Issuers' aggressive efforts to close credit cardholders' accounts last year shrank portfolios and will probably cut into profits this year, according to an analyst.
For the first time in decades, bank card receivables at the end of 2009 were lower than the year before, underscoring issuers' decisions to close accounts and cut credit lines to contain risk, said Robert Hammer, the chief executive of the credit card consulting firm R.K. Hammer.
Total receivables were $935 billion at the end of 2009 and $950 billion a year earlier. The card industry's pretax profit margin fell to 1.5% of outstanding receivables last year, compared with 4.24% in 2008, his research showed. And a return to higher profit margins will be slow, particularly because many issuers went too far in trying to reduce risk during the crisis.
"While there is evidence that consumers are using credit less and relying more on prepaid and debit cards as fallout from the recession, the biggest part of the runoff in credit card receivables was caused by issuers' chasing customers away by closing inactive accounts and being too aggressive," Hammer said last week. "When they closed customers' accounts without giving them a chance to respond, issuers cut off the opportunity to market credit cards to hundreds of thousands of customers. That is going to hurt their profits further this year."
Some issuers, including JPMorgan Chase & Co., took a gentler approach to handling inactive accounts, sending letters to cardholders notifying them it would soon close the account unless they began using it. Hammer said about 30% of people who got such notices opted to begin using their cards.
"Issuers that gave customers a chance to keep their accounts open got great results from those efforts, but too many issuers just shut down the accounts with no discussion," he said. "It will be very difficult, if not impossible, to get those customers back."
Hammer predicted that consumer defaults will gradually diminish within the next year and that issuers will probably see stronger profits by late 2010 or 2011. But to regain customers' trust, issuers must significantly increase marketing and customer service efforts, he said.
"It may seem counterintuitive for issuers to start spending more money when their profits are at such a low," he said, "but this is precisely the moment when issuers need to invest in new card products. Card issuers need to give people excellent customer service and flexibility in choices in the type of rewards they may earn. Some of the burn-off needed to happen — consumers were overextended. And we may never see the levels of credit card usage we had a couple of years ago, but consumers will come back to credit cards if issuers make it worthwhile."
