Credit Card Industry Trends
The weak economy reduced consumer spending and increased credit card delinquencies and net charge-offs, resulting in decreased profitably for credit card issuers in 2009. The Federal Deposit Insurance Corporation (FDIC) reported that in December 2009 the full-year return on assets (ROA), a key measure of credit card profitably, was a loss of 0.29%. Exhibit 1 illustrates the trend in annualized ROA and net charge-offs — two important credit card business metrics — from 2000 through 2009.
Exhibit 1
Managing Credit Card Risk and Profitability
To manage profitability, credit card issuers tightened their lending policies, reduced the new offers of credit, and reduced customer credit lines. New offers of credit decreased from an estimated 3.8 billion offers in 2008 to 1.4 billion in 2009. The Federal Reserve reported that open-to-buy credit lines for credit issuers peaked at $4.7 trillion (USD) in 2008 and credit line reductions and account closures reduced open-to-buy credit lines by over $1.3 trillion to $3.3 trillion by the end of 2009. Exhibit 2 illustrates the trend in open-to-buy credit card limits.
Exhibit 2
Retaining the Best Customers
TowerGroup estimates that voluntary and involuntary account attrition exceeded 20% for 2009, having increased 30% from 2008. The increase in attrition had two causes. The first was voluntary: consumers’ deleveraging their debt through reduced purchasing and repayment. The second was involuntary on the part of consumers: the closure of millions of inactive credit card accounts from 2008 through 2009. Tighter credit policies reduced the number of new credit card customers, and higher attrition, both voluntary and involuntary, increased the importance of pleasing and retaining the most profitable and creditworthy customers.
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TowerGroup believes that credit card issuers that do not quickly resolve credit card billing and merchant disputes will experience significantly increased account attrition. The CARD Act (the Credit Card Accountability, Responsibility, and Disclosure Act), passed by the US Congress in 2009, included many changes to credit rules and generated consumer questions about billing and charges for fees and interest rates. These translated into a notable increase in consumer credit card complaints. TowerGroup believes that credit card issuers that do not resolve a customer question and/or dispute in a timely fashion (one billing cycle) increase their chance of losing a profitable and creditworthy customer.
Consumer Complaints to FTC Increase
Combined with questions pertaining to the CARD Act, the increase in aggressive credit card portfolio management resulted in an increase in consumer complaints to the Federal Trade Commission (FTC). The FTC reported a 30% increase in total consumer complaints in 2009, with credit card complaints constituting 40% of the total. Exhibit 3 compares the value and number of FTC complaints from 2008 to 2009.
Exhibit 3
Summary
The current economic and legislative environment requires that credit card issuers focus on their most creditworthy and profitable customers. Changes in legislation have increased customer confusion and have led to more credit card disputes. Credit card issuers should ensure their chargeback and disputes resolution account teams are well trained and prepared to answer and resolve customer questions and disputes within one billing cycle. Complex disputes that exceed one billing cycle should keep the customer informed throughout the dispute resolution process.
Because all disputes will not end up with the customer being right, each credit card issuer must decide the customer relationship value (CRV) of that customer and decide if the long-term value justifies absorbing the cost of the dispute. The replacement cost and long-term revenue potential of that customer may or may not exceed the amount in dispute. This calculation must be made to justify any decision
This article is based on research by the Bank Cards practice at TowerGroup, a leading research and advisory services firm focused exclusively on the global financial services industry. Research Director Dennis Moroney can be reached at dmoroney@towergroup.com. Those interested in learning more about TowerGroup or subscribing to its research services may call +1.617.488.2000 or e-mail service-info@towergroup.com.
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