PETERBOROUGH, N.H. -
With data continuing to pour in from major consumer indices, including the Consumer Price Index (CPI) indicating that food and gas prices are leading the charge toward higher inflation, and MasterCard reporting on Bloomberg.Com that its Q4 2007 profits rose sevenfold led by consumer spending on gas and food, Credit Union Journal asked how the economic shakeout will affect credit card portfolios.
The bottom line: credit unions will need to be more active in developing strategies to ensure that their growth is from cardholders who can be expected to pay, said Timothy R. Kolk, managing partner at Brookwood Capital, which consults on various aspects of card portfolios.
Revolving Credit On The Rise
Overall, revolving credit usage on credit cards will increase in 2008. And as in the past two to three years, credit unions will see better growth than their banking peers. Unfortunately, some of that growth will due to consumers who are financially stressed turning to their cards to fund daily expenses, Kolk said.
“Fortunately for most credit unions, they are in a good position to identify which members are in that position,” Kolk said. “Figuring it out is not always easy, but they [credit unions] have a better ability to do so than many of the larger impersonal banks.”
As members continue to replace cash with plastic, card volume will grow, even if spending slows somewhat, says Jay Kurian, first senior vice president of TNB Card Services.
Kurian’s assessment suggests that credit union card portfolios will be increase between “4% and 10% depending on demographics and the geographic area of the country.”
Although credit unions will likely be betting on their card portfolios in 2008, not everyone agrees that growth in this area will be a sure thing. Some financial managers are guarded in their assessment of card volume in 2008, while one suggested that volume could even end up being flat.
“Transactions per account will fall slightly with purchase dollars per transaction rising,” said Kenton Potterton, director of credit services at PSCU Financial Services in St. Petersburg, Fla. “With the state of the economy and the publicity of the mortgage woes, we are anticipating a little more conservative usage on the cards.”
Potterton added that several issuers implemented rate floors following the previous low rate period so rates may not fall as much as in the past, an indication that card volume could be relatively unspectacular.
Historically, credit card volumes increase during economic downturns, observed Vinnie Calo, president of Fiserv Credit Processing Services in Lake Mary, Fla. “Currently, we are not seeing any evidence of this trend changing, however, that could change in the near future depending on economic variables.”
One of the unintended benefits of the current real estate slump is the potential for increased reliance on credit cards. During the most recent housing boom, many people made use of home equity as a kind of personal ATM. Now that housing bubble has burst, many people will find it difficult to tap into their HELOC like they used, so credit cards will be the next best thing, Kolk said.
“That could be troubling for issuers that aren’t closely monitoring cardholder behavior and risk,” Kolk warned. “While collecting on an overdue HELOC can be difficult, collecting on an overdue, unsecured credit card is far more difficult.”
Kolk said that cards have always been the first loan to go bad, and while the real estate market is creating its own perfect storm, card issuers will be in for a rough ride in the months and years ahead.
“It’s (real estate turmoil) part of the reason loss rates on credit cards have always been several times higher than any other loan product and why the largest financials are significantly increasing their loan loss provisions for credit cards for the coming years, he said.”
Fiserv’s Calo also cautioned that credit unions, and card issuers in general, may be headed for uncharted waters in 2008.
“As we move into an economic period that we’ve never seen before, we’re not sure how people are going to react,” he said.
Outstanding Balances May Reverse
There is evidence that the slow-down in the growth of outstanding card balances due to consumers transferring interest bearing balances to lower cost home equity loans may be reversing itself, according to Potterton.
“As rates rose, the fixed interest rate on many credit union cards resulted in more narrow spreads between the home equity rate and the card rate, thus the balance of transfers to home equity appear to have slowed,” he said.
Another factor contributing to the shift toward increased card usage will be lower home valuations. But again, those factors will be dictated by market demographics, Kurian added.
“There will be some level of increase in card usage as a result of these economic conditions, but what impact it has on card debt as a whole will vary depending on geographic area,” Kurian said. “In parts of the country where home prices are falling, we are seeing an increase in card usage.”
Despite the recent reduction in the federal funds rate to 3.0%, downside risks to card issuers remain specifically decreased margins and ROA, which Kolk says, “can be difficult to counter when loan losses and other expenses are ticking up.”
A Significant Downturn In Spending
Further worrisome is a recent report form the U.S. Commerce Department indicating a significant downturn in spending as consumers grapple with record-high oil and food prices. The report from the Commerce Department indicated that GDP grew at an anemic 0.6% percent in the fourth quarter of 2007.
Kolk added that when variable interest rates fall, fixed-rate cardholders start shopping for more competitive rates that can further affect the credit union’s bottom line.
“That, by and large, I think is an even bigger issue than losing margin on a variable rate product: you jeopardize entire relationships and are left with a pool of remaining cardholders that have a higher level of credit risk because the most creditworthy are those most able to leave for other offers,” he said.
Conversely, the tightening of credit and the deterioration of some receivables may actually increase credit card interest rates making some credit union fixed rate cards look more attractive, Calo said.
Because credit unions tend to offer fixed-rate cards, a more likely scenario would see credit union cards becoming less competitive with adjustable rate cards during low-rate periods, according to Potterton.
TNB’s Jay Kurian added that to cope with this situation, credit unions with fixed rate cards need to take steps to minimize cardholder attrition and offer promotional rates to acquire new cardholders. “Marketing efforts should also be increased to maintain top of wallet share among card members,” Kurian said.
MORE
Read more about how to gather and use member feedback at cujournal.com and searching the following bolded terms in the archive:
The Year Ahead...rise in consumer loans and credit card use
Real Estate Turmoil Could Be Credit Card Opportunity For CUs
For info on this story:
* www.brookwoodcapital.com
* www.tnbcard.com.
* www.pscufs.com.
* www.fiserv.com
