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This story appears in the December 2008 issue of Cards&Payments.
The economic downturn is affecting all corners of the payments industry. Credit card issuers are smarting from increasing charge-offs, and consumers are cutting back on spending.
With lower anticipated revenue and higher anticipated losses, planning for the next several quarters, particularly in the areas of marketing, staffing, and investments in technology infrastructure and new products, will require more care and foresight than ever, analysts and company executives say.
Major bank mergers already have reduced the number of jobs available in the payments industry, and observers say they expect issuers alone to cut 10% or 20% of their workforce as a result of the economic crisis.
Card-issuer marketing budgets also have declined in recent months, particularly as issuers pull back on direct-mail solicitations.
Meanwhile, forecasts are mixed on how the continuing economic crisis will affect planned spending for payments-related technology–from such basics as new card issuance and infrastructure maintenance to planned pilots and rollouts of new products.
"We're forecasting an [information-technology] slowdown for certain geographies around the world," said Jim Eckenrode, banking and payments research executive for TowerGroup Inc., during a conference call and Web presentation for clients in late October. U.S.-based TowerGroup is an independent consulting firm owned by MasterCard Worldwide.
"We do see a reduction in discretionary spending," Eckenrode added. "It does not apply to all institutions or even all business lines."
Right now, the upheaval in the banking system has disrupted many plans, but the chaos will calm down following a wave of bailouts and restructurings that began this fall, Eckenrode said. "Conditions will continue to be challenging in 2009 and into 2010, but I don't think it's going to be as dramatic as what we've seen in the last couple of weeks."
In the epicenter of the credit crisis, the United States, the bad-debt spotlight now is turning from mortgages to unsecured debt. The U.S. credit card charge-off rate rose to 6.82% of overall card receivables in August, up from 4.61% during the same period of 2007, according to Moody's Credit Card Indices, which track more than $435 billion of U.S. bank credit card loans that back the securities Moody's rates.
The increased charge-offs marked the 20th consecutive month of year-over-year rate increases, according to Moody's. Major credit card issuers, which have seen card charge-offs increasing over the past year, are projecting their credit card charge-offs to rise even higher in 2009 (
"Unemployment weakness is expected to continue into and through a good part of 2009, with the possibility of unemployment rising above 7%," Kenneth Lewis, chairman, president and CEO of Bank of America Corp., told investors during a conference call on Oct. 6 after BofA announced its third-quarter earnings.
What will that mean for charge-offs? "With current net losses at 6.4%, should unemployment rise above 7% we would expect to see (net charge-off losses) exceed" 7%, Joe Price, BofA chief financial officer, said during his conference call presentation.
In discussing Citigroup Inc.'s third-quarter losses during a conference call with investors and analysts, Gary Crittenden, Citi chief financial officer, said net card charge-offs could "exceed historical norms" during rising unemployment this time around.
One new twist affecting issuers' bottom lines in this economic cycle is the cost of securities to back card debts. Citi's securitization trust already is earning lower revenue from institutional investors less enthusiastic about betting on the profitability of credit card receivables, Crittenden noted. "This quarter, $2.5 billion of the total decline was related to securitization activities in the North American card business," he noted (
Issuers should not be surprised to see card-securitization costs rise, according to Paul Tomasofsky, president of U.S.-based Two Sparrows Consulting LLC. "If over the last few years risk has been underpriced, we're going to be, in the next few years, seeing risk overpriced," he says.
Despite the bad news, fire sales of troubled bank portfolios and company assets will continue to create bargains for companies with the cash to pounce on such opportunities. But such mergers and acquisitions can be disruptive for payments-industry players as well.
In the wake of the announcements in September that JPMorgan Chase & Co. would absorb Washington Mutual Inc. and in October that Wells Fargo & Co. would snatch up Wachovia Corp., transaction processor Total System Services Inc., which processes credit card transactions of WaMu and Wachovia, announced its third-quarter earnings three weeks early. TSYS reassured investors that its business is sound despite the potential loss of two card-processing contracts because of the acquisitions.
TSYS has long-term processing contracts with both WaMu and Wachovia that include early-termination fees that any bank taking over their portfolios would have to pay, Philip Tomlinson, TSYS chairman and CEO, told analysts during a conference call.
Furthermore, aging in-house processing systems and pending U.S. Federal Reserve rules related to credit card interest rates and fee and policy disclosures could convince more American issuers to farm out their card processing to third parties such as TSYS, Tomlinson added. "We've talked to some issuers who say that they'll have to use every technical resource available to them for the entire year of 2009 to comply with the Fed's rules on credit cards," he said.
For Visa Inc. and MasterCard Worldwide, bank mergers and acquisitions serve as new moves in their branding chess match. Chase has not said whether it eventually will migrate WaMu's debit cards from MasterCard to Visa, for example, but the acquisition certainly gives Chase a bargaining chip with both card networks eager to preserve or increase the number of cards issued with their brands.
"Because there are fewer banks out there, they hold more of the marbles," says Red Gillen, Celent LLC senior analyst, referring to the larger banks created through consolidation.
The coming quarters will offer opportunities, but only for those who can weather the challenges. CP
