The mundane world of accounting does not grab headlines as do surging credit losses, falling profits, and rising interchange rates but this item will have a direct impact on cardholder revenue. CECL, an acronym for Current Expected Credit Loss accounting will change the financial line that captures loan losses.
CECL (pronounced Cecil) is a financial standard which finance groups have been focusing on for 2 years and will affect the way all banks project financial risk. If you haven’t heard about it, or do not understand when your bank will implement, it would be a good idea to ask people in your finance group. CECL was designed to tighten controls and it will likely impact your 2019, or at best 2020, bonus. Forewarned is forearmed.
Today’s ABA Banking Journal points out that the Fed is “…doing everything we can to avoid a big change that’s disruptive to lending,” “We’ve tried to work with banks so that they’ll be able to implement this FASB decision in ways that are not too disruptive and too expensive and too complicated.” He added that the Fed is allowing banks to phase-in the new standard over a three-year period.
The Fed’s concern is appropriate. You can find the gory details of the new accounting standard in a Mercator Viewpoint titled Current Expected Credit Loss (CECL) Accounting: Radical Changes Ahead. To those that dismiss the potential impact of CECL, not the Fed’s concern and a statement by the American Bankers Association, which said: “The CECL model represents the biggest change-ever in Bank accounting.
As we mentioned in our research, new loss recognition, down to the account level, will require card issuers to deepen their portfolio analytic tools and use technologies to increase customer reconnaissance, going from a broad view measuring batch performance to an individual view of the customer as a segment of one. Scoring and a vision of managing the account from acquisition to maturity is essential.
All major accounting firms and analytic companies such as FICO and SAS are poised to help make a transition.
If you haven’t heard, it is time to talk to your finance group because the substantial change in credit card accounting is coming.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group