LAS VEGAS-When James Walsh was compiling a list of the Top 4 credit card risks, "fraud" was a surprise no-show
While important, the risk from fraud is currently being superseded by issues related to credit risk, compliance, interest income and interchange, said Walsh, CEO of Peterborough, N.H.-based credit card consultancy Brookwood Capital.
With the recession having a deep impact on employment, many people turned to their credit cards to survive. And for those unable to find new jobs, charge-offs and delinquencies for credit union-issued credit cards are up 69% and 42%, respectively, Walsh noted, adding rising losses are expected well into 2010.
The good news for CUs: the 10 largest credit card issuers are tightening credit-approval standards, lowering credit lines and shutting down accounts held by those with low credit scores. Into this gap, smaller issuers are approving more accounts, growing their balance per account and increasing their card assets.
With interchange income accounting for 50% to 100% of a typical card program's bottom line, Walsh sees two factors that may drive down revenue. First, interchange income is earned based on purchase volume, which has fallen sharply for three consecutive quarters as consumers increasingly turn to debit cards. Second, a coalition of merchants has filed a class action lawsuit against Visa, MasterCard and credit card issuers, alleging high interchange costs discriminate against smaller merchants. The suit further alleges Visa, MasterCard and card issuers are colluding to set interchange rates.
In addition to the suit, on June 5, House Judiciary Committee Chairman John Conyers reintroduced legislation that could mandate lower interchange rates.
Managing credit card risk in today's economy is a two-step process, Walsh advised attendees of an educational session at the Directors' Convention here. Step One is to identify and quantify the risk; Step Two is to create an action plan to mitigate the risk.
"First, create a separate P&L for the credit card program," he said. "Include multiple years for all credit card products and all past trends."
Next, issuers should forecast for three scenarios: leave the card program as is, invest money to reduce risk and improve card ROA, or transfer the risk by taking on a card partnership.
"For those who choose to invest, there is a deadline of Jan. 8, 2010, to create new products, write new disclosures and get them in the mail."
Options for mitigating card risks include: scoring the portfolio and assessing FICO drift, analyzing card pricing, assessing credit lines and exposure, implementing risk-based pricing, addressing interchange risks, and transferring the risk to a card partner.
