Credit cards have been resilient through recessions and economic downturns since they launched 50 years ago. Certainly, the industry experienced 10% write-offs during the Great Recession, but people try to salvage their relationships because sooner or later they will need to travel, rent cars, or use credit again for their everyday needs.
But, consumers do have their payment hierarchies. You need to keep the lights on and the rent payment so you can survive. You must pay the water bill, and do not forget about Uncle Sam and his tax requirements. And, if your car breaks down or baby gets ill, you have to do what you have to do.
The question du jour is about how online lenders will survive. The waters are not yet tested, and the risks are high. Borrowers in this asset class often entered with alternative bureaus instead of traditional FICO scores. It sounded great at the time, but by bringing people with thin files and limited credit experience, alternative lenders assumed a lot of risks.
Reuters Business News notes tightening at several online lenders in anticipation of a souring economy.
- U.S. online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC are scrutinizing loan quality, securing long-term financing and cutting costs, as executives prepare for what they fear could be the sector’s first economic downturn.
- Their underwriting methods also often include analysis of non-traditional data, such as education level of borrowers. While platforms see that as a strength, it has yet to be tested in times of crisis.
- ..worries are the latest sign that fears a U.S. downturn is nigh are growing. Economists polled by Reuters in March saw a 25 percent chance of U.S. recession over the next 12 months. More recently, some executives said, a Federal Reserve decision to halt interest rate hikes reinforced those fears.
Tight credit policy standards, like those maintained by federally insured banks, may seem boring, but you do get to sleep well at night. Look at Chase’s position here, which foresees a rosier climate.
- A downturn is also far from certain. On Friday, JPMorgan Chase & Co, the country’s largest bank by assets, eased fears of a recession after it posted better-than-expected quarterly profits driven by what it described as solid U.S. economic growth.
The takeaway: boring, staid credit policies withstood the test of time. For Alt-lenders, time to prepare for the storm before it becomes too late.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
