U.S. bankcard issuers faced intense challenges in 2009 as the economy sank into a recession. Unemployment rates soared and home values tumbled, driving credit card charge-offs to hit new peaks, and consumers for the first time pulled back on credit card spending.
The overall pool of credit card receivables in 2009 shrank as purchase volume declined and card issuers wrote off billions in losses and tightened underwriting criteria to further reduce their risk exposure.
Issuers with a heavy reliance on national direct-mail solicitations fared relatively worse, contends Scott Strumello, an associate with Auriemma Consulting Group. “Our research shows that issuers that are more relationship-oriented, whose card portfolios had a higher proportion of accounts generated through bank branches, tended to have lower charge-off rates last year,” he says.
Issuers last year also began girding to comply with the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama signed into law last May. The legislation introduced a variety of restrictions on issuers’ ability to increase cardholder interest rates and penalty fees.
The initial set of provisions, which included requiring issuers to give cardholders 45 days’ warning of any changes in interest rates, became effective last August. In preparation for the new restrictions that took effect in February this year, most issuers last year switched cardholders’ accounts to variable interest rates tied to an index, such as the prime rate, from fixed rates.
Profitability during 2009 varied widely among individual issuers.
“The largest issuers, including Citi, Bank of America and Chase, all lost money last year, but certain others, including Capital One and U.S. Bank, were profitable,” Robert Hammer, CEO of credit card consulting firm R.K. Hammer, tells PaymentsSource. “There were wide variations in performance based on each issuer’s portfolios, risk management and marketing strategies.”
Most issuers curtailed marketing last year as they coped with economic chaos and pending regulatory changes. Card industry direct-mail offers fell 71% during the third quarter, to 391 million offers from 1.3 billion a year earlier, Mintel Comperemedia says. Card issuers overall mailed some 1.9 billion direct-mail solicitations last year, down 62% from 5 billion in 2008, the firm says.
Bankcard issuers lost some $17 billion in profits during what was arguably the worst year in modern credit card history, PaymentsSource data show (see chart). Issuers posted an after-tax loss of $820 million, or minus 0.12% of average outstandings. PaymentsSource data do not factor into its model the effect of individual issuers’ loan-loss reserves, which varied widely last year.
PaymentsSource calculated total bankcard receivables on managed credit card outstandings for the nation’s Visa and MasterCard issuers at the end of 2009 compared with 2008 using data gathered from the Federal Reserve Board and the Federal Deposit Insurance Corp.
The increase in average credit card charge-offs on outstandings was the single biggest factor affecting bankcard profitability, experts say. The average percentage of credit card accounts issuers wrote off as uncollectible reached 10.06% in 2009, based on industry estimates, up 406 basis points from 6% during 2008.
“Clearly 2009 marked the highest charge-off rate we’ve seen, and the losses associated with those write-offs cut into profitability,” says William Black, a senior vice president at Moody’s Investors Services Inc. The charge-off rate climbed throughout the year, reaching 10.32% in December from 7.74% in January, Moody’s reported.
Issuers had combined average outstandings of $686.19 billion last year, down 4.7% from $720.13 billion in 2008, PaymentsSource estimates. (2008 receivables reflect adjustments to account for additional data not available at last year’s deadline).
A variety of factors caused the decline in outstanding balances, analysts say. Throughout 2009, issuers cut customers’ credit lines and shut down inactive and high-risk accounts.
Consumers, in turn, became more cautious about spending on credit, turning to cash and debit cards to control everyday spending.
Issuers likely were too aggressive in cutting customers’ credit lines, Hammer says.
Bankcard purchase volume reached $1.24 trillion in 2009, down 9.5% from $1.37 trillion in 2008, PaymentsSource research shows. Total charge volume, including cash advances, was $1.36 trillion, down 13.9% from $1.58 trillion.
Issuers’ cost of funds reached $13.04 billion last year, down 43% from $23.04 billion in 2008, mostly because of a lower federal funds rate.
Bankcard issuers last year generated total revenues of $121.50 billion, down 6.5% from $130.01 billion in 2008.
Expenses rose 18.7%, to $122.75 billion from $103.37, driven by a 68% increase in charge-off costs.
Combined spending on card marketing and processing remained flat at $36 billion.
PaymentsSource’s research reflects an average blended interchange rate of 1.75%, unchanged from 2008.
PaymentsSource developed its profitability report from issuers’ earnings reports, government agencies, Visa and MasterCard operational performance data, and interviews with industry consultants and analysts.
As for revenues:
• Interest income assumes an average annual percentage on revolving balances of 17%, up from 15% in 2008, and that 70% of account balances revolved, down from 81% in 2008.
• Penalty-fee income was up 26%, and the percentage of accounts delinquent rose slightly, to 6% from 5% in 2008.
• Annual-fee revenues assume that 18% of bankcard accounts paid a fee, up from 16% in 2008. The average annual fee on an open account was $47, up from $45.25 in 2008.
• Revenues from enhancements such as credit insurance and other marketing programs increased by 10% because of greater efficiencies, PaymentsSource estimates.
On the expense side:
• Cost of funds fell, to 1.9% of average receivables from 3.02% in 2008.
• The fraud rate rose slightly to 8% of total charge volume.
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