. For debit purchases, three sectors generated the highest growth, with Restaurants, Money Services and Food & Groceries each contributing 0.8 percentage points of growth. Debit purchases were offset by a reduction of 0.6 percentage points in Gasoline.

• The Consumer Price Index (CPI-U) decreased on an annual basis from 5.0% to 4.9% in April. For the third consecutive month, shelter accounted for the majority of the all-items inflationary increase. The Fed increased rates by 25 basis points on May 3 and signaled a potential pause on subsequent near-term increases. The next update will occur on June 14.

• Growth in contactless “tap-and-go” transactions remained strong in April, with credit transactions up 9.6 percentage points and debit transactions up 11.7 percentage points compared to a year ago. Growth in “tap-and-go” was strongest in the food-related sectors of Restaurants and Grocery Stores, as well with the younger age demographics of Gen Z and Millennials.

• Growth in non-discretionary spending slowed on both credit and debit cards with credit up 1% and debit up 2% year over year. Discretionary spending grew at a greater rate than non-discretionary spending, with credit up 4% and debit up 8%. Transaction growth on credit cards was up 4% each for discretionary and non-discretionary transactions. Transaction growth on debit cards was up 12% for discretionary and up 3% for non-discretionary transactions.

• The credit card delinquency rate for April finished at 1.81%, above the March 2019 pre-pandemic level by 0.13%. Total credit card balances were up 13.9% for April compared to a year ago, while the average credit card balance for active accounts was $2,946, up 8.7% (or $235) year over year.