Craig LaChapelle: All right. Welcome back, everyone, for TransUnion's first Extra Credit card and banking podcast of 2023, where again we seek to push insights, not products. And today I think we're really going to fulfill that promise because we are looking forward to predictions in 2023 for consumer behavior as related to lending, as well as some additional credit card insights.

While on our last podcast of the year, Paul Siegfried discussed with us year-end trends and also gave us a retrospective look back. Today we're going to focus on actual market performance, and credit card and deposit trends or priorities. Essentially a double click, if you will — because we have experts that not only can cover broader consumer credit card behavior, but who can cover credit card and deposit trends today.

So to that end, we welcome Michele Raneri, Transunion's financial services research and consulting leader, and Kathy Maffei, leader of our Argus Advisory business, who can provide deep insight into the card market as I mentioned earlier.

So first, let me start with you, Michelle: Welcome to our podcast, really looking forward to hearing what you have to say! But before we get going, can you provide us an overview of your background as well as your role at TransUnion?

Michele Raneri: Hey, thanks for having me, Craig and Josh, it's great to be here. So like you said, I lead the US financial services research and consulting. I've got a few teams here at TransUnion where we do thought leadership and develop the market insights by using statistical techniques, macro data, credit data. And then we also do all the business intelligence and probably the webinars that you see quarterly that come out about all of the trends that we monitor.

I've been here for about a year, coming up on my first year anniversary. I was at another credit bureau for 13 years prior to this. I also worked at Citigroup for credit card and mortgage, have been at airlines, and at the very beginning I was at USAA — so I've been in financial services and doing analytics and data for over 30 years.

CL: That's great, Michelle. So excited you're with us — not only today, but at TransUnion in general. Let's move next to Kathy Maffei! Kathy, welcome, and similar question for you. Can you describe your background as well as your current role within TransUnion?

Kathleen Maffei: Sure, thanks Craig, and thank you both Craig and Josh for having me today. I manage the Argus Advisory business, which provides benchmarking and consulting services mainly to financial service institutions on the credit card, for their credit card business, for their deposit business, personal loans, small business lending — really just going across consumer banking. I’m relatively new to TransUnion, having just been acquired less than a year ago. But, you know, very excited to be here. And I’ve been with the Argus business for about 6 years. Prior to being with Argus, I was at Citibank for about 20 years, primarily in the cards business as well.

CL: Interesting. To that end, did you guys ever cross paths at Citibank?

MR: Yes, I worked on Kathy's team for a short while.

CL: Wow, I guess I should have read more in my background notes.

KM: Michelle and I go way back.

CL: That's great, that’s good to know. Well, again, welcome to both of you. Before we actually dive in to your perspective that we're all anxious to hear, we like to keep it a little bit light and start with some trivia. So I'm going hand it over to Josh, who's prepared this month's batch.

Josh Turnbull: Perfect, thanks Craig. So Michelle, when we were talking to both you and Kathy and asking what topics you were interested in and wanted to talk about, Michelle, you said geography. Kathy, you said maybe running. So these are a combination of both. So questions about running with a geographic theme, so you can work together to come up with the right answer.

All right, so after finishing a marathon, which talk show host exclaimed, “Damn, this is better than winning an Emmy.” Was it A) Geraldo Rivera, B) Phil Donahue, C) Oprah Winfrey, or D) Jerry Springer?

KM: A.

JT: Emmy-winning. Did Geraldo win an Emmy?

CL: No, I think she was joking.

JT: Oh okay.

MR: I have no idea.

JT: I mean, I would love for Jerry Springer to win an Emmy too, but I don't think there's any hardware in his closet.

MR: Oprah?

KM: Yeah!

JT: Yes, it is Oprah. Well done, well done. All right, and then the last one. This annual marathon run in a major Asian nation takes place on an ancient structure that is one of the few manmade objects visible from space. What structure is this?

MR: The Great Wall.

KM: Great Wall.

JT: Correct. Yes, well done.

CL: It was either that or the pyramids, and that'd be a tough race.

JT: It's tougher going downhill than it is up.

CL: Yep.

JT: So then I’ll ask both of you a couple questions, to add onto your introductions in kind of a lightning round here for some reactions. So Kathy: Your favorite time of day for running.

KM: Very early in the morning.

JT: Nice. And how many miles a week?

KM: A week? Probably like 25.

JT: A lot more than I do! And listening to music while you go?

KM: No. I usually run with a friend. I talk.

JT: Ah, I thought it was going to be you listening to this podcast. And favorite brand of shoe?

KM: Nike.

JT: Nice.

MR: I'm just impressed Kathy can talk while she runs!

JT: I know, I can't even talk when I'm walking usually. Alright, Michelle: Your favorite geographic feature or type of landscape.

MR: I would say huge icebergs.

JT: Nice, nice. And how many continents have you been to?

MR: 7.

JT: Wow. Impressive.

MR: Yeah, that's all of them. In case anybody wasn't sure.

JT: And which of those is your favorite?

MR: I loved Antarctica. I know it sounds crazy, and lots of people go, “Oh, it's too cold, I'd never go there!” But I would put it above many other places that I have gone. It's beautiful. It's cold, but I have seen a million wild penguins up close and it's phenomenal. It is just fabulous to see that terrain, and it's clean, and the air is clear. I would recommend it to anybody.

JT: That sounds amazing.

CL: What do a million Penguins smell like?

JT: And the last question: What is the top of your list for a country you haven't been to yet that you'd like to go to?

MR: I have not been to Vietnam or Cambodia yet, so both of those are on my list. Maybe this year. I've missed those and I would love to go.

JT: Very nice.

CL: So talking market forecasts, let's turn first to Michelle — and let's talk about the health of the consumer. (And let's keep it US focused, apologies to our international listeners.) So what do you see happening with consumer credit health in 2023, and why?

MR: So this next year looks like it's going to be tough for consumers with credit and with their finances. Year over year we’ve done a forecast, and we're expecting card, personal loan and mortgages all to have decreased originations, and to have an increase of delinquencies. So not the direction anybody who wants for either of those.

The bright spot is that we are expecting that auto will have an increase of originations, and kind of flat-to-slight-decrease of delinquencies. And we're expecting that home equity products — probably both lines and loans — to increase originations, while we're seeing a decrease in refinances for mortgages.

And just to elaborate a little bit more on that, there's still going to be financial stress on consumers for the rest of the year. We've seen inflation come down a little bit, so a slight relief — and CPI in December that came down to 6.5%. We also saw that the Fed decreased their interest rate hikes and December, from 75 basis points that we saw several times in 2022 to 50 basis points in December.

The top level assessment is that goods and services, with inflation still continuing, will be more expensive. Layered on top of that is when consumers use credit to make those purchases, interest rates will make that even more expensive. So, you know, not the best of outlooks right now, but we've got several scenarios and that one was the most persistent. We're expecting inflationary situations to continue to stress consumers through the end of the year.

CL: Thanks, Michelle. Are there any metrics that you want to opine on to give us a hard hitting insight into what we can see in 2023? Whether it's credit scores, level of credit, unemployment delinquencies… anything key you would highlight as to the upcoming environment?

MR: Sure. So in addition to inflation and interest rates, unemployment is a huge contributor to whether or not consumers can pay their bills. So it's a lagging indicator in a whole lot of macro analysis. But when it comes to credit and delinquencies, it's the number one predictor of people paying their bills.

What goes with that, though, is the quit rate. Consumer are still quitting their jobs at record rates, and there is a confidence level in people when they quit a job and go to another job, particularly when it's in a period of economic stress; because everybody knows that when a company has to do layoffs, it is very typical that the last one in is the first one that is out. Yet people are still electing to change jobs at this time, which I think shows that there is a certain level of confidence.

Also, We do the Consumer Pulse survey that asks consumers how do they feel about the next 12 months. And in general, they felt that there was going to be a recession; 82% of them said that they thought they'd be a recession coming. But really interestingly, when asked what they think about their finances in the next 12 months, 52% were optimistic. Drilling down into that a little bit more, over 60% of people who were Gen Z and over 60% of people who were millennials said that they were more optimistic about next year's finances for themselves.

I think the reason for this is that people who are at the beginning of their careers typically get more promotions, more pay increases, might be changing jobs more frequently. And so they see that there is a path to making more money next year. Conversely, people who have been more established in their careers don’t have as big of changes, they probably don’t get as big of a percentage in pay increases… and people who are more established have more invested in the stock market, and they have their retirement funds already set up and the stock market isn't doing very well year over year, either. And so there are probably feeling more of a pinch than the people who are probably younger and newer in their careers.

CL: That's great insight. You know, it's really interesting those statistics from the consumer-stated preference survey. That provides some definite food for thought, particularly the differences in those percentages that you quoted.

Let's move on to thinking about the consumer credit lending more from a line of business perspective. Is there any particular line of business — whether it's auto, credit card, mortgage or consumer lending — you think will be most challenging? Or conversely, is there one of those lines of business that you think may hold up the best, at least in terms of originations or delinquencies?

MR: On the positive side, auto looks like it's going to do well. It's had a little bit of a rough time, not as rough as some of the others. There's been a little bit of a pullback of originations… a lot of that was supply-based, though, because there wasn't as much supply (different reasons, but a lot of it had to do with the chips over a couple of years not being manufactured). And now we're seeing that start to pick up, so we expect that originations year over year will increase, say, 4.5-5%. And that's great because they're going to start to come back a little bit in this next year, and their delinquencies are going to look better. Right now they're sitting at about 2%... we expect that'll see a 6% decrease and get down to about 1.9%. So we're anticipating that auto is going to have a better year than the other products or lines of business.

Now the one that is the most challenged this year… I would say that might be unsecured personal loans. Originations have had some really high peaks in the last couple of years, but we're going to see a decrease in originations this year — both in the middle of the year, and the year over year is going to be down probably about 13%. And I think that's also based on delinquencies that we've already seen, and lenders start to kind of slow down a little bit when they see a lot of delinquencies. The delinquencies that we see right now for personal loans is in the 4% range, and we're expecting year over year for that to increase; so at the end of 2023, that will be up to about 4.3%, which is about a 5% increase.

CL: That's a lot to think about. It's great to see auto coming back, but personal lending — and I think even to some extent, card — are going be a little more challenged. And obviously, everyone knows the mortgage story.

Thank you, Michelle. That was fantastic. I do have one other question for you, and this is maybe an unfair question. But thinking qualitatively, not looking at the numbers, are there any “black swan” risks you're looking at that really could impact the economy? Whether it's geopolitics, health… anything out there that we should be looking at?

MR: That’s a good question. One of the biggest drivers that could be a “black swan” — meaning it might not be foreseen, and could surprise us — is unemployment. It's been seen before, particularly in the Great Recession… one of the things that really threw off a lot of people's models (in addition to home valuations, and other things specific to that market) is that unemployment ranges went to levels that weren’t even in anybody's levers. As you're doing these models, you'll set a lever and say, ‘hey, our assumption is that employment might go up to 4.8% by the end of the year.’ But if that went significantly higher and started to unravel to a higher level than 5% — or if it went higher in the middle of the year, even if it's settled more at the end of the year — the repercussions that I think we would see as an industry would be high. So the delinquencies would certainly be much higher than what we have forecast. And in turn, I think the originations would also suffer because lenders would encounter a market that they weren't anticipating, and slow down.

CL: Excellent insight there, Michelle. One thing we didn't touch on is credit card and deposits, so to that end, we have Kathy here. Josh, turning it over to you and Kathy.

JT: Thanks, Craig. So Kathy, hearing Michelle forecast, I'm curious: The card issuers that you work with day-to-day, do you think that’s what they're expecting? Or are there things in Michelle's forecast that you think they'd find surprising?

KM: I think most of the card issuers are expecting what Michele was speaking about. In the most recent earnings results that came out, they are starting to increase their reserves, and are expecting to see losses starting to rise — and we're even starting to see the actual loss rates on the core portfolios rising slightly. Nothing drastic or to be alarmed about right now, but starting to tick up a little bit, and primarily in the riskier segments, not the entire book of business. So yes, to answer your question, I think the expectation is there that there will be a little bit more stress in the business as we go through this year.

JT: So in reaction to that: Loss rates may be going up a bit, and to your point, more so in some pockets than others — but I assume that customers are still looking to grow and think about how they drive profitable results. So beyond the risk side looking to growth, what are they doing?

KM: I'd say they are all still planning growth. I am not hearing or seeing this huge retrenching in the marketplace. But I would say the issuers are being a lot more targeted and segmented in terms of where they are looking to grow. So there's a lot more diligence being placed on credit criteria and acquisition strategies to make sure they’re actually going after the right segments of the population… where they would have the best chance at the highest levels of profitability, and not have as much stress from a risk perspective.

JT: That's helpful. And one of the things you and your team do on a day-to-day basis is engage with some of the senior most leaders and card issuers, and have really detailed conversations on strategies and what you're observing. So I am curious: In thinking about what you just mentioned and Michele's forecast, are there any places where you see folks a little unprepared for the year ahead, or for some of the challenges that lay around the corner?

KM: I don't know whether I would call it unprepared, but I will say there are certain issuers that might have had ideas about expansion or different types of products that they may not move forward with right now in this market. Like I said earlier, there's still the desire for growth, but issuers are really playing it safe in terms of where they want to get that growth.

But I do think they find it to be very important to not pull back so much. Michelle made mentions to the Great Recession, and I think the issuers that had the hardest time back then are the ones that retrenched so far, they couldn't come back from it. So I think everybody learned from that experience.

JT: I want to push a little bit on that, thinking about the various types of issuers you work with and that are out there generally. Doing that would be much easier if I'm an issuer focused on super prime consumers with lots of available liquidity, versus folks focused on a near prime portfolio or wherever you meet be seeing some of the stress right now. What does that look like right now in continuing to move forward and continuing to grow, but doing it smartly? Do you see that desire to keep growing and keep lending as somewhat uniform?

KM: Yes, we’ve had conversations with some of our near prime issuers where they're looking to start going a little bit more prime. So we're having conversations to ask how do we grow but at maybe a slightly different place than we've been in the past, and pulling them up into a better risk universe. So that's what they're doing.

JT: To kind of insulate, get a little more diversified? Yep, it makes sense.

KM: That's right. Balance out the portfolio a little bit.

JT: Got it. So Kathy, another thing you spent a lot of time looking at is deposits, and you have tremendously detailed data on spend and all kinds of things. I'm curious to know how deposits are holding up? We saw data over the course of the pandemic about all this excess liquidity people had and how banks were impacted from a balance sheet standpoint. What does that look like now?

KM: I would say that deposits are still growing, the deposit strength is still there. The difference we're seeing now is that unlike in COVID — where deposits went into a financial institution and stayed there — because of the rate environment we're in right now, there's a lot of movement. So banks are looking at inflows and outflows of their deposits because customers are not just parking their deposits in one place. That's the biggest change we're seeing at this point.

JT: So given that, if I'm sitting on top of a deposit portfolio now, where do you see people focused in terms of who they're marketing to, or what they're trying to do with that deposit portfolio?

KM: A couple different things. There are banks out there looking at different types of products. There are lots of products out there now without the overdraft fees and things like that, so that they can attract better customers. And particularly for some of the bigger banks, and even super regional type banks, they’re looking at that total customer perspective, and trying to focus on the customer that has multiple products with the bank. So how do they make it attractive for the person to have a car, and a checking account, and a savings account, and keep that customer loyal to that specific financial institution? There's a big focus and emphasis on that.

JT: And do you think that people have given up on the checking account as being a profitable product? That maybe they’ve said OK, with what I've given up on the overdraft fees, this is just this isn't going to be the money maker — and so I've got to cross sell and have that fuller relationship?

KM: I don't know that that's the only reason for the cross sell. I think even without the stress on the profitability of the checking account itself, it always was most profitable to have multiple relationships with an individual. So I think that will continue to be the case, and banks will continue to try to grow that multi-relationship customer.

JT: Kathy, anything else that's top of mind as you think about the conversations you're having around deposits and cards with customers? Anything they're asking about, or some of the topics that are top of mind for customers that we haven't touched on here?

KM: I think it’s really all about that balanced growth and profitability; how did they keep revenue up and continuing to grow? Because that's always been a challenge. We're seeing a lot more activity now, even in the balance transfer space. So still looking to grow those balances, just to make sure they have an ongoing revenue stream. For a while that had been a challenge, since payment rates were so high. They were struggling to keep a revolving balance. So there is that constant focus and emphasis on lifting that revenue.

So it's that balance, right? You have to worry about the credit loss obviously, but building the revenue is just as important.

JT: That paradox is so interesting. In some ways, if consumers are stressed, do I want to pull on a larger balance from someone who's revolving? But at the same time, that pressure to grow balances… it's a good point.

KM: And for a credit card business, the most profitable piece of a credit card portfolio is that middle tranche, right? So not your super super prime, but not your riskiest either. It's really if you can manage and build within that middle, that's kind of the sweet spot.

JT: Hm. Well this has been great. I appreciate the perspectives, Kathy and Michele! We got a lot in here that I think people listening to this will find valuable.

CL: Yeah, I'll jump in on that. Again, thank you for giving us a great look forward into 2023. Maybe not always the trends and the forecast we want to hear, but we need to hear what the experts are thinking. So thanks again and at some point in the future, maybe this time next year, we'll have you back and it'll be perhaps a bit rosier view then.

JT: That's right. Thank you both.

KM: Thank you.

MR: Thanks.