The credit card industry has been setting some records lately. Issuers mailed a record 2.7 billion offers to consumers in 1995 and received responses from a low of 1.4%, according to Behavioral Analysis, Inc., Tarrytown, New York. In June, the ABA reported that late payments reached a 15-year record in the first quarter--3.53% of accounts.
Although everyone knows this is a cyclical business, some analysts are putting the simultaneous explosion in offers and delinquencies together and blaming the one for the other.
Analysts George M. Salem and Aaron C. Clark of Gerard Klauer Mattison wrote in a June report: "Over the last two years (1994-1995) five billion card solicitations were mailed. This is equal to 32 invitations in 24 months to every American between the ages of 18 and 64 (160 million). We estimate persons receiving 32 invitations actually have been offered about $130,000 of lines of credit each. Our research indicates that the majority of individuals solicited either: (a) had more than enough credit; or (b) could never have enough, effectively making them a write-off or bankruptcy candidate."
They also wrote: "We think the proliferation of cards issued is the principal reason behind the escalating card losses. In our opinion, too much credit was issued with too little information and not enough control on the part of issuers."
The analysts propose a two-year moratorium on new card offers.
Other industry observers believe the card industry is taking steps to correct the delinquency problem and that there are still untapped pieces of the credit card market. "Card issuers aren't going to be walking wounded forever, they're going to pay attention and they're going to adjust things," says Robert Hammer, president of R.K. Hammer Investment Bankers, Thousand Oaks, Calif.
They are already controlling credit better, according to the company's latest research report, "Card Industry Performance Survey." It found that issuers have raised their cutoff credit scores for new applications by an average of 10 points. For several years before that, those cutoff scores had been dropping to accept more new cardholders. And while they haven't yet, Hammer expects that credit card mailings will slow down by the end of the year.
Robert McKinley, president of RAM Research Corp., Frederick, Md., says many bankers he's spoken to have dropped all preapproved programs. "When they did an analysis, they found that that's where they were picking up most of their losses," he says. Other banks that still make preapproved offers don't promise the cardholder a particular rate until they've taken a careful and current look at his credit report.
Some banks are also starting to review credit files on customers annually and even quarterly, McKinley says, to keep better tabs on freewheeling cardholders.
Hammer estimates that for 1996, card portfolios will see a five
basis point increase in interest income due to the expiration
of six-month teaser rates that cardholders got in 1995, a 36 basis
point increase in blended cost of funds, and a 20 basis point
increase in chargeoffs, all of which will create a 25 basis point
drop in average weighted pre-tax return on assets, to 3.3%.
Smaller banks' credit card portfolios are faring better than those at large banks, Hammer points out, and they may continue to do well with new credit card offers. Banks with less than $250 million in assets have chargeoffs of 2%, versus the industry average of 4.5%, the survey found, "so there's room for them to do local commercial relationship cobranding," he says.
Hammer sees two niches that could provide new card growth: single heads of households and first-time credits. "It wasn't easy to get credit as a single head-of-household woman ten years ago," he says. "Today there are people catering to that market." It can be reached through women's magazines and civic groups. A first-time credit could be a student or a married woman who never had credit in her name.
McKinley also believes the credit card market is not completely saturated, although he too believes that "consumers have far more cards than they could possibly use." Certain issuers that collect and use vast amounts of consumer data, such as First USA, Capital One, and Advanta could do well with very selective, targeted marketing campaigns, he says.
Commercial cards are a big opportunity for issuers now. "It's not going to be very lucrative, but it's very ripe," McKinley says. "There's a lot of volume out there that can be displaced from American Express to banks."
On the consumer side, McKinley thinks it will be very tough for
any issuer to come up with a hot new offer until smart cards come
into being and several applications can be put on one card, such
as air miles, health records, debit, and credit. He expects smart
cards to become widespread by the end of 1996.
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