Charles Davis reports on how US
payment research consultancy TowerGroup is urging issuers to learn
lessons from history in order to ride out the impact of the
deteriorating US credit market and higher delinquency rates.
A new report from TowerGroup paints a grim
picture of the US credit market and urges issuers to focus narrowly
on their existing customer relationships to ride out what is
looking like a perfect storm of higher delinquency rates coupled
with lower consumer spending.
Leaning on lessons learned during past economic
downturns could help issuers survive the current crisis, wrote
Dennis Moroney, a senior analyst at TowerGroup focusing on the bank
card industry. Moroney reports that the lethal combination of
higher delinquencies and slower spending rates could drive down the
return on assets (ROA) for issuers’ credit card units this year,
and concluded that the ROA for credit cards in 2008 could be as
much as 15 percent lower than the 3.46 percent reported last
Moroney found many consumers are relying more
heavily on credit cards because the ongoing crisis in the credit
markets has banks more reluctant to issue some other types of
loans, such as home equity lines of credit. That has sharply
increased card delinquencies, which means credit card issuers’
prospects for getting new cardholder accounts are “increasingly
risky”, he wrote.
The 2007 levels already were lower than 2006
ROA levels, even as US banks rely on strong ROA performance from
credit cards to boost their profits.
All is not lost, however, as Moroney also found
that credit card issuers can still find hidden revenue
opportunities by focusing business strategies on member and
customer retention and expansion, rather than acquisition. To
weather the current storm, issuers can learn from the past, Moroney
“To succeed in today’s economy, issuers must
implement more customer-centric business models – approaches that
identify ways to reward existing customers and encourage continued
loyalty and card use,” he wrote.
Technology today allows issuers to more closely
monitor macro-level portfolio metrics such as outstanding balances,
delinquency, bankruptcy and charge-off rates, which can make a huge
difference in earnings.
The report, Credit Crisis: What Card Issuers
Can Learn from Previous Economic Downturns, is a sobering reminder
that the worst of the current credit crisis is far from over, and a
snapshot of the damage done thus far.
Earnings for all US insured institutions in
2007 were $105.5 billion, a decline of $39.8 billion and over 27
percent from 2006. This is the lowest annual net income for the
industry since 2002 and the first time since 1999-2000 that annual
net income declined.
The drop in earnings was concentrated among the
largest institutions that dominate the credit card industry. The
Federal Reserve noted this was the first time in 23 years that a
majority of insured institutions had not posted full-year increases
in earnings.
Institutions that were unprofitable in 2007
exceeded 11 percent, the highest rate since 1991. The average
return on assets for all institutions for 2007 was 0.86 percent,
the lowest yearly average since 1991, and it was the first time in
15 years that the industry’s annual ROA was below 1 percent. Nearly
60 percent of institutions reported lower ROAs in 2007 than in

Non-interest income declines

Provisions for loan losses continue to mount, acting as a
significant drag on earnings. In 2007, insured institutions set
aside $68.2 billion in provisions for loan losses, which is more
than double the $29.5 billion they set aside in 2006.

Loss provisions represented 11.6 percent of net
operating revenue (net interest income plus total noninterest
income), the highest proportion for the industry since 1992. Total
noninterest income of $233.4 billion was $7.0 billion, 2.9 percent
less than that in 2006, and the Federal Reserve reported this was
the first time since the mid-1970s that full-year non-interest
income declined.
Moroney wrote that, until economic market
conditions improve, issuers should increase and intensify their
efforts to retain and expand their relationships with existing
customers whose credit risk is more predictable than new customers’
risk. Issuers should identify ways to reward existing customers and
encourage continued loyalty, an approach that TowerGroup refers to
as “a customer-centric business environment”.
The first tenet card issuers need to follow is
that “the customer rules”. An expanding economy makes it easy to
replace a customer, but a challenging environment inverts this
dynamic, the report said. The typical credit card issuer produces
daily, weekly, and monthly reports about customers’ behaviour. The
typical report includes information on what customers are spending,
how they are paying, and how they are responding to the latest
marketing promotion.
Although these metrics are important, they may
not be the best measures in the current market to gauge customers’
satisfaction and potential for retention.
TowerGroup’s research indicates most issuers do
not regularly survey their customers to determine if they are
satisfied. Therefore, they are missing a golden opportunity to
improve their relationship by asking cutomers their opinions on
products and service. Banks also can use survey information to
improve product designs. Survey data can be a vital source of
information on customers and an important metric to track, and its
use is vastly underrated, Moroney wrote.
In addition to more precisely monitoring the
customer relationship, the report recommends issuers work to
communicate more regularly and more clearly with the cardholder
The study indicates the monthly billing
statement is the one communication sent by the credit card issuer
that most customers read. The monthly statement is also credit card
issuers’ least effectively utilised communication channel.
“Credit card issuers spend millions of
marketing dollars to figure out how to encourage a prospect for new
credit card account to open an acquisition offer and apply for a
credit card,” Moroney wrote. “The majority of credit card issuers
do not devote the same money and energy to their monthly statement
communication channel.”
Increased analytical depth, combined with more
regular communication and the willingness to assume more credit
risk once consumer markets have stabilised can lead to real
opportunities to solicit consumers who have been adversely affected
by the subprime mortgage collapse.

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