Credit card industry profits fell sharply last year primarily because of record numbers of consumer-account defaults caused by the economic downturn. But in their efforts to prevent further losses banks may have overreacted, one analyst contends.
For the first time in decades, total bankcard receivables at the end of 2009 were lower than the previous year, underscoring the extent to which issuers closed cardholder accounts and reduced borrowers’ credit lines to contain risk, calculates Robert Hammer, CEO of credit card consulting firm R.K. Hammer. Card industry pretax profit margin fell to 1.5% of outstanding receivables last year compared with 4.24% in 2008, his data show.
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 tells PaymentsSource. “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.”
Certain 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 says his research shows some 30% of customers opted to reactivate accounts in similar campaigns.
“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,” Hammer says. “It will be very difficult, if not impossible, to get those customers back.”
As the economy stabilizes, Hammer predicts that within the next year consumer defaults gradually will diminish, and bankcard issuers may see a return to greater profitability by late 2010 or 2011. But to regain customers’ trust, issuers must significantly increase their marketing and customer service efforts, he says.
“It may seem counterintuitive for issuers to start spending more money when their profits are at such a low, but this is precisely the moment when issuers need to invest in new card products,” Hammer says. “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.”
