Financial institutions could experience significant drops in the rate of delinquent accounts by establishing multiple lending relationships with individual customers, the results of new research by credit bureau TransUnion suggest.
This could be especially important for card issuers, whose revenue increasingly is being squeezed by legal and regulatory constraints, including those involving compliance with the Credit Card Accountability, Responsibility and Disclosure Act, notes Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit and author of the study.
TransUnion studied lending information from six “super-regional” financial institutions–three banks and three credit unions–for the Decembers of 2007, 2008 and 2009. Some 19 million consumers were included in each review, and more than 400 million credit relationships were evaluated during each period.
The study examined the correlation between the number of consumer accounts 30 days or more delinquent and the number of accounts the borrower held with the lender. Other account types included mortgages, auto loans, home equity lines of credit and other lending services.
In December 2007, the average credit card 30-day delinquency rate stayed steady at 1.4% of accounts when the borrower had one to three credit relationships with the lender, falling to 1.3% with four relationships and to 1.2% with five.
Toward the end of the recession, though, consumers placed greater value on their cards, and card-account delinquencies dropped considerably the more lending relationships the borrower had with an institution, the study found. The average credit card 30-day delinquency rate in December 2009 was 2.7% among borrowers with one lending relationship with an institution. However, the rate dropped to 2.3% with two relationships, to 2.1% with three, and to 1.6% with five or more loans with the lender.
“The key lesson there is that card loyalty differs with different economic environments,” Becker tells PaymentsSource.
In 2007, issuers bombarded consumers with card offers, and many consumers held more than one card. Two years later, when credit dried up, the offers dropped, and consumers placed more value in their card-lender relationships, Becker says.
“A lot of the economic forces of the recession changed the hierarchy of payments,” he says. “We found that maintaining the health of a card relationship was far more important than at the beginning of the recession.”
TransUnion’s research only examined account delinquencies, not the financial severity of the defaults, Becker notes. So the credit bureau’s study results represent a foundation for further study into loyalty dynamics, he says.
“The question of severity of loss given defaults absolutely is something that should be addressed and explored when one considers quantifying loyalty and incorporating that into a lending strategy,” Becker says. “It is not the end-all study. It merely opens the door into studying new areas of risk management.”