In credit cards, the issue is no longer spending; it is borrowing


By Brian Riley

Today’s WSJ addresses the problem du jour for the credit card industry. Spending is back in vogue, but borrowing has not kept pace.  Unlike the last Great Recession a decade ago, credit card issuers did not aggressively collapse credit lines.

Instead, payment deferrals and checking accounts filled with CARES Act payments kept delinquencies low, and consumers shifted their spending patterns. Durable goods were out. The focus was consumables, ranging from paper products to foodstuffs. And, because of the lockdown, e-Commerce surged.

The WSJ cites data from Capital One Financial, a top credit card issuer known for its robust analytics and ability to target a wide range of credit types.

  • In recent months, many U.S. consumers were spending at levels similar to, or better than, what they were doing in the same period in the year before the pandemic began.
  • At Capital One Financial, purchase volume on its domestic cards was up 25% in the second quarter of 2021 from the same period in 2019.

That’s the good news. Now, if your business relies on interest revenue generated by borrowing, here’s the bad news.

  • Average domestic card loans at Capital One during the second quarter were down 10% from the same period in 2019. The company on Thursday said that, while payment rates were easing a bit recently, they are still running at “really quite a breathtaking level.”
  • For domestic cards, net interest income plus non-interest income from spending-driven fees as a percentage of loans was higher for Capital One in the second quarter than at any point in 2019 at nearly 18%.
  • And with many lenders having excess capital, perhaps it just makes sense to return that to shareholders and accept that people won’t be borrowing much for a long time.

Underwriting credit card applications is as much of an art as it is a science.  Models and automated lending algorithms are essential tools to get through piles of applications.  For example, yesterday’s PaymentsJournal noted that American Express booked 2.4 million accounts in the second quarter of 2021.

Based on industry approval norms, that meant the issuer had to review about 56,000 applications per day.  And, once the applications run the underwriting gamut, there will be rewards liabilities if the card had an introductory offer. The WSJ notes:

  • The danger is that rising reward givebacks can put pressure on non-interest revenue.
  • And without the discipline of credit risk, there is pressure and temptation just to keep adding more and more spenders.
  • That can backfire if the consumers who are most at risk of financial trouble in the future are the ones who are tearing open their mail to accept generous card offers. It could make the next credit cycle more damaging.

This problem is good.  Lenders need to open the loan approval gates a little but still keep the balance of credit risk management.  That is where the art of lending comes into play.  It is not just the science of lending; it is the art of balancing risk and reward.

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