US issuers must take steps now to weather the
growing credit crisis and recover more quickly when the economy
normalises, according to a new report from TowerGroup, the research
arm of MasterCard Worldwide.
Merely bulking up their collection departments
to deal with the increase in delinquencies expected with the
softening economy will not be enough to head off the lasting
effects of the credit crunch, wrote Brian Riley, senior analyst and
the author of the report.
Issuers will need to re-evaluate everything
from acquiring new accounts to account recovery, wrote Riley, who
said that issuers must begin paying increased attention to how
customers use accounts, which will help issuers anticipate
problems. Existing models and metrics did not prepare issuers for
the credit crisis that followed in the wake of the subprime
mortgage collapse.
Tools that worked well before (such as linear
regression models that follow the month-to-month aging of payment
delinquency) have never been tested under the current extreme risk
conditions. In order to prevent systemic failure, issuers must look
at all functional processes to ensure that each business segment is
tuned to the new environment.
Although the US card industry is expected to
experience incremental credit losses during 2008, well-prepared
issuers will be able to protect the long-term potential of their
business. Issuers that withstand the storm will be positioned to
take advantage of failures in the market and poised to recover
quicker when the economy normalises, the report said. Credit stress
is likely to worsen in the short to long term, so issuers must turn
to deeper portfolio analysis as a hedge against further credit
losses. Credit cycles once predicted with relative accuracy by
existing tools will grow more unpredictable, and shifts in spending
categories could likely spell impending trouble.
For example, if a customer normally uses a card
to buy durable goods and other larger-ticket items, then suddenly
begins spending more on groceries and gasoline, it could serve as a
signal for greater issuer scrutiny of the account. Other signals
include sudden increases in credit balances, high daily transaction
volumes and sudden, repeated cash transfers.
“The purchasing behaviour of customers who
previously shifted their consumable purchases to debit cards and
now return to their credit lines should be scrutinised to ensure
that they are not revolving their balances for consumable or
monthly living expenses,” Riley wrote. “If they are, business
models must trigger account-level warnings to ensure credit
management functions react quickly when delinquency starts to rise.
Similarly, transacting accounts that now revolve should indicate
new layers of risk. Customers that were never delinquent and now
experience credit challenges need special handling
Revolving customers, who pay minimum due
amounts, were once industry darlings for their contributions to
interest revenue. In today’s uncertain environment, revolvers must
be scored aggressively to assess the risk, and models should be
supplemented with external data from credit bureaus and regional
demographics to understand the depth of their credit
In conclusion, the report emphasised that all
business models and scoring systems must be stress-tested against
new market conditions.