By forcing people across the nation into unemployment and shattering the profitability of individual companies and entire verticals, COVID-19 has sent the United States into an economic recession unlike any before. Consequently, credit card portfolio management has become more critical than ever.
To learn more about how COVID-19 has impacted the credit card space and what issuers can do to stay on track, PaymentsJournal sat down with Brian Riley, Director of the Credit Advisory Service at Mercator Advisory Group.
COVID-19 brought a recession unlike any other
While recessions themselves are nothing new to economies—and are in fact a natural part of the economic cycle—the COVID-19 pandemic stands out because of its abrupt and unexpected nature. While there were indications of erosion and a potential recession prior to the Great Recession that began in 2008, that was not the case with the recession caused by COVID-19.
“With COVID-19, there was simply no anticipation whatsoever because it is an abrupt global public health issue,” explained Riley. Therefore, while a recession is a normal incident, this particular recession is abnormal because it came in a different form than any previous recession has.
For issuers, credit portfolio management is key
With credit use so closely tied to consumers’ household budgets, it has the tendency to ebb and flow as changes in the economy occur. Consumer spending has tapered off and creditors are sending out a record number of deferrals and payment holidays.
But consumers will still need credit on a long-term basis, making it important for issuers to manage their credit card portfolios in a way that takes the changing economic climate into consideration. By using a structured approach to evaluate and manage their credit portfolios, issuers can have the advantage of protecting their existing customer accounts and building downstream revenue.
A key portfolio component: Rewards
Credit rewards are a great example of what organizations can adjust within their portfolios to adapt to the changing economy. With the ongoing pandemic, travel rewards have lost their appeal as cardholders cancel trips and delay travel plans.
But while a trip to Hawaii may no longer be an aspirational benefit, cash rewards and cashbacks can provide an immediate benefit to the consumer in a way that meets their needs today. “The takeaway on rewards is that it is a living, breathing process that needs to be observed,” noted Riley. “It’s really important to understand where the market is going and to understand how a portfolio is positioned to compete against that,” he added.
Mercator Advisory Group’s Credit Card Management program
Credit cards are among the most profitable retail banking products that exist, but forces within the portfolio itself and external factors can impede that profitability. By conducting an independent examination of their portfolio, middle market banks and credit unions can protect their portfolio and prevent nationwide issuers and top banks with well-honed programs from poaching their clients.
That’s why Mercator Advisory Group offers its Credit Card Management program to issuers to help them understand how their credit operations work and how profitability can be maximized.
Mercator conducts an in-depth independent review of an issuer’s operation metrics, provides feedback and gap analysis to improve workflow, and offers a comprehensive view of risks and opportunities in an organization’s credit card business. Issuers can then leverage Mercator’s fact-based insights, metrics, and advice to hone performance or make the determination that a credit card operation isn’t suitable for the business.
“Mercator’s programs look to provide an external, objective view of the recession’s impact to a credit portfolio, how to counteract the risk, which stops should be in place, and where an issuer should position itself for when things get better,” explained Riley. In small to mid-sized banks with lower risk tolerance than large national institutions, it is particularly crucial to be able to have an objective view of what’s essential during these times.
A Mercator success story
One of Mercator’s clients that used its Credit Card Management program had a credit line increase program in place, but did not have a decrease program. “This is somewhat of a shortcoming,” said Riley, as the organization was “adding the balance when people performed better, but not contracting it in job losses or other circumstances where money was tight.” The ability to contract a credit line is a significant safety valve that needed to be in place to contain the risk.
The same organization had a large number of credit card offerings for its size, which made administrative functions like executing credit policies and conducting quarterly assessments of credit line management programs difficult to perform. Mercator helped to simplify many operations and create metrics that held actionable meaning to managers including flow rates, net flow rates, delinquency, and new account activation.
COVID-19 has sent the United States into a recession. As a consequence, consumers’ use of credit, which has historically been dependent on household budgets, has also been sent spiraling. But strong credit offerings are an important long-term investment and will be necessary to remain competitive and retain customers during and after the pandemic.
By serving as an expert independent advisory, Mercator Advisory Group’s Credit Card Management program can help organizations to maximize the performance and profitability of their credit card portfolio.