We are halfway through third quarter, and with four months remaining in 2018, credit card managers know that potential write-offs sit in the 60 days+ delinquency buckets. If you are among the top 100 U.S. card issuers, charge-offs are up to 3.65%, from 3.48% in Q1, and heading toward 4% by year end.
Problems loom at smaller issuers. According to the Federal Reserve, charge-offs skyrocketed in mid-2017, and have been north of 7% in 2018. In comparison to the top 100 metric at 3.65%, performance at smaller issuers is more than two times worse, at 7.57%. Now is an excellent time to read my last year’s Mercator Advisory Group report on U.S. credit quality: U.S. Credit Card Debt: Circle the Wagons and Fortify. A more recent report on the topic, Credit Card Acquisitions: Maximizing Results amid Change, is timely because rising attrition and 60 million new accounts a year means less account seasoning, an early indicator of risk.
Credit Card Profitability
When it comes to profitability in retail banking, credit cards rank highest. Cards still generate almost three times as much return on assets as retail banking as a whole. That metric is spiraling down, however, as discussed in my update on credit card profitability titled In Search of a Profit: Falling ROA Sets the Stage for 2019 and Beyond, a report released by Mercator earlier this month. You will learn why and where the number is vulnerable and what to expect through the end of the decade. If you’d like to dive deeper into this topic, please contact me for a discussion.
Credit Card Accounting Change: 2019
2019 will be here before you know it. Chances are your financial group is already preparing for CECL (pronounced “Cecil”). Hold on to your hats as the metric for credit impairment changes. Some bond raters, such as Moody’s, expect to see 50% increases. We are more conservative and see the number as half as much, but when you consider increased write-offs mentioned above plus more conservative projection tools, we may see some market compression in 2019. Read my Viewpoint, Current Expected Credit Loss (CECL) Accounting: Radical Changes Ahead, released by Mercator Advisory Group earlier this month.
The Never-Ending Saga of Credit Card Rewards
I continue to foresee problems with reward programs and recently pointed to five market changes that will likely to have an impact on credit card rewards programs. See the Mercator Viewpoint titled Five Reward Events That Will Alter the Credit Card Value Proposition, released in June. Topics include downgrading premium credit card reward programs, downgrading reward perks, and retailer plays in the private-label card world.
Programs have become expensive and as you can see in the discussion of ROA, issuers do not have the money to throw around as loss leaders. Expect some of the rewards generosity to slow next year, as issuers begin to batten down the hatches on non-interest expense items.
Keep your eyes on credit losses, one of the largest controllable expenses in credit cards. Pressures are on small issuers right now but will likely move upstream as we enter 2019. Take a few minutes to read the view on card profitability, cited above, which is good but not great. Know more than other people do about CECL and ask your business how it will affect both credit card lending and collections.
The books close on 2018 in less than 140 days until year end and all the risk is in your 60+ collection buckets. Pedal fast to contain credit losses!
Director, Credit Advisory Service
Mercator Advisory Group