At mid-year 1996, delinquency climbed 32% and charge-offs soared 33% during the past twelve months. Some issuers are now experiencing delinquency and charge-off rates of 5% or more. In a few examples, both delinquency and charge-offs have exploded by more than 60%. Fortunately the bank card industry continues to enjoy high profit margins, in relation to other retail bank lending, and can absorb fairly high losses before throwing in the towel or jumping out the window. California investment banker, R.K. Hammer, weighing all the bad news, projects an average pre-tax return- on- assets this year of 3.3% compared to slightly more than 3.5% last year. It's not the gravy train of the mid-1980s, when many card bankers earned returns of 5% to 6% (or more) on credit cards, but it's still pretty darn lucrative.
Besides the problem of tardy or bad accounts there are other factors slowing the gravy train. The amount consumers owe and charge has dropped like a rock this year. The most significant source of revenue for any card issuer is interest income, followed by merchant fee income. Since the first of the year the largest players have realized average growth rates, in outstandings or what cardholders owe, of 4.8% while in the first six months of 1995 balances grew by nearly 13%. Inotherwords balance growth has slowed by more than 60% this year compared to last year. Charge volume, which has been growing at annual rate of 26% for the past two years, grew only 10% (or $15 billion) in the second quarter of this year. Incidentally the growth in volume is not adjusted for inflation so the real growth rate is probably only about 6% or 7%.
Federal Reserve data, released July 8, showed the growth in all revolving credit dropped 21% between April and May of this year, from 20.3% to 16.1%.
With losses growing six times faster than revenue somethings gotta give. Card issuers are going to give up some profits this year but you can bet consumers are going to have to give up something too. In this declining profitability scenario most industries would simply raise prices to consumers. However the bank card industry finds itself in an interesting predicament.
American consumers have become pretty savvy about credit cards in the past five years. The good credits want low interest rates, no or low annual fees and freebies (points, cash-back, air miles, etc.). Armed with balance transfer checks the good credits will say adios to any issuer jacking up rates or fees. The bad credits don't give a hoot about the costs or the freebies, they just want credit. Punishing bad credits with higher rates and credit line cut-offs will simply drive more charge-offs or bankruptcies. So any card issuer stupid enough to raise prices on all their customers will end up with a portfolio of cardholders nobody else wants.
Compounding the pricing issue is competition. Finding new customers has become a highly expensive proposition today. The credit card issuing side of this business is saturated and consumers are becoming less responsive to card offers. As a result, there are plenty of competitors ready to eat your lunch everyday.
What's a card issuer to do ? How do bankers get the gravy train back on track? How will it affect consumers ? Will this business ever be the same ? Does Dole have a chance in November ? (hey who stuck that in ?) What can you do about it ? (not Dole stupid -- credit cards !!!) Stay tune . . . Part II follows in the August issue
