Challenging times for credit issuers require new
thinking in the area of collections and recovery. CI spoke
with Daniel Melo and Janice Horan of global credit scoring and
analytics specialist FICO about how changing usage of credit cards
is driving a re-evaluation on the part of issuers when it comes to
minimising defaults.


The woes of the US credit card industry are well-documented by
now. Slumping payment volumes combined with rising losses are
forcing issuers to decline a greater number of card applicants than
before, slash existing credit limits, and increasing political
scrutiny of the way issuers charge fees and interest is also adding
to the pressure on profit margins.

According to research from Credit Suisse First
Boston, in January 2009, total used and unused credit lines
continued to drop at the largest US credit card issuers, following
on from a quarterly report from the FDIC which showed that total
available credit lines fell by $470 billion (or 8.7 percent) in the
fourth quarter of 2008 and $542 billion (9.9 percent) for the full
year 2008, marking the first annual decline in credit lines since
1990. Estimates from Credit Suisse point to available credit lines
declining by between 15 to 20 percent over the next 12 months.

With a record unemployment rate expected to
accelerate the level of credit card defaults in the months to come,
issuers are now placing more emphasis on pre-emptive action and
identifying changes in the way financially stressed consumers use
their credit lines to mitigate against future losses.

According to Daniel Melo, solutions management
expert, and Janice Horan, senior director of solutions management
for the Europe, Middle East and Africa (EMEA) region at global
credit scoring and analytics specialist FICO (formerly Fair Isaac),
despite widespread perception of falling credit card volumes, some
surprising anomalies are appearing in consumer usage of credit

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Riskier cardholder

“If you look at the general industry
trends you see that retail spending is down and the cost of living
is down enough to be worrying consumers,” Horan told CI.
“You may have the assumption that it would be impossible to see
increased spending on credit cards. But where you are seeing
increased spending on credit cards, it’s coming from exactly the
people that you would prefer not to see allocating that spending
onto a credit vehicle.”

“What we’re seeing is that more and more
clients are going over the credit lines on their credit cards to
attend to their basic needs, like gas purchases or groceries, and
this brings into focus that the people who the industry would
prefer not to be using their card are now using their cards,” added
Melo. “High-risk clients are now using the product in contrast to
the normal behaviour we saw previously.”

The source of this worrying emerging trend
came from US survey data which focused on subprime customers –
meaning those with credit scores below 680 as measured by FICO.

Horan said: “When these customers were asked,
given limited resources if you had enough money to make either a
credit card payment or a mortgage payment but not both, by a 2-to-1
margin those subprime customers said they would make the credit
card payment.

“There were some theories about why that is,
mainly to do with the fact that it’s typically harder to foreclose
on a home than it is to cut off access to credit privileges. But
it’s not a trend that we had seen in other individuals and it’s not
a trend that we had seen in earlier generations,” she added.

Another factor causing concern, and which was
absent in previous recessions, is the use of automated billing on
credit cards, which can cover anything from gym membership,
subscription services, utility bill payments and so on.

“When past recessions have hit, credit cards
have typically represented more discretionary spending, so it was
easier for consumers to decide against things like clothing
purchases or luxury purchases, vacations and so on,” Horan told
CI. “When you have everyday expenses for the sake of
convenience rolling on to your credit card, it’s much harder to cut
back on that spending.”

Re-evaluation of risk

It is precisely these emergent usage
trends, combined with fears over escalating defaults and credit
losses in the months to come, that are underpinning industry-wide
re-evaluations of risk management and customer relationship
management practices.

“One of the things that card issuers did was
to look at their potential contingent risk and contingent
liabilities from cards that were not currently active, because what
typically happens in a recession is that people, particularly when
they see their income cut, look for available sources of funding,
and that piece of plastic that’s sitting in your wallet that you’ve
forgotten about over the last several months is a very convenient
mechanism for getting access to funding,” continued Horan.

As a result, issuers both in the US and UK
have actively cut credit lines and cancelled dormant accounts in an
effort to mitigate against what could be classed as increasingly
risky behaviour on the part of cardholders.

But other forms of action are taking a more
pre-emptive approach, which aim to identify future areas of concern
from current cardholder behaviour, as Melo explains.

“We must know our customers, now more so than
any other time before in this industry. That’s why we emphasise the
need for the concept of decision management. Every aspect of the
life with the client and every aspect of their behaviour must be
taken into consideration to drive the next actions to be taken,” he

“If a customer that changes their behaviour or
if a customer appears to be starting to change the trend of their
credit card utilisation, we must drive all of our decisions and
actions towards this new behaviour. For example, when you have a
customer in collections you need access to all their decisions and
transactional history, plus all the actions taken on that account
and with that customer,” Melo added.

However, Melo stresses that a sudden change in
cardholder behaviour need not necessarily lead to defaults further
down the line. “Some of those customers will go to collections but
it doesn’t mean they are bad customers. They become a collection
client, but it could mean that they are just passing through a
problem, and they might need more counselling and might need more
services, rather than just additional pressure from the issuer to
pay money back.”

Best-in-class collections

In such cases, better customer
knowledge plus access to decisions taken by the issuer with a
particular customer will provide best-in-class collections and
recovery practices, according to Melo.

“In these turbulent times, the best
treatment and the best service you can provide, the lower risk and
the more satisfied customers you have. This is the time to get down
to the basics, to the best customer service, providing proper
information at the proper time to the client, and having the
foundation on the operational side well served,” he told

It could even be said that issuers are now
taking a more holistic approach to collections strategies, with
issuers keen to shed the image of merciless debt collectors in
favour of a more customer-orientated advisory approach.

“Part of the reason for that is that a typical
customer now has multiple creditors that they’re trying to
rationalise payment towards,” Horan told CI. “In some
ways, that means that an individual credit card issuer needs to
think of itself as having a competitively distinctive collections
approach that will single it out from all the other collectors that
are calling into the household.

“During the mid-1990s downturn in the US,
companies like MBNA and First USA adopted a customer
service-orientated customer approach, and that meant that consumers
that were hearing from them were paying them first because they
were nicer than the other collectors who called,” Horan added. “We
also started to hear from some of our national auto lenders who
told us that the credit card issuers were getting paid and the auto
lender wasn’t, which meant that the collections activity that was
being taken actually effectively shifted the payment hierarchy for
the consumer.

“That taught the industry a lesson about how
powerful a respectful friendly approach could be when it came to
approaching younger borrowers in particular who had an expectation
that they were somehow entitled to credit, as well as a
consultative approach for customers who were finding themselves
with collection problems for perhaps the first time in their adult

Lessons from previous

A valuable lesson was learned during
the South Korean delinquency crisis of 2003, one of the more severe
customer-driven recessions in recent times.

Horan told CI: “Essentially
the government decided it needed to stimulate consumer spending, so
mass issuance of credit cards took place, and lo and behold, maybe
as many as 30 percent of the people they gave credit cards to
really shouldn’t have had them in the first place.

“Even when you talk about a 30 percent
delinquency rate, 70 percent of your customers are still current,
they’re still behaving the way you want them to, and when you start
to think about the loss rate calculation and losses over
receivables, there’s two things that can happen,” Horan continued.
“One is that absolute losses can go up by a higher magnitude than
receivables go up. But the worst kind of problem to have is where
you stabilise absolute losses or you’re bringing absolute losses
down, but the receivables are shrinking faster, so your loss rate
is going up but you’re being a very effective collections
organisation, and that kind of things happens all too often in this
kind of situation because issuers start focusing exclusively on
risk and forget to focus on revenue and receivables growth.”

The need to establish better communication
lines is not just restricted to issuers and their customers –
issuers are now seeing the need for greater data sharing with each
other and to reach at-risk customers at an earlier stage than would
have happened previously, and this is also driving issuers to place
more importance on the analytical capabilities they have in

“One of the things we’re seeing is that
companies that had previously thought they had not needed
sophisticated analytics or robust collection systems are very
rapidly changing their minds and are very aggressively trying to
get something implemented,” Horan told CI. “In that
respect, we have seen an increased demand from issuers for a number
of different things, including credit line management programmes
that will allow a view of which accounts they may still have the
opportunity of increasing credit lines on, so that they preserve
the revenue coming into a portfolio, and credit line decrease
programmes so again they can look after that contingent liability

“We’ve also seen some collections optimisation
projects being requested. One of the things banks in particular are
dealing with is that capital is scarce, and when that is the case
the ability to invest in staffing and technology may be very
limited and narrowed from what may have been formerly the case.
When that occurs, any type of score or any type of optimisation
technique that allows you to really rationalise where you’re
placing those finite resources and how you’re prioritising those
treatments has a tremendous operational and financial impact on
your organisation.”

Credit availability

Used and unused credit lines – US
cards ($bn)


October 2008

November 2008

December 2008

January 2009

American Express





Bank of America





Capital One










JPMorgan Chase










Source: Credit Suisse, US Treasury, company