Traumatized by shrinking retirement assets and home values - job losses, too - consumers continue to dramatically cut spending while juggling their monthly bills to stay afloat.
Card issuers have been spooked. For years they have been using bureau scores and risk-based pricing to acquire new cardholders. It was a numbers game that worked when loss rates were 3% or 4%.
In response, some issuers have reacted to short-term performance results by raising annual percentage rates (APRs), reducing credit lines and increasing fee structures on accounts through the use of a non-targeted, broad-brush approach. While such “batch type” programs can be implemented quickly and cheaply, they more often than not damage issuer relationships with good accounts, while failing to weed out all the risky ones.
For example, reducing credit lines of long-term account holders can backfire if the cardholders decide, “If I can't use it, I won’t pay it.” Reliable cardholders may be alienated as well, taking their business elsewhere. Issuers should be careful to take special care in the way they treat existing customers – or risk losing their loyalty when their circumstances improve.
Return to Judgment
In this challenging environment, bureau scores and long-standing risk models are no longer up to the task. Just as many financial institutions “outsourced” their risk management by relying on ratings agencies to evaluate their investments, many issuers were too dependent on credit scores in evaluating cardholders.
Issuers should look again at scores to identify the factors that are driving some cardholders to delinquency so that they can develop and offer appropriate treatments. Issuers experiencing deterioration need to adjust cut-offs and rebuild or develop supplemental models to augment what they currently use.
Banks also should view customers through a sophisticated and holistic profitability framework that accurately identifies their “best customers.” The goal of delinquency management should be to keep cardholders as customers whenever possible, of course.
The challenge: how to maximize collections without unnecessarily turning accounts into chargeoffs or otherwise alienating those cardholders who still have the potential to remain valuable customers in the long term.
To do that, additional information should be weighed: customer employment, income, residence, time in residence, number of cards owned and payment history of utility bills. Then factor that information against market data for the specific region, such as foreclosure or charge-off rates and jobless rates.
A group of delinquent customers who have broader relationships with the bank likely should receive preferential treatment over delinquent cardholders who use only one of the bank’s products.
Next week, return to
Richard Openshaw is the Global Solutions Leader of the Credit Risk team within MasterCard Advisors’ Risk Management, Fraud, and Operations Efficiency practice.
