Everyone talks about the ways in which the credit card industry is a mature one, but perhaps one of the biggest testaments to this description is the resounding lack of alarm with which card executives are facing 2002, a year that, by most expectations, may turn out to be among the worst of times on the consumer credit front.
Personal bankruptcies, which inevitably hit card lenders the hardest, continue their relentless ascent. Chargeoff rates for major credit card portfolios which used to hover in the once-worrisome 2% to 3% range before the industry was deemed mature are also climbing, with rates of 5% now considered admirable. Card lenders are all amassing loan-loss reserves to cushion themselves against anticipations of rising unemployment, continued recession, and other factors that could hinder consumers from paying off their credit card bills.
There are several reasons that panic has not set in. The maturity of the industry a shorthand term that seems to refer to everything from the rapid consolidation among card lenders to the sophistication with which card products are priced and marketed means that card companies have learned over the years what steps they need to take to run their businesses profitably in lean times.
Another factor that is more particular to the current climate is the increasing popularity of debit cards, which made big advances in 2001 and are expected to gain a lot more market share in 2002. As people rely more heavily on debit cards which are essentially no different from the secured cards that lenders issue to risky borrowers, as both are backed by a deposit account there is more breathing room in the credit card realm. Its safe to assume that at least some people who fear they could fall into trouble by spending too much on their credit cards are trying to avoid this behavior by using debit cards, which only let them spend as much money as they safely have.
At Moodys Investors Service in New York, analysts who track $335 billion worth of securitized credit card receivables a little less than two-thirds of the total outstandings in the United States say they expect that chargeoffs and delinquencies will continue to rise for at least the first few months of 2002, but that there were still a lot of factors working in the industrys favor.
The 11 cuts in interest rates have given issuers of securitized credit card debt a break on their variable rate cost of funds, said William Black, a vice president and senior analyst at Moodys who puts together the companys monthly credit card index. What weve also seen is that yield for the industry, that is, the APR-plus-fees component, has actually been quite stable despite the cuts in interest rates, and that just shows the amount of discretion that issuers have to reprice their portfolios.
Stable yields also show that most of the big issuers are successful at using risk-based repricing technology to hike rates for the riskier segments of their portfolios, Mr. Black said.
The other bit of good news in terms of performance, he said, was that despite the deterioration in delinquency and chargeoff rates, Weve seen the payment rate the percentage of balances being paid each month remain quite stable within historically high ranges within the last 18 to 24 months, which is certainly good news to asset-backed investors.
The American Bankers Association last week reported the somewhat counterintuitive finding that a greater percentage of credit card accounts were paid on time in the third quarter than in the second quarter. That just demonstrates obligors willingness and ability to pay back their debt, as they have been, despite whats been going on, Mr. Black said.
Daniel J. Frate, the president of Bank One Corp.s First USA credit card unit, called 2000 the best [year] since the mid-90s for the credit card industry, and said that while rising bankruptcies and slow economic growth put pressure on the industrys margins in 2001, the cost of funds has really been our saving grace, offsetting the credit problem.
Mr. Frate, who gave his views on the state of the industry in a November speech to the 2001 Card Marketing Conference sponsored by Thomson Financial in Orlando, said the card industrys chargeoffs for this year will be $30 billion, double the amount of five years ago. Ticking off some of the problems in the card business, he cited the glut of mailed solicitations, the teaser rate deadlock that has us all competing with loss-leading introductory rates, and the saturation of cards among creditworthy consumers.
While the good news is that 82% of households have our products, the bad news is that 82% of households have our products, and its been that way four years, Mr. Frate said. We are in a maturing, consolidating industry with a commodity-like product whose customers are pressured by a tough economy, and were stuck trying to undercut the other guy with our offers.
Nevertheless, Mr. Frate said he was still excited by the industrys potential, and talked about how cards are still making progress in displacing cash and checks, and how Internet transactions continue to enlarge the pie. Im very bullish on this industry and our ability to seize opportunity, he concluded.
Carl F. Pascarella, Visa U.S.A.s president, also emphasized the promise of the future over the shakiness of the present in a speech he delivered in November at TechMecca 2001 in Arlington, Tex., sponsored by Pulse EFT Association, the Independent Bankers Association of Texas, and the Texas Credit Union League. He said Visa is heartened by the expectation that the volume of e-commerce payments will double between 2002 and 2004.
If we truly want to read the future, weve got to see through the fog of war, and past the current economic turbulence to the permanent forces of technological change, Mr. Pascarella said. At Visa, it all starts with the realization that the future of consumerism is online.
