PETERBOROUGH, N.H. - The continuing problems in the U.S. economy are spilling over into credit cards, according to industry analysts, and that includes credit union issuers.
Tim Kolk, managing partner of Brookwood Capital, based here, told Credit Union Journal the entire credit card industry is seeing chargeoff rates of up to 100% higher than a year ago.
"Every credit card issuer is running scared, not just credit unions," he said. "None of the large issuers are predicting a rebound until 2010. It is a very dangerous time right now."
There is a dichotomy in credit card use by American consumers, Kolk reported. Some people are using their credit cards less because they are trying to control their spending. But more worrisome, he said, is the segment that is using their credit cards for everything-including gas, groceries, cash advances, etc.
How bad are things in the credit card space? According to Kolk, for the first time some credit union card portfolios are showing losses at the level of banks' portfolios.
"For years credit unions were insulated-their credit card losses were a third or a half of typical bank losses," he explained. "This is happening for a couple reasons. One, many credit unions have expanded their charters to take in the community, and those people are going to behave like typical bank customers. Second, many credit unions have been aggressively growing their card portfolios, and if there was a time they shouldn't have been growing aggressively, it was the last 12 to 18 months."
Kolk said part of the blame lies with credit card processing organizations and trade groups, which urged credit unions to market aggressively and place cards in more members' hands, leading to CU credit card portfolios growing faster than those of banks.
"For a credit union that manages risk well, and is in a relatively stable economy, this is good news," he said. "Unfortunately, a lot of the growth has been in places that should make credit unions nervous: Southern California, Nevada, Arizona, Florida and Michigan-all trouble spots in this economy. The people who were cheerleading growth were more focused on growth than risk management."
Kolk projects that once a credit card portfolio runs into trouble, it takes two to three years to correct it.
"There is no quick turnaround," he declared. "It takes endless blocking and tackling to manage risk on an account level. This means issuers must go into files of accounts every day and figure out who has good credit and give them more, and who is dangerous and take it away."
Big Red Flags
If members' credit scores are declining, or they are not paying other lenders-missing auto or mortgage payments, even by a couple days-these are big red flags for CUs, Kolk continued. "Unfortunately, many people today declare bankruptcy with little or no red flags. Consumers used to creep toward default; today it can be overnight."
Asked what strategies are CUs are or should be using in an attempt to build card market share-both credit and debit-given current economic conditions, AssetExchange's Dubois said the market offers the possibility of reward, as long as risk is taken into account.
"As larger issuers continue to tighten underwriting standards and reduce credit limits, credit unions have an exceptional opportunity to demonstrate their value to their members," he said. "But we are advising clients to be cautious in their growth strategies. For instance, rather than running a low-rate balance transfer promotion, credit unions may try running a campaign which highlights the competitive pricing of their cards and the fair treatment members receive relative to the big banks. This is especially timely with the recent media coverage and strong consumer reactions to credit card legislation."
Kolk added that while some credit unions might still want to build market share, for those whose card portfolios are troubled, market share is the least of their worries-perhaps to the point of not being credit card issuers any more.
"If a credit union has Citibank, Wells Fargo or Capital One in its market, and the card portfolio is in reasonable shape, then it might be in a place to pursue market share, because those banks are really beat up," he advised.
Kolk said it is important for CUs to keep in mind that credit cards are not a lead product. He said the best strategy is to pursue an entire relationship, which usually starts with a deposit, checking or CD product.
"A credit card is something you throw into a relationship," he said. "It is important to know the member before throwing a lot of new cards out there. Cards are the riskiest lending product, meaning a credit union must be careful giving a new member a card with a large limit.
"If I was a credit union, I would expect my credit card business to make me less over the next two or three years than it has over the last 10," he added. "It is kind of beat up right now."(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
