Back-Office Costs Pinching Banks' Credit Card Profits

The debate over credit card interest rates has turned a spotlight on operating costs and, unfortunately for bankers, these costs have been rising.

Even the banks that are most aggressive in cutting credit card costs through automation say that shrinking loan balances and higher delinquencies are offsetting any savings achieved in their computerized infrastructures.

Total operating expenses at credit card banks increased 13% this year, according to The Nilson Report, a card industry newsletter based in Los Angeles. It based its estimates on data supplied by a cross section of industry sources.

While automation initially lowered expenses in bank card programs, industry experts say that most banks have gained about as much efficiency through computerization as they can.

The sophisticated, high-powered computers and software that were designed to reduce back-office costs are of little help in controlling such fast-growing expense areas as collections and credit reporting.

Bankers have been citing the high costs of credit card operations in their defense against the call by Congress to lower interest rates.

Data processing expenses increased 8% this year over 1990, although they were unchanged as a percentage of outstanding credit. Expenses related to credit reporting agencies and background checks were up a whopping 26%.

Slow Payoff on Technology

"Without growth in outstandings, I can't keep up with this pace," said Collin G. McKenney, senior vice president at Star Bank Corp., Cincinnati, which has a $160 million credit card portfolio. The bank charges 19.8% interest on its cards, a rate in line with the industry average that has come under attack.

Star's overall operating expenses increased 6.7% this year. But as a percentage of outstandings, expenses are drifting down. Last year, operating expenses equaled 4.29% of outstandings.

The Cincinnati bank expects that number to be 4.15% this year, and estimates that operating expenses will be 4.03% of outstandings in 1992.

Star bank has invested in many technologies, such as image processing, automatic dialing systems, expert system software, and credit scoring systems to better define credit risk. It has also moved to centralize credit card operations to drive down costs.

Ms. McKenney said shrinking outstandings and rising delinquencies will offset cost-cutting successes in the bank's 80-person credit card operation.

Reductions Treading Water

Unlike some institutions, which have seen a rise in credit card debt, Star's outstandings were down the last two months.

"Unless somebody comes up with some new high-tech solutions, like a way to electronically send statements to customers' television screens," the bank has peaked out on expense reduction through automation, Ms. McKenney said.

Credit card analysts say this is the case for most banks.

"The economies of scale that have been created are not going to get substantially better," said David Robertson, president of The Nilson Report.

"Technology has about reached its peak in its ability to result in a reduction in operational costs. There's no reason to think that there will be great savings to come down the pike," Mr. Robertson said.

Delinquencies Loading Up

To make matters worse, banks must beef up collections staff because of the rise in delinqencies. Star, which has seen delinquencies rise 42% this year, recently hired seven full-time employees to help with the load.

Back-office expenses at large credit card banks also continue to rise. At Chase Manhattan Bank in Delaware, operating expenses for the first nine months of 1991 increased 12% over last year.

The figure includes chargeoffs and cost of funds, but a Chase spokesman said that much of the increase is attributable to higher operating costs, such as maintaining 24-hour customer service lines.

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