After the all-time high charge-off levels of 2009-2010, credit union credit card programs are back in familiar terrain: charge-offs have been declining and are now less than 3%. In fact, for the fourth quarter of 2011 net credit card charge-offs were only 2.6% of balances.
Does this mean that running a credit card business is as risky as before 2006? Unfortunately, it does not. Due to a combination of economic, competitive, and regulatory factors, this business is even riskier, and credit unions needs to manage it with new skills and techniques.
|Credit Card Quality Trends (% of $)|
|Source: TRK Advisors.|
Credit risk as measured in the above graph has indeed decreased, but the stability of the average card holder continues to be unpredictable. Over the past four years, the entire industry, not just the credit union segment, has charged-off about 30% of its credit card balances, so it is only natural for things to look good after this flushing through of many high risk accounts.
But we might now be in a credit risk valley because of that purging process, and the steady state might be a bit higher than it is today. That has implications on credit union pricing strategies today because ongoing portfolio management is riskier and more difficult than in pre-2006.
The CARD Act creates real risks of pricing mismatches between account risk and risk-based pricing tiers. Because account balances cannot be repriced quickly, it takes years now, the techniques required to track and measure existing account risk must become more forward-looking. Tracking account momentum has become as important as tracking static measures of risk such as current period credit scores.
Competitive risks are increasing. Credit unions are not the only segment benefiting from improving credit risk measures. Banks have experienced an even more substantial improvement. In 2009 and 2010, charge-off rates at large banks were about 10% annually for their credit card programs. Today that rate is less than 5%. This leads to their increasing confidence in once again focusing on growth and obtaining every possible credit card account including yours. That’s why we see aggressive marketing campaigns and impressive new products, such as Barclays 8% no-fee card and Bank of America’s 1.5 points per $1 spent rewards card.
The most engaged credit union credit card issuers are coming to terms with this new terrain and are actively updating their new account acquisition techniques, underwriting approaches, and portfolio management skills. They recognize risk-management is not just about credit risk, new accounts, or minimizing net credit losses. The best managed programs take a holistic view of credit card program management, balancing member value, pricing, expenses, and a variety of risk types into a comprehensive approach.
But despite the challenges in staying abreast of industry knowledge and keeping card management staff skills up-to-date, a commitment to those needs can lead to healthy card program growth, attractive long-term returns, and deepening member relationships.