Payment providers could find opportunities in record-high credit card rates

The news: Credit card interest rates will climb to record highs this year, according to a Bankrate forecast—which could present opportunities for payment providers as consumers lean more heavily on credit cards.

  • The average rate will hit 20.5% in 2023, up from 19.6% at the end of December and 16.3% at the start of last year, per Bankrate chief financial analyst Greg McBride.
  • The hike would take rates to their highest level in about 40 years, McBride said in an interview with Bloomberg.

What this means: Higher rates will likely be a boon for lenders. But cardholders could feel the squeeze as higher borrowing costs eat into inflation-weary budgets.

  • Consumers are already relying more on borrowing. More than 35% of US households used credit or loans to cover spending needs over a one-week period in December, up from about 32% in November, per a Census Bureau survey.
  • And if economic headwinds get worse, some consumers may struggle to pay back that debt—which could cause headaches for issuers. This would increase the risk of defaults and hurt lenders’ balance sheets. Issuers should remain alert and be prepared to implement relief measures if necessary.

What can payment providers do?

  1. Revamp reward schemes. As higher rates put greater pressure on cardholders, credit products need to be personalized, offer more flexibility, and provide market-leading rewards. Rewards should change with spending patterns, potentially focusing on everyday spending like groceries rather than travel to attract savings-conscious consumers.
  2. Embrace alternative payment methods. Higher rates could give nontraditional payment plans like buy now, pay later (BNPL) a chance to steal market share from credit cards as consumers seek out more flexible and interest-free payment options.
  3. Prioritize budgeting tools. Issuers may want to add money management tools to help consumers save money. Engagement among consumers who use budgeting apps is robust: 64% of users check them daily, per Plaid’s The Fintech Effect report.

Dive deeper: Read our Era of Uncertainty: Credit Cards report to learn about the challenges issuers could face with rising economic uncertainty and strategies they can use to cut risk.

This article originally appeared in Insider Intelligence's Payments Innovation Briefing—a daily recap of top stories reshaping the payments industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.