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It was, insists American Express, just a test. A select number of Amex cardholders had been given until April 30 to pay off revolving account balances and close their accounts, with the promise of a $300 prepaid gift card if they followed through on the offer.
This bribe, or carrot, or bounty — whatever it's called — was reserved for a small group of cardholders with inordinately high balances and little activity of spending and payments, according to Amex spokeswoman Molly Faust. "It was a very, very small number of cardholders we sent the offer to," she says.
But this low-level account pruning turned into a casus belli on fair play for consumers, where cardholders discovered that years of being squeezed by fees and rates was now paying off with a boot in the rear as times got tough. Populist rage jumbled American Express' gift-card offer into the outrage over bailouts and fat-cat bonuses.
What was missing in most discussions, though, was how different this was from other commonplace measures in setting cardholders adrift. At JPMorgan Chase, the booby prize for some card customers who maintain revolving balances was a $10-a-month fee that, under the threat of lawsuits, it has since rescinded. Bank of America and Discover raised balance transfer fees to 4 percent, and several issuers no longer cap the fees at $75 or $99, according to creditcards.com. Amex, though, was introducing an almost inverse form of collections, one that may have some impact on how card issuers alleviate portfolio risk if and when Amex reveals how well the program worked.
Consider first that the targeted cardholders were the severely delinquent, says TowerGroup bank card research director Brian Riley. At four-plus months past due, their accounts were likely being prepped for sale to external collections agency for 30 to 35 cents on the dollar, so "this gives [Amex] a chance to settle at 85 percent," he says. "Shouting and yelling in collection department years ago is not the way you collect money." In addition, "they can minimize the amount of the write-off, and show a marketing expense which is more positive thing than the write-off," says Riley. Amex will also reap the benefit of interchange as those gift cards are processed.
Many believe that credit-card portfolios will cause banks headaches for years to come and that issuers are only partially through the process of weeding out the problem accounts. Industry analyst Meredith Whitney said in December that credit lines were cut by roughly $2 trillion last year and will be chopped by another $2.7 trillion by the end of next year. Amex itself is bracing for a potential 45 percent increase in loan-loss reserves over the next year, according to JPMorgan Chase analyst Andrew Wessell.
Still, in a testament that Amex perhaps had the right idea, other issuers are taking to using incentives to encourage cardholders to pay down debt, according to Clark Abrahams, the chief financial architect at SAS Institute, which that provides risk analytics consulting for banks' card holdings. For example, some are offering customers lower interest rates if they agree to increase minimum payments from, say, 3 percent of the balance, to 4 or 6 percent, Abrahams says.
Edmund Tribue, the global credit risk practice director at MasterCard Global Advisors, says some banks are taking a less hard-line approach to collections because they recognize that many credit card customers might also have mortgage loans or deposit or investment accounts at the banks as well. Bankers understand "the consequences and the reverberations that go through their portfolios as they may take more punitive actions," he says.
