I had dinner in Boston last week with Dan Murray, one of the few active people in the credit card business that have more experience than me. There were several people at the table with tons of experience in cards, including Steve Murphy and Ted Iacobuzio. We were talking old war stories about credit cards and people we knew and Dan quipped “Credit card managers lose their bonuses for low marketing numbers, but they lose their job for bad collection numbers.” His comment hit a chord as I replayed some of the careers that I knew from people at Citi, Chase and First Union.
Today’s read comes from New Zealand in an article titled “KPMG warns banks of threats to their lucrative credit card business from rivals and regulators if they don’t get on the front foot and assist struggling borrowers” and it brought me back to that dinner last week. KPMG’s concern is that credit card managers are not sensitive to direction by regulators in this discussion paper about consumer credit:
- 5% of consumers with credit cards fulfilled at least one problematic debt indicator being severe delinquency, serious delinquency, persistent debt, and repeated low repayments.
That’s almost 1 out of every five people. The article continues by scoping the issue:
- Given this ASIC said credit card providers should be more proactive in addressing problematic credit card debt, ensure products are appropriate for borrowers, and the regulator expects efforts from credit providers to tackle these issues.
- In New Zealand, as interest.co.nz has highlighted on several occasions most recently here, credit cards and their high-interest rates are yet to be specifically targeted by any regulator. However, in December, The Co-operative Bank CEO David Cunningham told interest.co.nz the Commerce Commission should turn the attention of its new market study powersto the credit card market. Cunningham described credit cards as “a real area of customer harm,” and a “gravy train” for banks.
- This suggests “a number of Kiwis may not have the most appropriate credit card for their spending habits,” says KPMG.
In New Zealand, as interest.co.nz has highlighted on several occasions most recently here, credit cards and their high interest rates are yet to be specifically targeted by any regulator. However, in December, The Co-operative Bank CEO David Cunningham told interest.co.nz the Commerce Commission should turn the attention of its new market study powers to the credit card market. Cunningham described credit cards as “a real area of customer harm,” and a “gravy train” for banks.
Another reason for my flashback is how collections have changed over the years. My first job in credit was at the Household Finance Corporation, in Yonkers, NY. Back in the old days, before the Fair Debt Collections Practices Act of 1978, consumer collections was a game of muscle. At HFC, you had the authority to make loans up to $2,500, but you had the responsibility to collect them. That meant frequent (more than daily) calls when bills came over due. It also meant field-calls, (known as home visits) to Section-8-type housing, when necessary, particularly at month-end.
What I learned at Citi about collections is that it is finesse, not muscle that will bring in the money. People don’t pay because they don’t have money, not because they have bad intent. Instead of getting through 200 delinquents in a local HFC branch, Citi had millions of accounts in delinquency. Algorithms prioritize workloads better than post-its on ledger cards. Negotiations about “how we can help you get current” work better than desk-slamming collection managers demanding $20 payments.
Today, the collections have smart collection systems like FICO’s Debt Manager Solution that ensure regulatory compliance, force-feed the next action to the most capable collector, and do real-time reporting.
But Dan’s words of wisdom were right. It is one thing to bring in the credit business, it is another thing to protect the balance sheet!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group