US Banks Issuing Credit Cards Confronted with Changing Profitability Model

While credit card issuing has historically provided substantial revenues to US banks, recent changes in a variety of consumer behaviors — including a continued shift to debit cards and growing adoption of prepaid cards — have challenged revenues outside of the normal boundaries of credit risk and operating expenses. New research from TowerGroup finds that 2006 and 2007 will find card issuers facing new revenue challenges and threats, and exploring innovative options to mitigate the impact of these challenges. The author of the research is senior analyst Brian Riley, the newest member of the TowerGroup Bank Cards research practice.

“Credit card issuing banks have traditionally done a solid job of dealing with environmental and regulatory challenges. They now need to look more closely at consumer behavior, as American households begin to feel the squeeze of inflation and rising interest rates,” says Riley. “The shift of consumer spending to debit cards is forcing issuers to realize that the convenience of debit as an alternative that doesn’t build up debt may outweigh the attraction of credit card reward programs. Issuers must devise a strategy that manages and secures the consumer transition to debit, while educating them on the continued benefits of a traditional credit card account.”

Highlights of the research include:

• One challenge facing US card issuers arises from recent guidance from the Office of the Comptroller of Currency (OCC) to increase the minimum monthly payment due on card account balances. Given rising interest rates, TowerGroup believes the increase in minimum card payment (which will nearly double most households due) is likely to dampen credit card use and increase delinquencies.
• The rise in interest rates tied to the prime rate — forecasted to surge beyond 8% in July 2006 double the prime rate of 2004 — will revert the positive movement in write-off that issuers have experienced in early 2006.
• In addition to factors like the OCC and interest rates, US card issuers face a potentially more profound challenge in the evolution of consumer behavior. TowerGroup expects that the continued consumer shift to debit cards as well as rising prepaid card adoption will reduce the overall transaction volume of base credit card receivables, and therefore reduce transaction-based economies of scale.
• Riley continued, “While cards will continue to be an important revenue channel for card issuers’ holding companies, the industry as a whole will need to do careful planning as they look towards 2007. To overcome a host of new challenges, issuers will find it critical to more actively manage customers’ migration to debit cards — as well as more tightly control internal expenses and fraud.”

Riley’s deep understanding of consumer lending and bank cards will play out well in his new role as a TowerGroup Senior Analyst. He has 24 years of experience in consumer credit and bank cards, including work in applied technology, operations management, portfolio acquisitions, risk, scoring, and portfolio analytics. Along with senior management roles at Citibank, Chase and Wachovia, Riley led the design of numerous financial management systems at leading credit card issuers. Prior to joining TowerGroup, he led a group specializing in applied technology for the receivables and payment functions in vertical markets. His experience included participating in numerous portfolio acquisitions, and he played a significant role in the original migration of Citibank’s systems to South Dakota. He also orchestrated one of the largest sales of aged debt for a major issuer, spawning a new strategy for how issuers deal with delinquent accounts.

The TowerGroup research report titled “Credit Card Profitability in a New World: Meeting the Challenge of Changed Consumer Behavior” is available to qualified members of the press for review. A follow-up to this report “Debit Fraud: Where the Money Is” reviews trends in fraud that are becoming important as the industry shifts between debit and credit cards.