Editor's Letter: Large Versus Small

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This Editor's Letter appears in the August 2009 issue of Cards&Payments.

Among credit card issuers, size apparently does matter, at least in terms of how well they manage risk. And it's the smaller issuers that appear to have the edge.

In this month's cover story, Cards&Payments Associate Editor Kate Fitzgerald analyzes comparisons in the charge-off rates between the top five card issuers and a sampling of five smaller ones (see story). The results are quite shocking: Whereas charge-offs among the largest issuers in 2008 ranged from a low of 4.07% of total accounts held at JPMorgan Chase & Co. to a high of 9.32% at HSBC North America Holdings Inc., none of the smaller issuers in the sampling had rates that exceeded 3.9% (see chart).

Still, the experts say, scale will be important to the survival of card issuers as they work to manage risk and stay on top of new regulations that go into effect next year. So despite their ability to manage risk better, many smaller issuers may sell their portfolios because they lack sufficient scale.

My suggestion: Large issuers that might buy smaller portfolios should include in those deals the executives who manage their risk. They're apparently doing a better job than their big-bank counterparts.

Interestingly, some smaller banks see the problems their larger cousins are having as an advantage. Brian McCaul, vice president of bankcard sales at Zions Bank, says when big issuers are cutting customers' credit lines and raising rates and fees, he sees that as an opportunity for his institution to grow.

Zions avoids so-called "teaser" rates, and it uses fairly strict underwriting guidelines, he says.

Though such a strategy might be helping smaller issuers to keep their charge-offs low, it also may be helping produce a larger customer base that tends to pay off balances each month. Some observers believe if U.S. lawmakers cap interchange rates, that could adversely affect smaller issuers' bottom lines more than it would those of larger issuers, which tend to rely less on interchange as their main source of card income because more of their cardholders revolve and pay interest.

The next few quarters could be telling in terms of whether small issuers will benefit from larger issuers' efforts to make up for lost revenue through more fees and higher interest rates. But it also may bring about the portfolio sales of smaller issuers incapable of keeping up with market changes.

Jeffrey Green
Editor-in-Chief
Cards&Payments