Strong Credit Card Growth Requires Preparation for a Market Shift
The recent recession took its toll on the U.S. credit card business, causing billion dollar credit losses at each of the top tier issuers, shattering reserves that carried revenue to offset losses, and disrupting the cadence of lending, which had been growing steadily at a rate between 6% and 8%. The aggregate portfolio shrank as the recession persisted and it took lenders four years to get back to a meaningful growth pace, evidenced by minimal change between 2010, when the aggregated receivables sat at $839 billion, and 2014, when it ended at $858 billion.
U.S. card issuers are now wearing their lending hats. As we saw, Mercator Advisory Group sees a growth path between 2017 and 2018 continuing the nearly 10% growth we saw between 2014 and 2016. And as momentum builds, we caution that the fundamentals of credit management must be reviewed by issuers large and small. Here are some facts to consider:
- Although consumer bankruptcies in the U.S. were down nearly 7% to 793,932 for the fiscal year ending June 2016 and the percentage of accounts 90 days or more delinquent is at a 10-year low at 7%, a growing portfolio can mask many credit problems.
- With more than 450 million active accounts, and a run rate of 360 million new credit card inquiries based on data from the Federal Reserve Consumer Credit Panel and Equifax, it is likely that 1 in every 4 accounts is less than one year old.
- Contingent liability, the amount of all credit lines were they to be fully used, peaked at nearly $4 trillion during the height of the recession in 2009, then sharply declined to less than $3 trillion in 2011. It is on a steady course to hit $3.5 trillion in 2017, suggesting that increased trends in revolving debt and unused credit availability might create a hidden vulnerability to loan loss reserves.
- Trends on aggregated U.S. consumer debt indicate rapid growth of 169% for persons aged 67 and older in the measurement period between 2003 and 2015, a period in which credit card debt declined by 12% among those aged 39. This contrast suggests that the credit card industry must position itself for riskier credit situations and less growth potential as younger cardholders are less receptive to debt and older cardholders bulk up liability.
As it stands today, the U.S. credit card business is in relatively good health when measured by growth and credit losses, but be advised that complacency is not in order. Mercator Advisory Group believes that the industry must focus on credit management fundamentals, with an emphasis on bridling growth at the acquisition point, managing portfolio components, and focusing on risk management for both fraud and operational loss. This Viewpoint document outlines Mercator Advisory Group’s view of the credit management continuum, discusses the value chain, and suggests a set of action items for the issuers.
Read the full complimentary document: Credit Card Management: 7 Strategies to Take Advantage of a Growth Wave