Now that second-quarter results have confirmed a predicted rise in delinquencies and chargeoffs, credit card issuers are turning to precision marketing to stem the tide.

They had set the machinery in motion 18 months ago, industry observers said, when early indications of credit problems led to changes in underwriting criteria for new cards and more credit.

Card banks are now marketing to smaller pools of applicants. They have bolstered the technology that helps them mine data sources for prime candidates, beefed up collections of overdue accounts, and raised the bar in credit scoring formulas.

Many have moved to risk-based pricing, charging more to customers who pose greater risk. (See related story on page 22.)

"Everyone is pulling things out of their arsenals to keep things in control," said Robert McKinley, president of RAM Research Group, Frederick, Md. "During the last two years, no matter how sophisticated they are, people have been surprised by activity on plastic and the rapid rise in delinquencies."

Other observers said the rise in delinquencies is part of a 30-year cycle that must be weathered. Banks are tightening their belts and hunkering down for the long haul.

"There is a flushing out of the business through economics or self- imposed problems," said Robert Hammer of R.K. Hammer Investment Bankers, Thousand Oaks, Calif. "More money will be spent on precisely targeting the market."

Robert Skolnick, executive vice president of Behavioral Analysis Inc., Tarrytown, N.Y., said issuers are better equipped than in past downturns to deal with rising delinquency problems.

"Issuers are more sophisticated in technology for targeting purposes," he said. "They can target better, even with aggressive pricing, than they could three years ago, coupled with their ability to manage accounts more aggressively."

Collin McKenny, president of card services at Star Banc Corp., Cincinnati, said her company is marketing to a "smaller universe." Delinquency rates have been flat, she said, but chargeoffs are higher.

Ms. McKenny added that the bank has increased the credit score cutoff within the last year and a half and the loss provision for credit cards, as well.

Higher delinquencies "will continue to cause people to be focused on their modeling," she said.

Even under these market conditions, "everyone is out there, ready to eat your lunch," said Mr. McKinley of RAM Research.

The larger issuers, he said, will use "surgical marketing, information- based marketing" to forestall delinquencies and attrition. He sees a rise in issuers' using risk-based or punitive pricing, in tandem with 10% to 20% reductions in credit lines.

"People who are less creditworthy will pay 400 to 500 basis points more than those with a superb credit history," agreed Mr. Hammer, the investment banker. "The less creditworthy will pay more for credit, if they can get it."

Credit-line adjustments and risk-based pricing have been used for years by Wachovia Corp.'s credit card unit in Atlanta. During the last year, the company has imposed punitive prices of 300 to 600 basis points above normal rates.

John Russell, a spokesman for Banc One Corp., Columbus, Ohio, said it has scaled back its marketing within the last 18 months to target "a higher level of customer."

No significant change has been made in credit application forms, he said, but there are significant differences in the bank's credit scoring, where cutoff thresholds have been raised 5% to 10%.

"We have seen three or four economic cycles like this before, and our models are based on a long predictive history," he said. "We know more about people than we did a couple of years ago."

Mr. Russell, a former vice president in charge of marketing at Banc One, said upgradings of data mining technologies that have been built into the bank's Triumph software - developed by Andersen Consulting - help make more successful determinations.

He also said the company has needed to strengthen its collections division, paying closer attention "to retail credit collections, across the board."

Mr. Hammer said technology would separate winners from losers during the delinquency and chargeoff upsurge. Those who have bought, and effectively use, data base technology "will be in a better position to extract the better customers," he said.

But Mr. McKinley said there is some debate over the usefulness of predictive modeling. He cited "the changing environment" that puts a premium on identifying creditworthy customers and retaining those who are already profitable.

Mr. McKinley said mailings, which set records in 1994 and '95, would subside this year by about 30%. He said the industry would probably mail 1.7 billion solicitations, and the response rate, which has been "lousy," will probably average less than 1.5%. Response rates have been 5% to 6% for the last couple of years.

Mr. Skolnick of Behavioral Analysis, however, said mailings would hold steady this year - not dropping significantly from last year's roughly 700 million per quarter.

"Although mailings are comparable to last year, the ability to book accounts is being impacted by going after better and more credit-worthy folks who have less need of credit," said Charles Hegarty, senior vice president and director of marketing at Wachovia Bank Card Services. "They are less likely to respond.

"It's time to be more prudent," he added. "Our delinquencies and losses are trending upward."

Smaller or regional issuers that cannot afford the sophisticated technology are widely expected to sell their risky portfolios and stick close to home.

"If you are not up there with the top 10 and ready to be really aggressive and competitive, then you have to think about what your point of difference is," said Patricia Hudson, president of Porges/Hudson Marketing, a San Francisco consulting firm.

She said the smaller banks could find such an advantage in their stronger ties to local customers.

Cynthia Graham, president of Barnett Card Services, a midsize issuer based in Jacksonville, Fla., said her company has always emphasized retail banking relationships and finds them "a real advantage" on the card side of the business.

After being hit hard by chargeoffs of 6.4% in the second quarter of 1996, Barnett Banks confirmed in July that it is considering selling its 1.7 million portfolio or finding a partner for the business. The possible sale or partnership follows a year of rapid growth for the bank where its card portfolio expanded by 30%.

"We know more about the financial picture" of the customer, she said, "because they do more things with us."

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