Fannie Mae is lowering its minimum 620 middle credit score requirement for purchases and refinance loans—a move that could broaden access to homeownership for borrowers with thinner credit files or lower scores.

Following Freddie Mac’s lead, Fannie Mae is removing the threshold from its Desktop Underwriter (DU) eligibility determination system. While DU may no longer require a credit score, it will continue to evaluate loans using a comprehensive set of credit risk criteria to determine whether they qualify for sale to Fannie Mae.

The impact on homebuyers could be significant, even though Fannie Mae and Freddie Mac do not originate mortgages directly. These entities purchase loans from other mortgage lenders, but lenders often check borrower eligibility in DU and Freddie Mac’s platform before issuing loans.

The policy shift could especially benefit “near-miss” borrowers: those with consistent income or cash reserves but credit scores that previously fell just below the 620 cutoff.

Still, Fannie Mae will continue to weight multiple risks, including property attributes, occupancy status, whether the loan is a purchase or refinance, borrower debt levels, and available cash reserves.

An Older Homebuyer

This change in eligibility criteria comes amid mounting challenges for younger consumers trying to buy homes. According to the National Association of Realtors, the median age of a first-time U.S. homebuyer has climbed to a record 40 years old—a sharp jump from 33 just five years ago.

At the same time, first-time buyers now account for less than a quarter of all home purchases, the lowest share in nearly 45 years.

Gauging the Risk

Although removing credit scores from the mortgage eligibility equation could open the door for more buyers, credit scores are still a critical measure of borrowers’ ability to repay loans—and a key indicator of broader economic health.

Recent data from credit bureau TransUnion found a widening divide in consumer credit profiles, with borrowers classified as either super prime or subprime, leaving fewer in the mid tier. This polarization has been driven by long-term economic turmoil and rising household debt.

In addition to credit card debt, which has been hovering near all-time highs, more consumers are taking on unsecured personal loans, and auto loans have veered into delinquency. Since Fannie Mae and other mortgage lenders must still consider this debt when determining loan eligibility, it’s unclear whether removing the credit score requirement will meaningfully expand access to homeownership.

The post Fannie Mae to Drop Minimum Credit Score for Homebuyers appeared first on PaymentsJournal.

Americans are carrying more revolving debt than ever, and 2025 could push those numbers even higher. Credit card balances have ballooned as inflation eats into wages and borrowing costs stay stubbornly high. With economic uncertainty still looming, the big question is whether consumers will keep swiping—or start pulling back.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Javelin Strategy & Research’s Report: Seven Credit Card Warning Signs in 2025: Don’t Stop Lending, but Watch Out

U.S. Revolving Debt, Year-End Totals (in trillions of dollars)

• In 2022, the U.S. revolving debt total was $1,213 trillion.
• In 2023, the U.S. revolving debt total was $1,319 trillion.
• In 2024, the U.S. revolving debt total was $1,317 trillion.
• In 2025, the projected U.S. revolving debt total is $1,375 trillion.

Source: Federal Reserve, Javelin Strategy & Research projections

About Report

For credit card managers, navigating shifting risk indicators is a constant challenge. Today’s landscape sends conflicting signals: unemployment remains low, inflation has eased but is still elevated, and consumers are tightening their belts on nonessential purchases. Meanwhile, lender confidence is waning and delinquencies have climbed well above typical levels. The inevitability of a future recession only adds to the uncertainty.

In this new report from Javelin Strategy & Research, seven core metrics—revolving debt, consumer confidence, lending outlook, unemployment, inflation, delinquencies, and charge-offs—are analyzed in depth. The report also offers strategic guidance for credit managers looking to mitigate exposure and maintain portfolio health.

The post Will Revolving Debt Increase in 2025? appeared first on PaymentsJournal.

Credit card debt among U.S. consumers reached $1.21 trillion, the highest level on record since the Federal Reserve began tracking the data over 25 years ago.

According to its Q4 2024 findings, credit card balances increased by $45 billion in Q4, reflecting a more than 7% year-over-year increase. At the same time, credit card delinquency rates remained high, with 7.18% of balances reported as delinquent over the last year.

Despite rising credit card balances and increased delinquencies, U.S. consumers continued to accumulate debt throughout the holiday season. More than a third of respondents said they took on additional debt during the period, and nearly half stated these expenses were unplanned. According to LendingTree, the average consumer added $1,181 to their credit card bill in the holiday season, up from $1,028 the previous year.

Continuation of a Trend

Data from the Federal Reserve points to a continuation of an ongoing trend. Not only is credit card debt mounting, but over 10% of consumers are also making only the minimum payments on their balances.

Inflation has been one of the culprits behind the rising dependence on credit cards, a trend that accelerated in the wake of the pandemic. In addition, high interest rates have made carrying a balance even more expensive.

Over the past few years, the Federal Reserve has raised interest rates, causing the average credit card rate to skyrocket over 20%. However, despite the Fed lowering its benchmark rates in the latter part of last year, credit card rates have yet to decline significantly.

Fragile Segments

The strain of rising prices and interest rates has particularly impacted lower-income households. In addition, more retirees—who traditionally live within fixed budgets—have turned to credit cards to make ends meet. According to data from the Employee Benefit Research Institute, over two-thirds of U.S. retirees carried outstanding credit card debt last year, a substantial increase from previous years.

“What is important here is that not all card segments are showing signs of stress, but the most fragile segments—those with low FICO Scores, lower incomes, and less experience with credit—indicate downfield risk in 2025,” Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, told PaymentsJournal.

“When you consider that revolving consumer debt is at an all-time high, the problems of inflation continue to stress household budgets, and issuers must keep a keen eye on vulnerable portfolio indicators,” he said.

The post Credit Card Debt Continues to Mount for U.S. Consumers appeared first on PaymentsJournal.

Consumer credit card spending came to a halt in March, surprising experts who had expected a steady increase. The total outstanding revolving credit rose by a mere 0.1%, a stark contrast to the consistent 5% monthly rises observed since the pandemic began.

The Federal Reserve reported that revolving credit rose by $152 million in March, marking the smallest increase since credit card debt declined in 2021. This figure is notably lower than February’s $14.12 billion increase, nearly a hundred times as much as the March figure.

Economists had expected a $15 billion increase for March. What went wrong? Part of the issue lies in a baseline problem, with credit reaching higher levels in February than initially reported. The Fed’s initial report indicated a $11.2 billion increase for that month, still placing  revolving credit at an all-time high. The higher figure released this week caused the percentage increase for March to be lower than initially anticipated.

Factors Slowing Credit Increases

Higher interest rates are likely a factor. The average interest rate for a credit card reached 21.59% in February, its highest since the Fed began keeping track of rates in 1994. But, that should have already been factored into the estimates.

The expert error doesn’t seem to have come about because Americans were spending less. An earlier report from the Bureau of Economic Analysis, released at the end of April, found that personal consumption expenditures (PCE) increased by $160.9 billion in March, a rise of 0.8%. On a percentage basis, that matched the rise in PCE from February.

A Spike in Income

That same report showed a significant increase in income. Personal income rose by $122.0 billion in March, representing a 0.5% monthly rate of increase. Disposable personal income, which is personal income minus personal current taxes, increased $104.0 billion.

In February, disposable personal income had risen by just $49.7 billion. This means Americans had an additional, unexpected $50 billion in income to play with in March. Real personal income minus transfer receipts—which include such things as retirement and unemployment benefits—is currently at an all-time high.

Was that a factor in the nation incurring so much less credit card debt? We’ll gain further insights in early June when the Fed releases its next report on consumer credit. The report will hopefully provide a clearer picture of the sustainability of this trend.

The post Why Credit Card Debt Slowed Sharply in March appeared first on PaymentsJournal.

Households worldwide are leaning on credit cards to meet everyday costs as inflation and elevated interest rates take a toll. In the U.S., credit scores for lower-income cardholders have fallen to their lowest point since the beginning of 2020, indicating that credit delinquency might still get worse.

In the UK, a Bank of England credit conditions survey revealed that both mortgage and credit card delinquency rates increased by the end of 2023. That’s even as borrowing rose in both credit card and non-mortgage lending.

In reference to the UK report, Javelin Strategy and Research Director of Credit Brian Riley said, “Consumers in every market face the dual challenge of rising interest rates and high inflation. Like the U.S., loan demand is strong, but consumers are leaning on credit cards to support their household budgets. They are simply not able to keep pace with rising costs.”

A Global Problem

The Q4 report from the Federal Reserve Bank of Philadelphia echoed many of the concerns raised in the Bank of England survey. Around 3.5% of U.S. credit card balances were over 30 days past due—that’s the highest level of delinquent accounts since 2012, and an uptick from the previous quarter. The amount of accounts that were 60 or 90 days past due rose as well.

The number of borrowers who were simply making minimum payments also soared to its highest mark, increasing 0.34% from the previous quarter. Roughly 10% of cardholders have a balance exceeding $5,200, and 25% of accounts broke $2,000 for the first time.

Relief may be on the way for UK borrowers because the Bank of England projected that inflation is expected to drop below 2% in the coming months. However, it clearly hasn’t made any impact for consumers yet.

Kareem Haji, who oversees UK financial services for KMPG noted: “Defaults across all unsecure lending (not including mortgages) increasing over the same three-month period indicates many people are still struggling to meet their day-to-day costs. Lenders will need to be vigilant and continue to offer support for borrowers in the interim.”

Thinking Downfield

The initial response from lenders was not as supportive as borrowers might like. Credit card issuers in the UK have begun to shorten the interest-free periods for credit card balance transfers.

In the U.S., many card companies have begun to tighten credit limits. The median account had a $3,000 limit in Q4 2023, which continued a yearly decline. In contrast, the average credit limit was $3,368 in Q2 2023.

Riley, who has been forecasting a delinquency wave for years, said, “Credit card issuers need to think downfield into late 2024 and early 2025. These stresses will turn into real operational risk that will result in higher chargeoffs.”

The post Pressure on Consumers Driving Worldwide Credit Card Delinquency appeared first on PaymentsJournal.

With Americans continuing to leave vacation days on the table—especially younger demographics—there’s a rising determination to travel, even if it means borrowing money to do so.

According to a data from Bankrate, more than a quarter of those surveyed said they would be willing to take on debt to travel this year. That’s more than double that of those who would do the same for categories like dining out and live entertainment. Specifically, 44% of Gen Zers and 37% of millennials expect to spend more on travel in 2024 than they did a year ago. In contrast, 34% of Baby Boomers said the same.

Nearly half of Americans did not use all their vacation days in 2022, according to Expedia’s Vacation Deprivation Report 2023. Even those using vacation days didn’t use them for fun. More than half used at least one day for personal appointments, and nearly as many used an average of two vacation days in lieu of sick days. Respondents cited financial reasons as the biggest issue that prevented them from using their allotted vacation time.

A Struggle to Pay for Travel

A recent Credit Karma study reported that 92% of millennials and Gen Zers would rather receive the gift of travel or an experience like a concert or sporting event, rather than paying for material items. This falls in line with another study from Credit Karma which found that 38% of Gen Zers and 28% of millennials have been influenced to spend money they don’t have on travel after being exposed to other people’s vacations on social media.

The upshot is simple: More debt to pay for the travel young people so richly desire. Younger individuals have been found to favor rewards points more than older generations, presenting a rich opportunity for companies offering travel rewards cards. Prepaid gift cards have also become an option for older consumers looking to provide the younger generation with what they desire but may not afford.

“Gift cards provide a great opportunity to allow recipients to get the gift they want,” said Jordan Hirschfeld, Director of Prepaid at Javelin Strategy & Research. “It’s unlikely that a giver would directly buy a plane ticket or an on-site experience, but a gift card to offset those costs or provides a more meaningful opportunity and a treasured gift.”

The post Young Americans Willing to Incur Debt for Travel Experiences appeared first on PaymentsJournal.

Nearly two-thirds of U.S. consumers are in credit card debt, average roughly $5,875 in prepayments, according to new data from Clever Real Estate.

The company polled 1,000 U.S. credit card users and found that nearly half rely heavily on their credits cards for essentials, including food, rent, and utilities. But because of the current state of the economy, and the fact that the cost for goods and services has increased significantly, consumers are having a difficult time keeping up with their bills and paying them off. In fact, nearly a quarter (23%) of respondents said they’re going deeper into debt as a result.

Financial Woes

Consumers are spending roughly $1,506 each month via their credit cards, according to the research. More than a quarter (28%) said they are having a tough time keeping up with the minimum payments, while fewer (14%) said they’ve even missed a payment this year.

According to Clever Real Estate, millennials are struggling the most, compared to their younger and older cohorts. In fact, more than two-thirds (67%) of millennials surveyed said they’re in credit card debt, with an average balance of nearly $6,800. In contrast, baby boomers said they carry an average credit card debt of $5,143 while Gen Z is not carrying as much credit card debt, averaging a balance of $4,461.  

U.S. Debt Is Reaching New Highs

Data from the Federal Reserve released earlier this year found that U.S. household debt has reach $17 trillion in Q1 2023.

While the Federal Reserve found that mortgage originations during the first quarter of 2023 were low, auto loan originations increased, particularly when compared to pre-pandemic volumes.

By and large, credit card balances have been increasing over the past year—and will continue to increase—as inflation grows. Consumers, particularly those that are struggling to make ends meet, will continue to lean on their credit cards for necessities.

The post More Consumers in the U.S. Are Dealing with Credit Card Debt appeared first on PaymentsJournal.

Headlines proclaiming record credit card debt levels in the U.S. may have elicited concern, but analysis from WalletHub reveals a more optimistic reality.

At first glance, it may seem that U.S. households are drowning in credit card debt, with a staggering $1.03 trillion owed as of Q2 2023. But, as WalletHub’s analysis of Federal Reserve Bank of New York data reveals, the impact of inflation can’t be overlooked when weighing the significance of these numbers.

Diving into the Figures

While credit card debt in the U.S. is at a record high, when adjusted for inflation, the narrative isn’t as ominous. According to WalletHub, total credit card debt is 18% below its inflation-adjusted peak, and the average U.S. household carried roughly $8,668 in credit card debt by the end of Q2 2023, which is “20% below the record on an inflation-adjusted basis.”

When inflation is accounted for, it becomes evident that previous periods in recent history have seen higher debt burdens. American households, on average, appear to be managing their credit card debt more responsibly than in the past, and the ratios of credit card debt to deposits and total household debt to deposits are on favorable trajectories.

“I’m cautiously optimistic about the economic environment going into 2024,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “The large bank delinquency rate has been increasing steadily, which we interpret as normalizing to pre-pandemic levels. However, as we discuss in our report “A Mid-Year Review of Credit Cards,” charge-off rates at small to mid-size banks are at highs unseen since 2009.”

There’s also an impending economic hammer that is about to drop this fall—student loan payments are set to resume after a three-year hiatus.

“We are about to see a significant shock to the market when student loan payments come due in October for the 44 million borrowers holding $1.57 trillion in debt. I fear that households have been making long term financial decisions, such as taking out auto loans, without budgeting for these extra payments,” Danner said.

The post Adjusted for Inflation, Levels of Credit Card Debt Aren’t So Bad appeared first on PaymentsJournal.

Consumers in the U.S. continue to struggle with payments, as interest rates and inflation plunge households further into debt. According to new data from the Federal Reserve Bank of New York, U.S. household debt has reached $17 trillion in the first quarter of 2023.

The research is based on the New York Fed Consumer Credit Panel, which draws data from anonymized Equifax credit reports, this report provides valuable insights into the state of the economy and its impact on American households.

Record Levels of Debt

According to the Federal Reserve, aggregate household debt balances have increased by $148 billion in Q1 2023, a 0.9% rise from the previous quarter. This brings total balances to $17.05 trillion, representing a $2.9 trillion increase since the end of 2019, just before the pandemic-induced recession. While growth in mortgage balances has been relatively modest, other forms of debt, including home equity lines of credit (HELOC) and auto loans, have shown consistent upward trajectories.

The data also highlights a reduction in mortgage originations during Q1 2023, reaching the lowest point since Q2 2014. However, auto loan originations remained elevated compared to pre-pandemic volumes. These insights indicate potential shifts in consumer preferences and financial priorities, which could influence the development of new payment solutions and lending models.

The Federal Reserve Bank of New York also provides valuable data on delinquency rates and public records. While delinquency rates remained low and roughly flat in Q1 2023, the transition rates into early delinquency for credit cards and auto loans increased.

Inflation—A Global Problem

We’ve previously covered how credit card balances are increasing as inflation grows, and how more Americans are struggling with increasing costs and decreasing savings.

Cost-of-living is becoming a growing issue, and not just in the U.S. In the UK, for example, keeping up with the rising cost of goods is leaving some people to shoplift—or in many cases—turn to buy now, pay later (BNPL) services to divide up their payments in smaller installments to help during this difficult time.  

The post Total Household Debt Reaches $17 Trillion appeared first on PaymentsJournal.

The persistent cost-of-living crisis in the United Kingdom has another symptom: a rise in shoplifting.

A news report from the country cited incidents “being reported rampantly in the UK.” The report fixated on food costs, noting that they had risen 19% in March 2023 from a year earlier.

That inflationary rate for food nearly doubled the overall March rate of 10.1% reported by the Office for National Statistics last month. The agency’s next report is due on May 24.

British tabloid Metro cited a survey indicating that one in 10 young people has resorted to shoplifting. The same report suggested that the crisis is landing on the younger set with particular force: 37% of young adults have sought financial support to buy food, compared with 5% of those over 55.

Prices have skyrocketed in recent years, with a steady climb beginning in March 2021. A downward drift has occurred only recently, but it has not been enough to ease the pain. Each monthly number is year over year:

UK Inflation Rate, February 2021-March 2023

Contrast that with the U.S. numbers during the same period (again, monthly statistics are year over year):

U.S. Inflation Rate, February 2021-March 2023

Inflation is a global problem, but the impact isn’t the same everywhere.

On Thursday, the Bank of England increased the interest rate for the 12^th consecutive time, lifting it to 4.5% from 4.25%, in an effort to tame inflation. The central bank has said that it expects the inflation rate to fall later this year. Initial projections had it dropping to around 4%, but around 5% is now anticipated.

Dealing With the Pain

Earlier this year, a report indicated that some UK residents were using buy now, pay later (BNPL) loans as a way of soothing their money woes during the cost-of-living crisis.

At that time, more than a third of workers in the UK had used the loans, with another 15% saying they expected to use such loans, in which goods or services are received, then paid for in installments that are generally interest-free.

The problem, of course, is that many consumers who are cash-strapped now put themselves in greater jeopardy by taking on future obligations. Indeed, BNPL users often profile as debt-laden.

These payment products—which don’t trigger credit checks, a fact that makes them more appealing to younger, less creditworthy segments—are now drawing regulatory attention in the United States, as outlined in a Javelin Strategy & Research report written by analyst Daniel Keyes, Buy Now, Pay Later’s Suddenly Uncertain Future.

Meanwhile, Back in the UK …

In a sign of where the UK crisis is landing hardest, the pediatric medicine Calpol is reportedly one of the most frequently shoplifted items. A news report said daily essentials such as milk and cheese have been fixed with security tags.

According to data compiled by Statista, reported shoplifting incidents hit nearly 275,000 in England and Wales in 2021-22, up from 227,983 in 2020-21. And though that’s a remarkable rise, the numbers in the five previous years—before the cost-of-living crisis—were much higher:

• 2015-16: 337,257
• 2016-17: 370,306
• 2017-18: 382,650
• 2018-19: 375,173
• 2019-20: 359,315

The post Cost-of-Living Pressures in UK Drive Desperation appeared first on PaymentsJournal.

Debt collection requires a lot of technical support. Given that a typical debt collection case load comprises 100 accounts per person per day, staffing debt collectors for a million accounts requires a small army. As a result, triaging the accounts and assigning them to staff who are best equipped to address them is crucial.

To meet this challenge, companies such as Zoot have developed account management and debt recovery systems that analyze customer behavior to rank delinquent payers by risk level, and assign them to the staff best equipped to manage them. Optimized debt-recovery systems will be crucial for financial institutions as the pandemic glut of savings diminishes and consumers take on more debt.

Changes in Credit Card Trends Since the Pandemic

At the beginning of the pandemic when unemployment spiked, consumer debt declined paradoxically. This was due to government financial support as well as changes in consumer behavior. Consumers benefited from increased unemployment aid, antieviction policies, stimulus checks, and loan forbearance programs. In addition, because of COVID-19, consumers decreased their spending on shopping, fuel, dining, entertainment, and travel.

As a result, consumers were in a better place financially, on average, after the pandemic. With extra funds and reduced costs, many consumers paid off debt and accumulated savings. This led to a decline in credit card balances and loan delinquencies.

In 2022 this trend has reversed, with inflation cutting into consumers’ budgets. From December 2021 to May 2022, total household debt increased from $14 trillion to $16 trillion. In Q2 of 2022, the number of credit cards Americans hold increased to a record 500 million. All of this reflects the reality of the American economy: people are struggling to keep up with inflation. Credit card delinquency rates have increased since their lows during the pandemic, as have foreclosure rates.

For financial institutions, this means the financial situation of their customers has changed. As a recent True Acord article explained, “Consumer ability to acquire, and feasibility of keeping up with payments for most types of loans is very different today than it was a year ago. And that customer’s profile changes again when they start missing payments due to financial stressors.”

Financial institutions should anticipate that consumer debt will continue to rise, especially if a recession does come. They need to focus on optimizing their debt collection systems so they can be ready for the storm.

What Is a Debt Collection System?

A debt collection system leverages the customer data it has and allows banks to assess the likelihood an individual customer will repay their debt, as well as helps banks devote debt collection resources accordingly.

Zoot’s system uses cash flows, collections history, collateral, account balances, customer demographics, bankruptcy filings, and account activity to help determine risk ratings for customers.

As an example of how this works, Zoot looks at a customer’s credit line and evaluates how much credit they’ve used so far and how much is available. “Does the customer only use $100 of it or are they running up to $5,000 every month? That data says a lot about how the customer manages a budget,” said Brian Riley, Co-Head of Payments Research at Mercator Advisory Group.

One red flag is the use of cash advances. “[Cash advances] have a much higher interest rate. To get $20 out of an ATM on your credit cards could cost you $8 in interest fees,” he said. “A person who does that repeatedly is a high-risk customer.”

People who bounce checks are inherently riskier as well, as are those who consistently don’t make payments until the end of the month.

Using the Risk Model Effectively

When it comes to customers who aren’t paying off their debts, banks tend to hand over that information to collection agencies to recoup that money. “For those who don’t have the money, banks work out arrangements,” said Riley. “There are certain consumers who can’t pay due to temporary situations—they’re in the hospital, there’s a natural disaster, or they’re dealing with a family emergency.”

If customers have a reliable track record, it doesn’t make sense to waste internal resources collecting from them. Moving collections staff toward the riskiest customers lets banks manage their collections with fewer staff.

The more interactions with customers, the more likely those customers are to pay back debt. According to Zoot, “Consistent interaction with delinquent account owners can reduce charge-offs, strengthen customer retention, further trust and goodwill, and reinforce the institution’s reputation.” A debt recovery model goes through those millions of accounts and sorts them into groups. “Typically, there’s three groups of accounts,” said Riley. “There’s ones where no matter what, they’re not going to pay; there’s another that, with a little effort, will pay; and finally, there’s one that just doesn’t have the resources to pay.”

The debt-recovery system sorts these customers into account queues in a case management platform. A collection manager assigns staff to these work queues and can sequence the queues in order of urgency.

Riskier clients require more aggressive efforts to collect, while dependable clients may require less aggressive efforts. “A bank customer with a mortgage that’s paid off who has been working for 40 years is less risky than a young guy right out of college,” said Riley.

Using Collections Staff Wisely

According to Riley, the turnover rate in the collections department is very high, typically around 25% to 30% a year. As a result, highly trained debt collectors are scarce.

“If there are 500 debt collectors at a bank, 100 of them will be relatively new, 100 of them will be well trained, and 300 will have medium-level training,” said Riley.

A debt recovery system can classify accounts into different buckets based on the likelihood of client repayment. Those categories can be deployed to employees with the right level of skills.

Collecting from delinquent customers is “more brain than brawn,” Riley said, leaning on his experience running a debt collection unit at Chase. “If somebody is 30 days delinquent, I don’t want to kill their account and alienate them as a customer. As time goes on, I slowly increase pressure. If a customer hasn’t called me in four months, or had no contact, I’m not going to be that forgiving when he wants to make an arrangement. But at the end, you can’t get blood from a stone.”

With Zoot’s debt collection software, it’s possible to give certain segments of the population a pass on debt collections based on extenuating circumstances. “With the Fort Myers hurricane, do you really want collection calls when people’s windows are blowing off?” Riley asked. A sophisticated collections system like Zoot’s can block all accounts in an affected zip code. “This happens every year in New Orleans,” he added.

Preparing for the Future

According to Zoot and The Washington Post, “the modest delinquency rates of the recent past appear to be coming to an end. Charge-off rates remain at historical lows, but falling since 2010, they recently plateaued and in mid-2022 showed a hint of an increase.”

This implies that customers will be more likely to be delinquent on paying debt in the coming year. As bank profits are hit by inflation, banks need to focus on making their businesses as efficient as possible. Focusing on optimizing debt collections is a good step toward that effort.

The post Optimizing Debt Collection at Financial Institutions appeared first on PaymentsJournal.

UK fintech startup Yapily has released a new report titled, “Connecting the Dots: Open Banking and Financial Wellbeing,” which surveyed 2,000 consumers and 500 UK businesses. The report comes as the UK is facing historic levels of inflation and economic stress. They found that 95% of consumers expressed concern about the cost-of-living crisis. The UK Consumer Prices Index (CPI) rose to 10.1% in September, a return to its peak in July and areas most affected include energy (electricity & gas), motor fuel, and food.

When times get tough during economic stress, consumers tend to turn to credit products. The report showed that 66% of consumers used a financial product or service to supplement their income, which was accomplished in a variety of ways: 33% used credit cards for the first time, 27% used Buy Now, Pay Later (BNPL), 18% overdrafts, 13% personal loans, and 6% turned to payday lenders.

Businesses have also looked for ways to supplement their income during these difficult economic times. Roughly three-quarters of businesses reported using a financial product or service for cash flow management over the last 12 months and 33% reported using business cards for this purpose. Business cards provide a fast way to get working capital, but the credit line comes at a higher interest rate than a traditional small business loan.

Overview by Ben Danner, Research Analyst at Mercator Advisory Group.

The post New Survey Shows How UK Consumers & Businesses Are Adapting to Economic Stress appeared first on PaymentsJournal.

Consumer debt; encompassing credit card debt, student debt and auto loans, but not mortgage debt, continues to rise sharply, as Americans struggle with increasing costs and decreasing savings, a sharp reverse from the higher use of debit products in the past several years. A recent article in SchiffGold by Michael Maharrey details the rising trends:

“In August, revolving credit increased by a staggering 18.1% as total consumer debt surged to a record $4.68 trillion, according to the latest consumer credit data from the Federal Reserve. Total consumer debt increased by $32.2 billion in August, an 8.3% increase on an annual basis. That was well above the $24 billion projection…

To put the 18.1% increase into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.”

Bridge the Consumer Debt Gap

The current scenario amplifies coverage that Mercator has been providing that identifies both cause and potential solutions for financial institutions to bridge the gap with consumers, keep them in healthy financial situations, and benefit their business in the long term. As my colleague Brian Riley wrote in his research, this disposable income is at risk as personal expenses rise and consumers have no additional income alternatives to utilize when accounting for necessary spending. While credit will benefit, the added risk could become burdensome and also make credit less available to more at risk populations. In addition, as Maharrey reports, the tendencies in fiscal policy will be to make the cost of credit more expensive.

“And it appears that the Fed isn’t finished raising interest rates. This is bad news for Americans depending on credit to pay their bills. With interest rates rising, Americans are paying higher and higher interest charges every month with minimum payments rising. With every Federal Reserve interest rate increase, the cost of borrowing will go up more, putting a further squeeze on American consumers.”

Broaden the Toolbox with Prepaid Products

As an alternative FIs should look to broaden their toolbox to create better entry ramps for consumers who are not credit worthy or need to limit the additional stress of utilizing their remaining available balances. My latest research provides insight into the unique ability of prepaid products to provide such a gateway for FIs to create new opportunity that makes better budgeting sense for consumers, provides access to the credit/debit rails for customers and builds long term goodwill with budget conscious consumers.

The trends pointing to progressively larger increases in revolving credit also amplify the opportunity I wrote about last week. The fintech community to lean in the situation and be cognizant of credit and inflationary issues when developing products and business plan expectations. It’s clear that even as inflation moderates, the long-term effects of the past year will follow consumers and business looking to be financially stable.

Overview by Jordan Hirschfield, Director of the Prepaid Advisory Service at Mercator Advisory Group.

The post Consumer Debt Rising Due to Inflation appeared first on PaymentsJournal.

St. Petersburg, Fla. — (Sept. 20, 2022) — PSCU, the nation’s premier payments credit union service organization (CUSO), has announced it has expanded its partnership with ValleyStar Credit Union (ValleyStar). In addition to support services for credit, the CUSO will now also provide debit processing support for the credit union.

Founded in Martinsville, Virginia, in 1953 to serve nylon plant employees, ValleyStar currently operates in 44 counties and cities throughout Virginia and North Carolina. With a mission to make banking and managing finances as easy as possible, ValleyStar is committed to serving and supporting its members and their communities to lead more financially secure lives.

With more than $650 million in assets, ValleyStar was searching for a robust solutions provider that would deliver a highly functional, reliable and secure debit card program to its members. It was also seeking a partner that understood and employed the “people helping people” credit union philosophy. After a comprehensive review process, ValleyStar selected PSCU.

“PSCU has already proven itself a dedicated and trustworthy partner, and we felt that the CUSO was the right fit to keep our debit programs agile as we move forward in today’s constantly evolving digital landscape,” said Diane Walker, card services manager at ValleyStar. “PSCU’s shared commitment to delivering an unparalleled experience allows us to focus on our members, which is always our ultimate goal.”

PSCU will begin providing debit processing services and support to more than 45,000 members starting in fall of 2022.

“The way in which ValleyStar lives up to its goal of meeting members where they are in their lives is admirable, and we are proud to expand our partnership with them,” said Chris Gunnare, SVP, chief sales officer at PSCU. “We look forward to continuing to leverage our industry-leading technology to help ValleyStar meet their goals while also making a difference in their members’ financial lives.”

About PSCU
PSCU, the nation’s premier payments CUSO, supports the success of 1,900 credit unions representing nearly 7 billion transactions annually. Committed to service excellence and focused on innovation, PSCU’s payment processing, risk management, data and analytics, loyalty programs, digital banking, marketing, strategic consulting and mobile platforms help deliver possibilities and seamless member experiences. Comprehensive, 24/7/365 member support is provided by contact centers located throughout the United States. The origin of PSCU’s model is collaboration and scale, and the company has leveraged its influence on behalf of credit unions and their members for more than 40 years. Today, PSCU provides an end-to-end, competitive advantage that enables credit unions to securely grow and meet evolving consumer demands. For more information, visit pscu.com.

Media Contact:
Peyton Burgess
French/West/Vaughan
919-277-1168
PBurgess@fwv-us.com

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With digital payments picking up steam around the world, it could be said that the future of the physical card is uncertain. The COVID-19 pandemic has accelerated the rate of digitalization, with new ways to make a touchless card payment – such as QR codes, mobile wallets and contactless payments – becoming widespread.

The role of the physical card, however, is still a key element of the cardholder experience, with some users preferring to use their physical cards whenever possible. With so many different consumer needs to meet, what should issuers be mindful of in today’s changing payment environment?

Are digital payments leading the pack?

Data is emerging which shows digital payments are leading the way. One payment option that is growing in favor thanks to their speed and ease is digital wallets. This technology can be used to make online payments, transfer money to friends and to make contactless payments with your mobile. This is particularly true in the Asia Pacific area, where digital wallets are the most popular payment option for both e-commerce and point-of-sale (POS) transactions. In 2021, digital wallets represented 68.5% of regional e-commerce transaction value. This is predicted to expand to over 72% in 2025.

Likewise, mobile wallets – which are a specific type of digital wallet – have been gaining traction. Mobile wallets are the technology which enables consumers to make contactless payments with their mobile device rather than using a physical card at the POS. Global mobile wallet transaction volumes are set to hit 49 billion in 2023, representing 92% growth since 2021. One factor driving this growth is the increase in the contactless payment limit. This makes it even easier for consumers to tap to pay, reducing friction at checkout.

Don’t underestimate the importance of the physical card

Despite the recent developments in digitalization, issuers must not forget the relevance of the physical card. The pandemic did not just impact the growth of digital payments, but it also increased the number of contactless payments made with physical cards. This has obvious hygiene benefits, and for some people, may be a novel experience.  

While there is clear interest for digital, the physical card is here to stay – at least for now. In the US, 80% of iPhone users have activated Apple Pay, yet only 6% use the service. Despite 70% of US merchants accepting contactless payments in 2021, some consumers are still hesitant to give up the familiarity and convenience of their physical card. Trust could also be a factor hindering the widespread implementation of digital payments. Over the past few years, more consumers have reported that their perception of digital payments has deteriorated, rather than improved.

Can biometrics combine the best of both worlds?

Biometric cards have seen high levels of interest due to their security and usability. Interest in this technology has grown as biometrics look set to authenticate over $3 trillion of payment transactions in 2025, up from $404 billion in 2020. Providing the security of biometrics with the trust and familiarity of a physical card, they bring digital and physical together. The use of biometrics to authenticate the user of a card will allow issuers to raise the contactless limit and accommodate larger transactions. Going forward, cards or wallets which store cryptocurrency may also emerge, which could incorporate biometrics to increase security.

It seems undeniable that the digitalization of payments will continue. Payment initiation services will grow with the implementation of real-time payments and request-to-pay (RTP) solutions for account-to-account payments. However, issuers must strike a balance between security and convenience. For example, European issuers are concerned with meeting the Strong Customer Authentication (SCA) regulation mandated by the Second Payment Services Directive (PSD2).

Nevertheless, enhanced security must not come at the expense of a seamless customer experience (CX), or cart abandonment rates will increase. In an omnichannel world, consumers expect to be able to pay how they want, and for it to be quick and easy on any device in the digital or physical world. Giving them the choice to use their preferred payment method is vital.

Therefore, issuers face the challenge of having to stay ahead of the curve when it comes to implementing new technologies. All while ensuring that transactions are trusted, reliable and secure.

The post Physical vs Digital Cards – How the Landscape Is Evolving appeared first on PaymentsJournal.

The Consumer Finance Protection Board (CFPB) issued an advisory opinion regarding the use of convenience fees, also known as “pay-to-pay” fees by collection agencies.  It is becoming increasingly common for collection agencies to charge a fee to the consumer for the convenience of making a payment via phone, even though in many cases it costs the collection agency less to handle these types of payments.

“Federal law generally forbids debt collectors from imposing extra fees not authorized by the original loan,” said CFPB Director Rohit Chopra. “Today’s advisory opinion shows that these fees are often illegal, and provides a roadmap on the fees that a debt collector can lawfully collect.” 

Chopra also emphasized that the absence of a prohibition of a fee by the CFPB does not make it legal; only fees specifically listed in the consumer’s loan agreement or specifically authorized in legislation can be applied to collections transactions.

While this advisory opinion specifically addresses fees applied by collection agencies for loan payments, we have to wonder if similar guidance is forthcoming on the growing numbers of merchants that are applying surcharges to credit and debit card transactions for everyday purchases.  Rules governing surcharging and its less transparent variant “cash discounting” have been established by most card networks and individual states, but so far have escaped the scrutiny of the CFPB.  Although the application of surcharges and convenience fees to debit card transactions are expressly prohibited by all card networks and state laws, many merchants have implemented programs that can’t or don’t distinguish between credit cards and debit cards.

Overview by Don Apgar, Director, Merchant Services Advisory Practice at Mercator Advisory Group

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While economists vary on when the next recession will come, practical credit policy managers should think it will be sooner than later.Consumer debt is up and savings are down.

The New York Times noted that the World Bank indicates that “Global Growth Will Be Choked Amid Inflation and War.”

World growth is expected to slow to 2.9 percent this year from 5.7 percent in 2021. The outlook, delivered in the bank’s Global Economic Prospects report, is not only darker than one produced six months ago, before Russia’s invasion of Ukraine but also below the 3.6 percent forecast in April by the International Monetary Fund.

And expect to see a tough climate through the rest of the decade, meaning the next 7 years.

Growth is expected to remain muted next year. And for the remainder of this decade, it is forecasted to fall below the average achieved in the previous decade.

In some ways, the bank said, the economic threats mirror those in the 1970s, when spiraling oil shocks followed by rising interest rates caused a paralyzing stagflation or a menacing combination of soaring prices and low growth.

Here in the U.S., two metrics to watch are the growth of debt and the shortfall in consumer savings.

Data published by the Federal Reserve on June 7 indicates that revolving debt is setting new records. There are two ways to look at revolving debt: seasonally adjusted and non-seasonally adjusted.

Not-seasonally adjusted is a spot look at debt. It trails the seasonally adjusted number because the adjustment smooths out peaks and valleys in how consumers spend. Winter holidays, for example, increase consumer spending, so volumes tend to peak. In contrast, the non-seasonally adjusted numbers simply show actual amounts. As of the latest report, revolving credit card debt hit a peak of $1.1 trillion with the seasonal adjustment and $1.0 trillion without the seasonal adjustment.

Non-revolving debt, which includes auto loans, installment loans, and student debt was three times that amount, clocking in at $3.5 trillion, up $20 billion from the month before.

In an environment where we have 8% inflation in the U.S., expect more debt to build. The increased volume will certainly come from credit cards, as consumers toil with gas and groceries but keep an eye on installment lending, as consumers consolidate debt with cheaper (but climbing) interest rates. (For more information on installment debt in the U.S., see this Mercator report.)

Now, consider savings. Here it is evident that the party is over.

Dating back to the 1960s, when Americans saved about ten percent of their income, the metric fell during modern times. In February 1960, the metric was a 10.6% personal savings rate. In February 1991, the number was 8.8%. Trends dipped in 2005 to a mere 2.7%, then peaked during the COVID-19 period as consumer bank accounts filled with relief funds, at a whopping 24.8% rate in May 2020. The latest metric published by the Federal Reserve for April 2022 sits at 4.4%, indicating that Americans have gone through their savings.

That is why Jamie Dimon, Chase’s CEO suggested: “You’d better brace yourself,” Dimon told the roomful of analysts and investors. “JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”

I would go with Jamie on this one. Credit policy managers must begin tapering loan books, particularly credit cards, as the storm begins. And from the looks of it, there will be a long tail on this recession.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s Report: Installment Lending: Fintechs Gaining Ground on Loans Forecast at $212 Billion

U.S. Household Debt by Type:

• Collateralized debt from mortgages and home equity lines of credit accounts for 73% of U.S. consumer debt.
• Collateralized debt from auto loans accounts for 9% of U.S. consumer debt.
• Unsecured credit card debt accounts for 5% of U.S. consumer debt.
• Unsecured student loan debt accounts for 10% of all U.S. consumer debt.
• 3% of U.S. consumer debt is classified as “other,” which includes short-term loans, checking account credit lines, and ancillary lending.

About Report

Mercator Advisory Group released a report on trends in installment lending titled Installment Lending: Fintechs Gaining Ground on Loans Forecast at $212 Billion. The research explains the state of consumer installment lending in the United States and how fintechs and finance companies now outpace banks and credit unions in installment loans. Furthermore, this research examines how companies are offering embedded finance products such as CCaaS to allow customers the ability to offer their own credit card product. By way of four evaluative criteria, general advice is provided for those seeking a relationship with a fintech provider.

“Banks used to dominate consumer lending, with installment lending products priced far lower than credit cards, but that is no longer the case,” comments Brian Riley, Director of the Credit practice at Mercator Advisory Group, and the author of the research report. “Buy Now, Pay Later (BNPL) was a wake-up call to credit card issuers. BNPL was a recast of a merchant finance model used long ago by companies like GECC (now Synchrony) and Household Finance Corporation (acquired by Capital One). Now, fintechs are moving in the same direction with installment loans,” Riley says.

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Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s Report: Credit Card as a Service: Vendors You Need to Know

Credit Purchases and Revolving Debt Declined in 2020:

• During the height of the pandemic in Q2 2020, we observed the most significant decline in credit card purchase transactions in recent years.
• Using stimulus money from the CARES Act, consumers paid down their credit card debt.
• This caused revolving debt to decline by 10.7%. 
• Furthermore, open credit card accounts decreased for the first time in several years.
• The decline in credit card use forced issuers to rethink their product set and enhance their offerings to engage consumers and encourage credit card usage.

About Report

Mercator Advisory Group released a report covering vendors in the emerging Credit Card as a Service (CCaaS) market, titled Credit Card as a Service: Vendors You Need to Know. The research explains the current credit market and forecast, discusses the latest in credit products, such as Buy Now, Pay Later (BNPL) lending, and examines the effects of the COVID-19 pandemic on the consumer credit industry. Further, this research examines how companies are offering embedded finance products such as CCaaS to allow customers the ability to offer their own credit card product. By way of four evaluative criteria, general advice is provided for those seeking a relationship with a fintech provider.

“Exploring a partnership with a fintech is a viable option for launching new products, testing and evaluation,” comments Ben Danner, Analyst at Mercator Advisory Group and the author of the research report. Through API integrations, partners can easily integrate new financial service technologies into their existing portfolio to respond quickly to changing consumer demand.

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Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s Viewpoint: Revolving Debt in the United States: Ready to Charge, but Exercise Caution

Revolving Debt Generates Interest Revenue:

• A credit card account revolves when the customer does not pay their monthly debt in full. 
• Cardholders may pay as little as the minimum due to keep the account current, but interest accrues to the account if a balance remains. 
• Mercator Advisory Group projects that 42% of cardholders revolve and 58% pay their bills in full.
• At the current annual average interest rate of 17.13%, monthly interest revenue for U.S. issuers is $14.6 billion.
• Revolving debt fell from $1.092 trillion to $974.6 billion between 2019 and 2020. 
• At current interest rates, every billion-dollar reduction in revolving debt diminishes interest revenue by $14.4 million.

About Viewpoint

Credit card issuers acted aggressively to restore revolving debt, thereby offsetting the interest revenue loss resulting from COVID-related changes in purchasing and borrowing habits. However, while growth results effectively rebuilt portfolios, credit card issuers must be cautious about growing with new, riskier accounts rather than established card accounts.

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For most people, financial education was left out of school and career training. Financial knowledge barriers block well-meaning individuals from securing loans, paying off debt, and elevating their savings. But the fintech sector is pushing back, giving more people the opportunity to achieve their financial goals through a variety of high tech tools. 

The onset of the pandemic highlighted economic inequalities, even as it also brought about digital transformation in the workplace, in supply chains, and in the palms of consumer’s hands. And with other countries inching towards cashless societies, the demand for fintech debt management solutions has increased.

Fintech has answered banking shortcomings with forward-looking solutions that include security, digital payments, and lending. Now the sector has found a new role to fulfill in the area of debt management. Let’s take a look at how fintechs are beginning to pivot toward debt management solutions to help customers and break banking barriers. 

Better tools, better finances

According to the Federal Reserve, the unbanked and underbanked population in the US has reached 22% of adults. Workers in the hardest hit industries such as entertainment, hospitality, and manufacturing – already some of the lowest paid workers in the US – are expected to take five years to recover to pre-COVID financial levels.

According to one report, the total debt of US consumers grew to $800 billion, an increase of 6% from the previous year and the highest annual growth jump in over a decade. This has created significant demand for debt relief services that run similarly to the financial technology people are becoming more accustomed to. While there are an array of services and strategies for overcoming debt, many of them are systemically inaccessible. 

In addition to a widespread lack of financial literacy, the US also suffers silently from reading literacy as well. The Department of Education reports that 54% of adults ages 16 to 74 read at about a sixth grade level. The impact of this crisis is enormous considering that literacy rates are directly correlated with important outcomes in several other areas such as personal income, employment levels, and economic growth in general. 

Add that to the fact that banks and credit unions often use language that can only be understood by less than half of high school graduates, and you have a recipe for widespread financial ruin. 

Life insurance is another issue that faces families and individuals with limited financial knowledge. In the event of a financial disaster such as job loss or death of a primary breadwinner, having a life insurance policy can be beneficial. But the fact is that not many people know how to use this resource. In Canada, for instance, only a third of adults with children report having a life insurance plan in place, and in the United States, only 52% have life insurance. 

In sum, the struggles that were realized by everyone in 2020 were amplified for those living in debt. So while fintech has made huge strides in personal finance, there is still much to be gained from exploring debt management solutions on a personal scale. 

Debt management in Fintech

Fintech offers many solutions such as mobile account access, peer-to-peer lending, bill payment tools – and now debt management apps. There are now several apps on the market that are geared towards helping consumers erase their debt. 

While it is recommended that individuals save between 3-12 month’s worth of expenses for emergencies, many are only scraping by without the means or the education necessary to build their savings. This is where debt management apps can really prove their value.  

The most popular type of debt management fintech is the round-up app where a predetermined amount of money is set aside as soon as direct deposit is hit. Other types of debt management apps mainly assist with automating payments so consumers can’t forget and accidentally get behind on their payments. 

Here are just a few examples of Fintech apps that are beginning to change the tide for so many living in debt:

Student debt

• Pillar – Recently acquired by Acorns, this AI-powered startup helps consumers create a roadmap to getting out of student debt. In the future, Pillar will be available as a part of a subscription tier that allows customers to use the model of setting aside money as soon as they get paid to prioritize student loan repayment. 

• ChangEd – Another round-up app, ChangEd creates an easy way to automate regular payments to pay off your student loans. What sets them apart is that the app also helps users set aside extra payments so that they can pay off their loans sooner. 

Credit card debt

• Tally – This debt management app automates credit card payments so users can pay down their debt more quickly. Tally also offers a line of credit that consolidates consumer debts into one simple loan with a low APR and helps customers determine the best way to save money based on user activity. 

• Debt Manager – This simple app uses consumer debt information to create graphs and chart progress to provide a visual of paid and remaining debt. This interactive app utilizes the Snowball Method of debt repayment to manually or automatically make credit card payments. You can also make data-driven decisions with it’s different scenario calculators. 

Other personal debt

• Digit – Although not a traditional debt management app, it serves its purpose as a debt management tool. Another app in the round-up category, it helps users save money automatically without having to think about what else they could spend their money on. While there is no specific debt category for savings, it can easily be created by users so that they can begin to pay down their debt. 

• Mint – Mint is one of the most well-known apps for budgeting, but they’ve also made strides in debt management. This app gathers all of your finances in one convenient location so you can track payments, cash, credit cards, loans, investments, and more. 

Conclusion

One of the greatest challenges for today’s economy is achieving secure banking access for customers around the globe. Fintech provides apps that provide so many people with vital banking abilities and access to credit so they can better plan for their financial futures. Debt management is just one of the ways fintech continues to shake up the finance sector. 

The post Fintech is Bringing Debt Management Into the Digital Era appeared first on PaymentsJournal.

Here’s an interesting read as we close out October. The New York Times reports on a research study from The University of Missouri in an article titled “Credit Card Debt is Bad for More than Just Your Finances.”  The essence of the research centers around “A new study that worries about repaying debt may lead to poor health in later life.” Says the Times:

The stress of carrying card debt through adulthood is linked to poor health, including joint pain or stiffness that interferes with daily activities, a recent study from the University of Missouri found. Beyond the worries about repaying debt, one reason for poor health may be that people with high debt have little money left to pay for resources that protect their health, the study said.

The findings come at a time of increased financial insecurity for many Americans due to the pandemic, though the study noted that the level of unsecured debt, like credit cards, payday loans, or medical bills, has been rising more quickly than income over the past several decades.

In short:

It found that people who carried consistently high levels of unsecured debt were 76 percent more likely to have pain that interfered with their daily life than people with no unsecured debt.

People who carried debt over time reported worse physical health late in life, said Adrianne Frech, a medical sociologist and associate professor at the university’s School of Health Professions who is the study’s lead author.

And the effects lingered even if the debt had been repaid, she said. People who had paid down their debt over time were still 50 percent more likely to have pain that impeded regular activities.

According to the University of Missouri website:

Adrianne Frech, a medical sociologist, and associate professor at the MU School of Health Professions, analyzed data from the U.S. Bureau of Labor Statistics to example the financial health of nearly 8,000 “Baby Boomers” from age 28 to age 40, as well as their physical health.

Now, I don’t challenge the findings, and they are intuitive, but if the study was done for a business environment, you might want to know about the other variations on the data. For instance, is it low-wage workers feeling the stress, and what else is going on in their lives? Do they lack healthy 401(k) accounts? Do they have physical labor jobs that worked when they were thirty but might be too much for their old bones at 50?

And most of all, are these transactors – those who pay their bills on time – or revolvers – those that carry forward debt, the 43% or so of those who pay credit card interest? From personal experience, I get stressed out when I have an obligation but feel good when the commitment is paid off.

The University study is interesting, though it might also consider who fits into the group. Other factors play a role. The story reminded me of one Payments Journal covered in early 2021. The story talked about a recent MIT study about the feel-good aura of using a credit card.

A study by the Massachusetts Institute of Technology (MIT) shows that credit card spending triggers the same chemical reaction in the brain as addictive drugs such as cocaine and amphetamines.

But different cards can spark different desires, the study showed. Cards used in restaurants and on holidays create a greater appetite for spending than cards used to buy fuel, for example.

The takeaway, or at least mine, is that I feel good when I use credit cards. You do not have to touch money. You are protected at the point of sale. It can be a profitable game if you rotate cards for rewards. For example, my Amex Blue Preferred is the card of choice for groceries because it pays back 6%. But In Q4 2021, remember to use your Chase Freedom at PayPal because of the 5% back. Or, in December, use your Discover it card at Target to get 5% back. And if it is for gasoline, Citi Premier’s 3x multiplier is excellent, particularly as the national average for regular-grade gas is now $3.39. Or try Chase’s “adaptive accelerator”, and is there anyone in the world who does not want a trip to Disney on Chase?

But one thing is for sure. It does feel good to use a credit card and even better to repay.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Cards: First You Feel Good, Then Maybe Not So Much appeared first on PaymentsJournal.

One trillion is a large number.  When it represents the amount of consumer debt in the United States, each of the 132 million U.S. households carries $7,575 in revolving debt.  Assuming the average credit card interest rate at 16.30%, the latest number published by the Federal Reserve, it means that each household will pay about $1,235 in interest over a year.

$1,235 is not peanuts, but it does cost money to provide lending services. In addition, there are operational costs, fraud expenses, and credit losses, to name a few.

We use the Federal Reserve G-19 Report metric for the line item marked as Total Outstanding Revolving Debt, Not Seasonally Adjusted.  Not Seasonally Adjusted means that you do not smooth out the number to account for changes like winter holidays, tax refunds, or other events.

 Tracking began in January 1968, under the Johnson Administration, when revolving debt was only $1.4 billion.  You can see the number scale up to its current level at this link.

Historically, the U.S. market only passed the trillion thrice.  The first time was in December 2008, on the cusp of the Great Recession.  As the recession started, revolving debt plummeted to $789 billion, driven mainly through charge-offs.  As delinquencies aged, bad credits charged off and reduced interest-bearing receivables.  The market rebounded, but it took until December 2017 to pass the $1 trillion mark again.

December revolving debt peaks usually follow winter holidays as people increase their shopping.  With spending harnessed in the first quarter, and tax refunds in hand, consumers often pay down debt, which they did through April of 2018 when the low point for revolving debt settled at $963 billion.  The number scaled back up over a trillion in August of that year and stayed slightly over $1 trillion through March 2020, the period associated with COVID-19.

Since COVID, revolving debt bottomed out at $912 billion in April 2021. Since then, the U.S. market is headed back up towards a trillion, with three consecutive increases to the current level at $951.1 billion.  Our best estimate is that come December 2021, the U.S. market will be above $1 trillion again, which will bring back the level of interest income many credit card issuers rely on.

While these revenue lines are comfortable for lenders, the market faces credit card issuers reviving their card interests, such as Wells Fargo, and new entrants, including Goldman Saks.  More players mean less to distribute in interest income.  But even more critical are the threats of inflation and rising interest rates.

It makes you wonder- is $1 trillion in credit card debt the maximum the U.S. market can handle?  We think there may be a little more opportunity, but not much.  Plus, little attention goes to Buy Now Pay Later lending, which we expect will pass the $100 billion market in less than two years. 

We assume that household budgets can keep pace with inflation and interest until the next crisis, but keep an eye on the $1 trillion mark.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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The Senate Banking Committee holds a hearing about interest rate caps on July 29.  The title is ominous: “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.” The Military Lending Act (MLA) is in place to protect service people from predatory lending, primarily focused on PayDay lending.

While the Committee’s announcement does not mention the facts about interest rates and goes for an emotional, consumer-attractive title, it fails to consider the impact to consumers if interest rate caps are imposed.

First, a simple fact about credit card rates, according to Federal Reserve data.

The average credit card interest rate in the United States is 15.91% lower than the last two consecutive quarters and significantly lower than the average for 2018, 2019, and 2020, where the average rate was 16.04%, 16.98%, and 16.28%, respectively.

This hearing is by no means not the first attempt to control interest rates, as you can see here and here. However, the move sounds innocent, and by linking it to guidelines for military lending, it sounds like it is in the public good, but it will contract consumer lending. 

The issue is not that 36% interest rates should exist in credit cards. The skyrocketing rate rarely happens, except in the case of default interest rates.  The issue is should the government control consumer interest rates.

First of all, the U.S. government is probably the last place to look for insight into debt management.  According to TruthInAccounting.Org, the U.S. government is bankrupt many times over.  Using data from the annual financial State of the Union report, the Federal Government has 5.95 trillion in assets and $129.06 trillion in liabilities., including $21.1 trillion in publicly held debt. That’s a lot of zeros. 

We are not even talking about the $1.71 trillion student loan debt problem in America.  11.1% of those student loans are 90+ days in default.  Lending Tree says that there only $14.7 billion of those loans are in repayment status.  There is another $113.4 billion in deferment and $887.4 billion in forbearance.

When it comes to consumer credit management, asking the federal government to weigh in seems a little out of whack.  I am not the only one with this view. Consider a recent letter sent by seven top bank industry trade groups: American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America, and National Association of Federally-Insured Credit Unions National Bankers Association.  The organizations not only cite mathematical errors in the military rate calculation, but they also summarize their view as follows:

• We urge you to oppose pending fee and interest rate cap legislation because it will reduce access to credit for millions of consumers, particularly subprime borrowers who rely on affordable small-dollar loans, credit cards, and other depository institution products for short-term financing needs. Fee and interest rate caps will also discourage development of innovative products, especially those designed for the under-served market.

Ballard Spahr, a top U.S. law firm, summarizes the trade group’s strategy.

• They point out that the result will be to reduce access to credit and force many consumers who currently rely on credit cards or personal loans “to turn elsewhere for short-term financing needs, including pawn shops, online lenders—or worse—loan sharks, unregulated online lenders, and the black market.” 

Regulating lending parameters is an unsound move unless the goal is to contract lending.

Let the market decide.  With an average interest rate <16%, few cardholders have rates even near 36% under normal conditions.  But the minute Congress sets its sights on lending parameters, you will see lending contract at a massive scale.  And, I’d say with almost $6 trillion in assets and $130 in liabilities, you would be asking the wrong people for advice.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Interest Rates: Well-Intended, But Asking the Wrong People appeared first on PaymentsJournal.

Credit card growth might be lagging after COVID-19, but business is booming for private debt settlement companies. According to the Consumer Debt Relief Initiative, an industry-sponsored group settlement companies, private firms that negotiate compromised payment terms project that 10 million customers will use debt settlement services in 2021, a 75% increase over 2020.

Today’s (San Francisco) East Bay Times covers legislation to harness industry marketing efforts. AB-1405, filed in the California Legislature, passed through the first approval level for the state’s Senate Banking Committee and will likely resonate throughout the country. Also, expect to see something along the lines of the “Fair Debt Settlement Practices Act,” another consumer protection.

Debt settlement companies are for-profit or sometimes structured as not-for-profit debt relief companies. In contrast to Consumer Credit Counseling Services, a sixty-year-old non-profit governed by the National Foundation for Consumer Credit, debt settlement companies aggressively market their services to debt-stressed consumers.  Companies in the space include American Debt Enders, CareOne, Curadebt, Debt Consolidation Care, and National Debt Relief.

Companies aggressively market their services, and from the industry group’s numbers, more than 25 million consumers have used private debt settlement services since 2014.  Given high levels of unemployment and bulked-up consumer debt, there are likely some industry and consumer benefits. But, as the California bill explains, likely, vulnerable consumers are not aware of the long-term implications of using debt settlement companies, which often results in unexpected expenses, compromised payment options,  and, quite often, tarnished credit records.

Debt settlement firms are not associated with lenders, so plans to solve consumer debt issues often go awry, as the East Bay Times explains.

• Among the economic winners is the booming debt settlement industry, composed mainly of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on the customer’s behalf.
• But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.

And, confusion is often the order of the day.

• Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.
• Customers who enroll in a debt settlement plan make a monthly payment to a debt settlement fund. But, according to Nguyen Orth, debt settlement companies wait until the customer has defaulted on their debts — which can sometimes take up to six months — before they begin to negotiate with creditors.
• The defaults must occur before the negotiation process, but the debt settlement companies avoid explicitly saying this, Nguyen Orth said. Instead, debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.
• Despite loan forbearance from the federal CARES Act and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely overlooked by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.

The article offers the same advice I’d give a friend if asked what to do about a debt overload: call your creditor and work directly. Of course, it will be cheaper in the long run, and the debt settlement company would have to contact the creditor directly, anyway.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Debt Settlement Companies Come Under Fire: It Is About Time appeared first on PaymentsJournal.

Based on Bloomberg numbers, nine top credit card portfolios continue to show negative growth. The Financial Times illustrates credit card YoY loan growth as a percentage of the prior period. Portfolio shortfalls range from 9% at Discover to 21% at PNC.

The good news is that 2Q21 revenue should hold well, as credit card issuers continue to release loan loss reserves after Stress Tests indicated that the future would be less risky as expected.  The bad news is that the cushion will be gone by 3Q21, so it is time to market.

• Loan balances slid between 9 and 14 percent yearly among the largest credit card lenders, including JPMorgan, Citigroup, and Discover in the first quarter. So now, those lenders are at the forefront of a marketing blitz that is accelerating into the summer months. 
• According to Competition, online solicitations for new card customers jumped 85 percent last month year on year as lenders trotted out enhanced rewards, higher credit limits, and low promotional rates.
• Even with the surge, overall balance transfer offers are still at only 50 percent of 2019 levels.

This is not the first time in recent years where issuers scramble to bulk up their portfolios. If they do not, they will feel the pain with reductions in interest revenue and interchange. With collection volume down, now is a good time for some aggressive lend

• Last month Citigroup, Bank of America, and Capital One doled out unsolicited credit line increases to some customers with good credit history, raising those limits by as much as a third, according to offers reviewed by the FT and Competiscan data. Citigroup led the pack with the most increased notifications, according to Competiscan.

Collections are under control, and many issuers have their loss rates in the bag for 2021. Now, it is time to beef up solicitations and underwriting to build the revenue stream. If done effectively, 2022 will be off to a good start. If not, expect 2022 to start off in the red!

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Portfolios Slide: Lower FICO Scores, Steal a Co-Brand, or Loosen Up Lending appeared first on PaymentsJournal.

There was a great article written for Multichannel Merchant. The article provides a perspective on the opportunities of card-linked offers including how they evolved, how they work, and what can be done to make them better. 

This is a timely article too. Issuers are looking at card-linked offers, aka merchant-funded rewards for their debit cards. Most issuers experienced significant growth in debit use in 2020 and they would like to hang on to that. It’s a tough decision as the cost to manage a debit card is going up as fraud increases and as a probable interchange reduction is on the horizon for those issuers with greater than $10 Billion in assets and covered by Regulation II. 

While a debit rewards program where merchants are providing the discount help to keep costs in check, these programs do need ongoing attention to keep them top of mind with cardholders which generates greater use and loyalty. Here’s an excerpt from the article:

Card-linked offers initially appeared to offer an interesting niche, but not a channel worth serious marketing dollars. After a few years, though, larger institutions such as Bank of America, Chase, American Express, Wells Fargo and Citibank realized they were here to stay. Such offers were driving some of the highest Net Promoter Scores ever recorded for banking products, an uptick in card usage and lower attrition rates from checking account customers.

At the same time, the CLO platform companies were getting more sophisticated, creating advanced targeting options, incremental sales measurement and wallet-share insights. As more financial institutions opened up their customer base and associated transaction data, the industry’s scale attracted marketing spend that had previously gone to direct mail and other digital channels.

As the card-linked offer industry grew, marketers spent even more on it. But some banks began getting questions from their customers. They wanted to know why they weren’t receiving offers for the places they shopped the most, including supermarkets, convenience stores and big-box stores like Walmart and Target

In order for customers to receive card-linked offers from supermarkets and other large retailers that rely on manufacturer dollars to advertise, it’s necessary to integrate the SKU-level data from the receipt with the bank’s transaction data — that is, to add Level 3 data to Level 2 data.  If that were to happen, CLO companies could provide product-level offers (“Shop for Pampers at Walmart and get $5 cash back!”), or even category-level offers (“Buy groceries at Target and get $10 cash back!”). This would also enable more advanced targeting and deeper measurement of campaign performance, so merchants and brands can finally understand which offers work best.

It is past time for card-linked offers to evolve. When they do, customers, marketers, and financial institutions will all enjoy the rewards.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post What Makes Card-Linked Offers Work? appeared first on PaymentsJournal.

The often thankless job of a collection manager deserves note today, with 184 days remaining in 2021. Sure, collections do not have the panache of credit card acquisitions or the high-tech feel of innovating the latest technologies behind the scenes. The collection people execute risk management policies.

And, today, as in many markets worldwide, what is in the collection working queues represents the entire risk for the calendar year 2021. Therefore, the 185 days past due collection requirement remains applicable, and any credit card delinquency that cycles in tomorrow is 2022 credit risk.

Forget about the financial crisis for a moment and consider what is on your plate. 

The latest numbers published by the Federal Reserve indicate that credit card delinquency for 1Q2021 was a meager 1.99%. Here you can see that the metric is at the lowest level since at least 1Q1991.  Write that one down as you start forecasting your 2021 bonus.  The peak for delinquency during those 30 years was 6.77% delinquency 2Q2009.  Remember how that went.  If you were running or working in a call center, you would remember that the 6.77% turned into loss rates north of 10%.

Not today. With the current credit card charge-off rate at 2.88%, I’d bet the 2021 final rate will be closer to 2% than it is to 3%.  With the 4Q2020 final credit card charge off rate sitting at 2.67%, expect an improvement YoY of about 30bp.

That 30bp improvement is likely to make a collection line manager smile as they prepare for their MBO review.  But, for now, enjoy the limelight.  2022 will not be a piece of cake, and by the time 2023 rolls around, your collection operation will contend with the ugly issues of inflation and increased interest rates.

In the interim, expect your boss to be even happier than you.  As CNBC reports, “the Federal Reserve gives U.S, banks a thumbs-up as 23 lenders Easily Pass 2021 Stress-Tests” with the most recent stress testing results.

• The central bank said that the scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market.
• While the industry would post $474 billion in losses, loss-cushioning capital would still be more than double the minimum required levels, the Fed said.
• The Fed, in releasing the results of its annual stress test, said all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn. Bank shares popped after the release; the KBW Bank Index rose 1.5% at 5 p.m.

This means credit card issuers can release some loan loss reserve money to smooth out the suppressed revenue numbers caused by reduced revolving debt. As a result, interest income this quarter will be weak, and these funds can help.

So, June 30, which is also the anniversary of the day Gone With the Wind, was published. In addition, Albert Einstein published his theory of relativity (“Zur Elektrodynamik bewegter Körper”), add another important milestone to your calendar: National Credit Card Collection Day.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post National Credit Card Collection Manager Day appeared first on PaymentsJournal.

According to a  Harvard University study, more than 43 million households rent their homes in the United States.  Some rent out of necessity. Others rent because they do not want the maintenance issue associated with owning their home. Others, such as residents in Miami, New York, and San Francisco, have few options.  The Harvard study showed that “renters are more likely than owners to be young, low income, and single.”

One of the most significant issues for renters is that paying your rent does little or nothing for your credit score.  Ironically, if you own a 2 acre home in Sioux Falls, SD, you might be servicing a $150,000 mortgage with a $1,400  monthly fee.  Your credit bureau would reflect your payments. In contrast, if you had a $4,000 rental in San Francisco, your credit score would ignore the fact that you carry the debt each month.

Here is where a new credit card comes into play.  The WSJ reports on a new credit card aimed at the rental market.  The claim is that the card solves the most significant issue for renters: landlords do not typically accept credit cards for payment or charge a 3% fee to offset processing costs.

• Bilt Technologies Inc., a real-estate startup, is joining with Evolve Bank & Trust and Mastercard Inc. to launch a credit card designed for renters. Users can accumulate rewards points through rent and another spending, with no fees charged to the tenant or the landlord when paying rent on the card, according to Bilt.
• Many landlords already accept credit cards, but they typically pass on processing fees to renters, totaling about 3%. For landlords that don’t accept plastic, Bilt says it will mail landlords paper checks on behalf of the tenant, then charge the renter’s credit card account, with no fee.
• According to Bilt, the partnership can afford to offer no-fee rent payments because of the fees that Evolve and Mastercard will collect from all other types of spending on the card. The card program also attempts to incentivize non-rent expenditure by increasing the rewards for rent when cardholders spend more on everything else. Mastercard declined to elaborate further on how it will profit from the card without fees on rent payments.

The WSJ is somewhat early in its reporting.  A search of Bilt Technologies, Evolve Bank and Trust, and the CFPB could not find the official terms and agreement.  It will be interesting to watch, however.

Statistica reports that the average two-bedroom apartment in the United States rents for $1,101 monthly.  That means if the consumer were to use their card monthly, someone would be on the hook for $19.82 in monthly transaction costs, assuming 1.8% interchange.  Start doing the math and multiply 12 months, and you have $238 in annual fees, then consider 5% penetration of 43 million units, and we’re up to potentially $2.1 billion in interchange.

It is hard to see how this card could displace a good-old Discover iT card or a Chase Freedom, but stranger things have happened.  In the meantime, start saving for a house!

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Cards and Rent Payments: Realty Out of Synch with Reality? appeared first on PaymentsJournal.

The most recent numbers on U.S. inflation, which the Bureau of Labor Statistics (BLS) tracks, is that the Consumer Price Index (CPI) rose by 0.6% in May 2021.  The 12-month increase was 5..0% for all categories, with food increasing 2.2%, energy surging 28.5%, and all items excluding food and energy climbing 3.8%.  On a blended basis, the CPI index grew by 4.2$ between April 2020 and 2021.

The question is how long the trend will last and where it will level off.

 Suppose you ask Jerry Powell, the Federal Reserve Chair. In that case, you might feel fine when he says: “Our best view is that these effects on inflation will be neither particularly large nor persistent.” 

However, if you speak to Chase’s Jaime Dimon, you may become unsettled, as Barron’s mentions his comments at a Morgan Stanley conference: “he expects to see higher rates and more inflation. To prepare, he’s keeping a little extra cash on the balance sheet—about $500 billion. “Our balance sheet is positioned and will benefit from rising rates,” Dimon said.

You can probably see price changes in your consumer purchasing today.  At the grocery store, slight increases are evident in things like milk, eggs, and meat.  At the gas pump, AAA reports that the average price for regular gas is currently $3.075, versus a year ago at $2.103.  And, so it goes, as Kurt Vonnegut would say.

S&P points out that “the right balance of inflation and economic growth is important for a healthy economy,” which makes sense.  People need to get raises, and with that, prices will naturally increase, but they have to work in tandem. 

Inflation hits consumers and their ability to service their debt obligations from several angles.  First, the consumer may feel the pain less if they have credit available, which many do today, as we know from the stagnant growth in revolving debt.  Open credit lines measure in the trillions of dollars.  But then, stack on future months of small increases, and the storm brews.

On top of paying more and carrying more debt, consider what happens when interest rates rise.  With most credit cards pegging their interest rates to the Prime Rate, a perfect credit risk storm may be brewing with rising rates, rising prices, and rising debt levels.

The consumer burden is something for credit card issuers to watch from a risk management perspective, but there are three downfield opportunities for financial institutions to consider.

• Keep a steady eye on the merchant processing function.  Inflation brings incremental merchant revenue, but it will increase pressure on margins, perhaps creating the opportunity to shift processing volume to more efficient merchant partners.
• Advancing risk management technologies are essential, particularly as eCommerce continues to grow and Card Not Present fraud outpaces the growth.
• Buy Now Pay Later offers two learnings for bankers: micro-loans have a certain appeal, and alternative credit options will yield more buyers.  In both cases, though, bankers must consider their credit standards.

On the inflation issue, Jaime’s view is probably the most insightful. Once inflation starts, it begins to spiral, and the question goes back to how long and by how much.  But looking ahead, there needs to be a balance of credit risk management and market opportunity.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Cards & Inflation: A Serious Concern in Consumer Credit appeared first on PaymentsJournal.

It may be the calm before the storm, but the numbers are exceptional.  Collection managers, take solace in the fact that in 15 days, all your potential charge-off is in the collection work queues.  And these days, the operational results are better than ever.  Seeking Alpha published five headlines that indicate the second half of the year will be easy-breezy for collection operations. 

• Alliance Data Systems (NYSE: ADS) Card Services segment’s reported a delinquency rate of 3.2% as of May 31, 2021, compared to 4.8% in the same period a year ago.
• Bank of America (NYSE: BAC) reports an improving delinquency rate of 1.03% as of May 31, down from 1.17% in April and 1.46% in May 2020.
• Capital One Financial’s (NYSE: COF) credit card delinquency rate of 1.69% improves from 1.92% in April and 3.15% in May 2020.
• The first of the credit card companies to report credit quality metrics for May, Discover Financial Services (NYSE: DFS) credit card delinquency rate declined to 1.50%  in May 2021 from 1.69% in April and from 2.36% in May 2020
• Synchrony Financial’s (NYSE: SYF) credit card delinquency rate of 2.2% improves from 2.4% in April 2021 and 3.6% in May 2020.

Operational numbers run ahead of the Federal Reserve reporting Q12021 delinquency was a record low, at 1.89%.  Even with this historic low, 2Q numbers should look better.

Make hay while the sun shines, but remember, what goes up must come down, and the inverse is also true.  What goes down will also go up.

2022 might exhibit some stress as credit card issuers bulk up, but for now, enjoy exceptional operational results in credit management.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post 2021 Credit Risk: Locked and Loaded in 15 Days appeared first on PaymentsJournal.

Here is a complicated issue.  Are consumers and businesses saving too much cash? I’d say you can never squirrel too much money away, but it looks like that might be an issue for deposit accepting institutions.

Today’s WSJ covers the shift in savings by businesses following COVID. 

• U.S. companies are holding on to billions of dollars in cash. Their banks aren’t sure what to do with it.
• When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Unfortunately, banks have been holding that cash ever since, and because companies are reluctant to borrow from them, they can’t turn it into income-generating loans.
• That has weighed on banks’ profit margins, and some have started pushing corporate customers to spend the cash on their businesses or move it elsewhere.
• Bankers say they thought the improving economy would reduce companies’ desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic’s impact, say they aren’t ready for big changes, even if they earn little or nothing on their deposits.

The WSJ provides a chart on Total Deposits in U.S. commercial banks; it illustrates the cash movement into deposits. For example, on March 4, 2020, U.S. savings deposits at commercial banks grew to $13.48 trillion.  On May 19, 2021, the metric rose nearly 50% to $17.10.

• High deposits usually aren’t a bad thing for banks, as long as they can use the money to make loans. But bank lending has been slow as many companies prefer to borrow money from investors. For banks, total loans equaled 61% of all deposits as of May 26, down from 75% in February 2020, according to the Fed data.
• According to the Federal Deposit Insurance Corp, the industry net-interest margin, a key measure of lending profitability, fell to a record low in the first quarter.

The WSJ does not present consumer savings rates, but the Fed tracks the number here.  In March 2020, the U.S. consumer savings rate grew to 12.9% from COVID-worried consumers.  Two months prior, in January 2020, the savings rate was  7.6%, on par with the prior year.  In the latest reported numbers, reported for April 2021, the consumer savings metric rose to 14.9%

Three takeaways here.

• In managing 2021 credit policy forecasts, expect slow, steady portfolio buildups.  Revolving debt has been hovering under the pre-covid peak of $1.1 trillion for a year.  In the latest reported numbers, the metric stands at $963.7 billion.  Mercator expects this number will approach the peak in mid-2022, but it will be slow, steady growth, not a rapid buildup.
• Slow build up bears well for credit losses, and while the current charge-off rate increased slightly to 2.95% in Q12021, the number is still relatively low and will likely normalize in 2022 around 3.5%
• The Asset-Backed Securitization market will be slower through 2022, as credit card issuers will use deposits to fund credit card investments since high savings will be cheaper than Wall Street Rates.

The short story: Savings levels are up for consumers and businesses.  It might be bad news for some banks, but it sure feels good to have money in the bank.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Savings Rates: Too High For Its Own Good? appeared first on PaymentsJournal.

When Ant Financial pulled back its IPO plans in November 2020, investors were in a state of frenzy, as the $34 billion offering indicated that Jack Ma was out of compliance with Beijing’s long-term goals. However, halfway into 2021, the firm comes back to the table, this time as a financial holding company. In late May, according to the WSJ, “China’s banking and insurance regulator said Thursday that it had approved an application by Ant Group Co. to set up a consumer-finance company, the first milestone in the financial-technology giant’s restructuring.”

• The company, Chongqing Ant Consumer Finance Co., is licensed to conduct consumer lending and other operations. It will hold Ant credit services Huabei and Jiebei, used by almost half a billion people in China.
• Huabei, which means “just spend,” functions like a virtual credit card that people can use to make purchases online and in stores. Jiebei, which means “just borrow,” provides borrowers with unsecured loans of up to 12 months that are typically repaid in installments.
• One of the areas that drew Beijing’s ire was Ant’s colossal consumer-lending business. At the end of June last year, people who had borrowed money from Ant’s platforms had a total of the equivalent of $271.1 billion in outstanding loans.

Ant Financial mainly originated loans for other banks.  Rather than keeping debt on its balance sheet, Ant uses partners who pay a fee. What is interesting here is that Ant Financial feeds itself- it arranges loans to finance items sold on its retail commerce platform.

• Regulators frowned upon Ant’s activities because they encouraged some people to borrow and spend beyond their means and created risks for the banks that supplied funds for the loans.

As a result, the financing component worked well for Ant.  It kept commerce flowing, banks comfortable, and Ant in the black with increased sales.  But Chinese regulators wonder if Ant might be too aggressive in its cooperative lending strategies.

• Ant said Thursday that under the guidance of regulators, it would work with the other shareholders of Chongqing Ant Consumer Finance “to serve the needs of consumers, and to continue enhancing the quality of financial services and risk management capabilities” on Ant’s platforms.
• The new company will fundamentally change how Ant conducts consumer lending. In the next six months, Ant intends to transition from its current model of operating a microlending platform into a consumer-finance business with a more diverse range of funding options.

The shift means Ant Financials will now bear balance sheet risk.

• Setting up the new consumer-finance company means Ant will end a practice that for years enabled it to avoid bearing default risks for the consumer loans it originated with banks. Under that previous model, Ant’s proprietary consumer data and risk models were used by banks, which provided the funding for loans and bore the risk of losses if people didn’t repay their debts. As a result, Ant earned a portion of the loans’ interest income.

Here in the U.S., we call that having “skin in the game.”

• There could also be some loans that the new company makes together with banks. Under such co-lending arrangements, the consumer-finance firm will supply at least 30% of the funds—and bear the corresponding default risk—and banks will provide the remainder, in compliance with new Chinese regulations, the person added. These loans would be Huabei or Jiebei offerings, according to the person.

Having skin in the game slows down the lending process. U.S. regulators have a similar requirement for Asset-Backed Securitization.  Big credit card banks like American Express, Bank of America, Capital One, Discover, Chase, and Citi originate credit cards. They sell their portfolios to private investors, primarily large investment companies like the California Teacher’s Retirement Fund.  The retirement fund requires investments that yield better than government securities.  The banks generate a fee from the investors for servicing the account, but the risk is off the bank’s balance sheet.  The skin in the game comes in because the financial institution cannot sell all the portfolios to the ABS trust. The financial institution must keep at least 10% of the receivable on the books.

Ant certainly knows how to scale a business.  This time, with a broader license in lending, expect to see rapid growth.  And for Ant, a little bit of balance sheet risk never hurts- when it brings in billions.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Ant Financial: Shaking it Up in China appeared first on PaymentsJournal.

The trillion-dollar mess of student loans has been a political football for years.  Forgive and forget was never part of the loan agreement, as evidenced by changes to the bankruptcy code, limiting one’s ability to purge the liability from a student (or parent’s) budget.  In 1987., according to the Student Loan Borrower Assistance site:

• The most common test is the Brunner test which requires a showing that
  • 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
  • 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).

However, the non-dischargability of student loans through bankruptcy receives plenty of media attention.  As NPR noted,  with an example of “Lauren.”

• Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.

The topic of student loan bankruptcy will likely accelerate as President Biden indicated a shift, as CNBC reported.

• On the campaign trail, President Joe Biden issued his support for $10,000 of undergraduate or graduate student debt relief for every year of national or community service, up to five years and $50,000. Since then, House and Senate Democrats repeatedly urged Biden to “broadly” forgive up to $50,000 of federal debt through executive order during his first 100 days in office.
• Biden’s first 100 days are now behind him, and he has repeatedly pushed back against leaders of his party, stating that he will only support up to $10,000 of debt forgiveness and that he would prefer Congress craft the legislation. 
• On Friday, The Washington Post reported that several “ambitious Biden campaign pledges” will likely be left out of the annual White House budget — including student debt forgiveness. The Biden administration is reportedly reviewing federal student loan relief programs separately.
• But higher education expert Mark Kantrowitz says the news is “not surprising.” He says those interested in the future of student debt forgiveness should instead pay close attention to the memo Biden has requested about the use of executive authority to cancel student loans. 
• “President Biden is still waiting for the U.S. Department of Justice and the U.S. Department of Education to report on their review of his legal authority to forgive student loan debt through executive order,” explains Kantrowitz. “Only after he receives that report, which I expect will find that he does not have the legal authority, will the ball be in Congress’ court.”

While students (now graduates) face financial challenges in repaying their loans, the payments industry needs to watch the decrease in borrowing habits caused by overloaded debt burdens.  The CARD Act of 2009 severely limited a college student’s ability to borrow without a parental sponsor.  With lower credit scores and student debt that will not go away quickly, there is another problem.

According to the Federal Reserve, household debt owed by those older than 70 years old is outpacing those aged 18 and 25.  This means that the feeder group for new credit accounts is failing, which requires credit card issuers to review their strategies and normalize their approach through the next decade.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Student Loans: Will Millennials Ever Get Out of the Lurch? appeared first on PaymentsJournal.

Household debt increased $344 billion over last year to $14.64 trillion.  Growth was evident in auto loans (+$8 billion) and student loan balances (+$29 billion), but credit cards saw the “second-largest quarterly decline, “ the NY Fed reported. 

First and foremost, the Fed says the CARES Act Worked as Designed.  Issuers had several chaotic moments as the dust settled, but the goals were to protect the financial services sector with stability, protect households from a credit crisis, and keep the country moving.  By all measures, the strategy was successful.

According to the report:

• Aggregate delinquency rates across all debt products have continued to decline since the beginning of the pandemic recession, reflecting an uptake in forbearances provided by the CARES Act or voluntarily offered by lenders.
• These supportive policy measures continue to be visible in the delinquency transition rates, as the share of mortgages that transitioned to delinquency remained low at 0.5%.
• As of late March, the share of outstanding debt in some stage of delinquency was 1.5 percentage points lower than the rate observed in the first quarter of 2020, just as the COVID-19 pandemic hit the United States.
• About 114,000 consumers had a bankruptcy notation added to their credit reports, a decline from the previous quarter and a new historical low.

The headline grabber for risk managers, however, is in the delinquency decrease.  Accounts 90 days or more delinquent tumbled from 5.31% to 3.78% in Q1 2021.  With this in mind, consumers and retailers should expect to see loosened credit underwriting to enable credit card issuers to rebuild their portfolios. 

According to Seeking Alpha, Chase’s credit card delinquency volumes increased substantially, with a decline to 0.78% in April from 0.89% in March.  The exact time last year was 1.27%.  Improvements in charge-offs continued at Chase, from 2.03% to 1.97%.

Discover experienced similar improvements, as did Capital One.  Discover delinquencies fell in April from 1.85% to 1.69%, with charge-offs declining to 2.55% from 2.71%.  At Capital One, delinquencies fell to 1.92% from 2.24.

What Next:

Expect the decrease in volume and decrease  in delinquency to spark up credit card lending, higher credit lines, balance transfer offers, and sandboxing low and thin credit file customers.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Delinquency: Metrics Continue to Improve appeared first on PaymentsJournal.

A sign of returning to normal is evident as credit card issuers reposition their strategies to get back into the lending business.  Revolving debt in the United States increased slightly in February and March, moving back towards the $1 trillion mark. 

Following a peak of $1.082 trillion in 2019, volumes slipped to $974.6 billion in 2020, then slid to $966.4 billion in January 2021, with slight increases to $974 billion in February, and up to $980.4 billion in the latest report by the Federal Reserve for March 2021.

With credit card charge-offs at a record low of 2.53%, expect to see credit card issuers honing their offers.  U.S. Bank’s just-announced program is a good example.  The Minneapolis Star-Tribune reports that this top issuer launched a “new travel-based credit card” dubbed “Altitude Connect.”

Yes, a travel card.  Remember travel?

• U.S. Bank is adding a new travel rewards card, called Connect, to its Altitude series of cards that started last year with Go. The cards are vertically-oriented, in contrast to most credit cards.
• MORE
• With many people antsy to travel after a year of not getting around much, U.S. Bank executives think the time is right to launch a new travel rewards card.
• The new card, called Connect and part of its Altitude line of Visa Signature cards, is being rolled out now after being put on hold last year after the pandemic hit, Steve Mattics, head of retail payments Minneapolis-based bank, said.

The card carries relevant rewards for business travel.

• During the pandemic, other travel rewards-related cards retooled a bit to try to stay relevant, offering other non-travel benefits such as food delivery to appeal to consumers who may have been mostly homebound.
• Users of Altitude Connect will be able to rack up 4X points on travel and at gas stations and 5X points on prepaid hotels and car rentals booked directly through its rewards center. It also offers 2X points for grocery delivery and shopping, dining, takeout and food delivery, and streaming services such as Netflix and Spotify.

Today’s WSJ points out a credit card issuer challenge.  Credit card interest assessed dropped with the dip in revolving debt, causing angst for large and small credit card firms.  As people pay down, less interest accrues, resulting in a revenue shortfall.  The Journal paints the picture:

• In the U.S., total outstanding credit-card debt fell by 11%, or $100 billion, between February and the end of June, according to Equifax. April was the largest monthly drop in revolving credit on record, while May was the second-largest, according to Federal Reserve data. Personal-loan originations were down by a third in mid-May compared with the beginning of March, according to Equifax.
• Since February, credit card debt is down 11% in Canada, 14% in the U.K., and 17% in Australia. In the eurozone, credit-card debt and other forms of revolving credit for households fell 5% between February and June.
• But credit-card debt has continued to fall even as lockdowns were relaxed in May and June and retail spending rebounded. Data from card companies indicate that the pandemic has spurred a shift away from credit cards toward debit-card purchases across spending categories, in part due to government stimulus payments, analysts say.

Senior loan officer surveys (SLOOS) indicate a similar trend.  Lending standards are returning to pre-COVID levels.  And, with that will be more aggressive marketing as we see with U.S. Bank.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Re-Igniting Credit Card Lending: Get Ready for Points and Credit Lines appeared first on PaymentsJournal.

The Federal Reserve Board made an announcement today that it is seeking input on a clarification to Regulation II requiring that all financial institutions, regardless of asset size, offer two unaffiliated debit networks on cards that will function for purchases made both in-store and in remote channels.  Here’s a link to the Fed’s announcement.

While all financial institutions offer two unaffiliated debit networks today, some issuers do not offer a version of a domestic EFT debit network (aka PIN debit network) that will work for all ecommerce purchases.  The Fed correctly points out that when Reg II first rolled out, this capability wasn’t available. 

Since then, networks like Shazam, STAR, PULSE and Accel among others have rolled out their PINless debit products that allow purchases made online to be routed through their networks instead of the global networks.  Here’s what the Fed said in its announcement:

“…the regulation requires that there be at least two unaffiliated payment card networks enabled on a debit card to process debit card transactions. At the time the Board promulgated Regulation II, the market had not developed solutions to broadly support multiple networks over which merchants could choose to route card-not-present transactions. Although technology has subsequently evolved to address these barriers, data collected by the Board and information from industry participants indicate that two unaffiliated networks are often not available to process card-not-present debit card transactions because some issuers do not enable two networks for those transactions. The absence of at least two unaffiliated networks for card-not-present transactions forecloses the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment.”

This change or clarification to the regulation under consideration was sparked by a letter written to the Fed last October by Senator Durbin.  More on that here.

So what does this mean?  I suspect that the clarification will be made and those financial institutions that don’t already offer PINless will need to change their issuance strategy going forward.  Also, merchants who optimize their routing will have another option for ecommerce transactions when a debit card is used. 

If merchants select the EFT debit network, they will likely be charged less interchange meaning financial institutions will see less interchange revenue.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Attention Debit Issuers: The Fed Plans to Clarify Regulation II appeared first on PaymentsJournal.

Hunter is among several retailers tapping payment leaders to offer a convenient, secure and contactless budgeting tool for consumers

SAN FRANCISCO, April 8, 2021 —  Afterpay (ASX:APT) the leader in “Buy Now, Pay Later”, and Adyen, (AMS: ADYEN), the global payments platform of choice for many of the world’s leading businesses, are joining forces to offer Afterpay’s leading BNPL service to retailers, kicking off with Hunter, the premium British footwear brand.

Leading iconic British outdoor lifestyle brand, Hunter, is among some of the first retailers to offer Afterpay with Adyen.

“We wanted a way of offering our customers more flexibility through payments, as we know giving our customers choice to pay in a way that suits them, drives on-site conversion” said Bryony Longden, senior eCommerce manager for Hunter. “By offering Afterpay through Adyen, we were able to implement this new payment method quickly and effectively to offer a seamless checkout experience. The ability to split payments really helps to make higher price point items accessible to our customers. ”

Hunter can now offer Afterpay, known as Clearpay in the UK – the popular service which allows customers to get their items right away and pay in four installments, without the need to take out a traditional loan or pay upfront fees or interest. The service is completely free for consumers who pay on time. Afterpay now has more than 13 million customers in the United States and close to two million shoppers in the U.K.

With Afterpay, retailers attract a growing segment of the population who prefer to pay without incurring traditional credit-style debt, interest or fees. For this reason, many retailers offering Afterpay see an average increase in conversion of approximately 22% – as well as increased basket size, higher customer satisfaction and repeat customers.  More than 90% of Afterpay transactions are made with debit cards.

“BNPL has changed the retail industry – as young shoppers prefer to use their own money to buy items they need and want – instead of using credit cards which often lead to revolving debt with interest and fees,” said Ben Pressley, SVP of Global Sales Strategy and Operations at AfterPay. “We are so excited to kick off our partnership with Adyen and Hunter to offer a payment solution that delivers real benefits to consumers and retailers alike.”

Merchants of Adyen can offer Afterpay in the UK, the United States, Canada, Australia and New Zealand to their customers.

The post Afterpay and Adyen Partner to Deliver Flexible Payments with BNPL appeared first on PaymentsJournal.

Forbearances, an agreement to forestall collection activity against a delinquent account, give the consumer a short-term solution to suspend payments in a time of need.  Mercator Advisory Group covered the topic in a recent viewpoint titled Credit Card Account Forbearance: Not Forgiveness and Not Forever.

In the context of credit cards, forbearance freezes delinquency aging.  It disrupts the aging flow and protects the account from charging off as required by the Office of the Comptroller of the Currency (OCC), which applies to all national banks and their operating subsidiaries. In 2000, the OCC reaffirmed the delinquency trigger with this explicit rule:

• The policy establishes standards for classification and account management of retail credit in banks and thrifts. It generally requires that closed-end loans be charged off when 120 days past due and that open-end credit be charged off when 180 days past due.

Credit cards are open-ended credit because there is no explicit term.  Once the card is open, charging can occur until the card expiration date; in the most common case, the card will be re-issued.

From a consumer’s perspective, forbearance provides breathing room; forbearance suppresses charge-off from the financial institution’s perspective, which you see in the current numbers.  The fact of the matter is that December 2020 charge-offs for U.S. credit cards were only 2.62%.  A year earlier, before COVID, the rate was 3.75%.  Simply put, today’s numbers are about a third better than the prior year, even though most people know the global economy is unsteady.

CFPB’s Latest Announcement on Mortgages

On April 5, the Consumer Financial Protection Bureau (CFPB) proposed that forebearances be extended on mortgages through 2021 year-end.  CFPB cites this data:

• Millions of families are at risk of losing their homes: As of February 2021, there were nearly 3 million homeowners behind on their mortgages, with an estimated 2.1 million mortgages in forbearance and at least 90 days delinquent. If current trends continue there may be 1.7 million such loans in September 2021.
• Preventing foreclosures helps homeowners and communities: Foreclosures are expensive for homeowners, with an average cost to borrowers of at least $12,500. Neighboring homes also lose value, with sales prices dropping by 1 to 1.6 percent after nearby foreclosure sales. Families who endure foreclosure are likely to suffer other harms as well, including broader financial distress and housing instability.
• The housing crisis is deepening racial inequality: Black and Hispanic homeowners were more than two times as likely to be behind on housing payments as of December 2020, according to a March CFPB report 

What About Credit Cards?

The CFPB is silent about credit card forbearances at this point, which is appropriate.  In our view, unsecured, open-ended credit should not extend the forbearance process for cards because forstalling aging overstates a receivable’s health.  There is no credit manager worth their salt that suggests that a parent does not pay a doctor’s visit over a credit card or let a mortgage go into foreclosure to pay a delinquent credit card bill.

Still, at the same time, it is essential to have a good sense of how risky the credit card portfolio.  As mentioned in a recent Mercator Report, Credit Card Charge-off Collections Takes Brains, not Brawn; unsecured consumer collections require finesse to resolve problems. The context of secured household lending is very different.  It is hard to replace a home that goes into foreclosure; for credit cards, there are many options once the household returns to normal.

For now, there is no direction, but perhaps a realistic look at the health of credit card portfolios will require that the numbers represent the safety and soundness of the receivable.  And that will mean higher charge-offs in 2021 and 2022. For credit cards, that is far better for consumers, financial institutions, and investors to face than an out-of-control delinquency wave that has been understated for two years.

Overview Provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post CFPB Considers Extending Mortgage Forbearances through Year-End; What About Cards? appeared first on PaymentsJournal.

An article in Law360.com reports that the Consumer Financial Protection Bureau has rescinded a series of policy statements it issued at the beginning of the COVID-19 pandemic that exempted lenders from some consumer credit oversight reporting requirements. The guidance was intended as a way to help financial institutions transition to remote operations and relieve the burden caused by pandemic-related staff shortages.

For the past twelve months lenders have been allowed to operate under loosened control, with flexible deadlines for investigating credit reporting disputes and more leeway to classify disputes as erroneous. The rescinded policy also suspended reporting requirements for mortgage lenders and allowed credit card lenders to forego submitting card agreements to the CFPB.

While meant as a temporary measure, the guidance has remained in place for over a year, allowing financial institutions to function with less oversight and consumer protections in place. It is rather surprising that the lenient policy has been reversed only 12 months into the pandemic as most lending institutions have long transitioned to remote work and have continued business as usual.

“The policy statements, which were issued under former CFPB Director Kathleen Kraninger, a Trump appointee, provided leeway on consumer credit report dispute investigation deadlines, suspended certain reporting requirements for mortgage lenders and credit card issuers, and offered accommodations tied to agency exams and enforcement, among other things.

But the CFPB said it is revoking those statements effective April 1 and “intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act,” the law that created the agency.

“Because many financial institutions have developed more robust remote capabilities and demonstrated improved operations, it is no longer prudent to maintain these flexibilities,” Dave Uejio, the CFPB’s acting director, said in a statement. “The CFPB’s first priority, today and always, is protecting consumers from harm.”

The seven policy statements being rescinded were issued between late March and early June last year when the rapidly unfolding COVID-19 crisis threw millions of U.S. consumers out of work and triggered a wave of stay-at-home orders and other public health restrictions to contain the virus.”

The return of increased oversight has been welcomed by the consumer protection community and can be interpreted as one of the first manifestations of the expected tightening of regulatory controls by the Biden administration.

The increased oversight is particularly relevant for stakeholders in the credit card industry, which have seen an almost percentage point year-over-year increase in transaction volumes (dollar terms) in 2020. The reversed policy of lenience will hopefully help keep credit card and mortgage debt default risks under control, a much needed guarantee of stability in an economy that is reeling from a deep recession.

Overview by Sam Klebanov, Research Analyst at Mercator Advisory Group

The post CFPB Revokes Pandemic Guidance for Lenders, Reverses Leniency in Compliance Requirements appeared first on PaymentsJournal.

This piece is posted in This is Money and discusses several recent apparent financial collapses while associating these with supply chain finance.  First of all, the author describes reverse factoring as supply chain finance (SCF), but the category of SCF contains various financing types, of which reverse factoring is only one, albeit the most frequently used.  

Members can review one or more of our papers on the subject. The piece goes on to discuss the recent collapse of Greensill Capital, the 2011 startup out of London with backers that include Softbank, and that specialized in this form of SCF. So the gist of the piece is that a more transparent accounting of reverse factoring (or, more broadly perhaps, all types of SCF) is needed.

‘Now the Greensill scandal has prompted calls for a change to accounting rules to force firms to be more transparent about their borrowings. Critics warn many companies could be using supply chain finance to disguise ‘hidden debt’ on their balance sheets….Greensill was one of the biggest champions of this way of lending. In the past decade alone, the London-based firm extended more than £108billion ($150billion) worth of financing to some 8m customers and suppliers in more than 175 countries – with the full reach of its activities still not completely understood….But Greensill – founded by Lex Greensill – collapsed when backers abandoned it over concerns about the value of its assets, triggering a crisis that has put thousands of jobs at risk as the firm’s borrowers have been left in the lurch.’

Quite provocative language but there is no detail to explain, therefore readers will need to delve into this and other cases mentioned in the piece on your own.  We did take a quick look at the Greensill example and it seems that the receivables upon which they built their asset base (SCF is a short term loan, 60-90 days, or the length of typical trade terms) were being re-packaged and sold as separate investments, sort of like securitizing assets like mortgage loans, except that these were identified as short term payables instead of debt on the balance sheet.

Therefore investors would not have clear visibility into the risks involved.  One of the insurance companies backing up the investments decided not to renew a policy or two, and this dried up the firm’s liquidity.  We would need to spend a lot more time reviewing this.  The point of the article is that accounting rules should be revised to require more transparency around how companies are using SCF.

‘Although primarily used for short-term payments, Greensill turned the loans into complicated products that were not what they seemed at first. …Supply chain finance was singled out by MPs and ratings agencies in 2018 as one reason that outsourcer Carillion’s impending collapse was not spotted sooner….Professor Alex Yang, associate professor at the London Business School, has called for accounting rules to be urgently reformed to take into account borrowing via supply chain financing. …This is because, like Carillion and others, many firms class cash owed through these schemes as short-term ‘trade payables’ – and not long-term debt. …But there is no requirement to disclose supply chain financing arrangements specifically to investors….Yang said: ‘Businesses should explain supply chain finance arrangements.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

The post We Must Learn Lessons of Greensill Debacle: Call for Firms to Become More Transparent in Major Shakeup of Supply Chain Financing appeared first on PaymentsJournal.

The number for credit card issuers to watch is revolving debt in the United States.  The metric I prefer is from the Federal Reserve’s G-19 report, for revolving, total outstanding.  We find the projected number to be $975.9 billion in revolving debt in the latest report, almost $100 billion less than the 2019 year-end close.

With COVID still impacting the economy, and an unsettled horizon, it is hard to draw a bead where 2021 will end, but the decrease is nearly stable.  Q120 was the peak for 2020, at $1.078 trillion, then a dead-cat-bounce in Q2 20 to $995.0 billion, followed by $986 billion in Q320, then ending the year a projected $975.9 billion.

The critical takeaway here is that the credit card issuer’s Interest Income revenue line is relatively protected.  The downward trend picked up by many media sources is not so bad after all.  Now, if you sit on the consumer side of the equation, where the December average state unemployment rate in Nevada is was 9.2%, or in California, where it is 9.0%, life is not so rosy. Still, there are some pockets where unemployment rates are decent.  Unfortunately, these are smaller states, such as Alabama (3.9%), Iowa (3.1%), Indiana (4.3%), Kansas (3.8%), New Hampshire (4.0%), South Dakota (3.0%), Utah (3.6%), and Vermont (3.1%).

Getting people back to work and getting beyond the politics is what is key to recovery.

The good news is that charge-offs remain stable.  The latest numbers, which update in about two weeks, show that Q320 was 3.48% for top banks.  Smaller banks, not in the top 100, did not perform as well, at  6.39%, but they improved over the Q220 peak, which was 7.99%

On the positive side is total household debt, which rose 1.4% in 4Q20, and now sits at $14.6 trillion.  CNBC cited a record-breaking rise that pushed the metric to more than $10 trillion.  The dark side is that student loan debt increased slightly, mostly due to forbearances.

And for credit cards, one good number to watch is the number of accounts entering delinquency was <4% in 4Q20.  Much of that number is influenced by forbearances, but take it as a win.  Third-party placements at collection agencies are at an 18-year low-representing less than 8% of consumers, according to the NY Fed.  Take your successes when you get them!

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post The Dead Cat Bounce in Revolving Credit Card Debt: Not So Bad Considering the Facts appeared first on PaymentsJournal.

Household debt is at a staggering $48 trillion globally with sharp growth in both Norway and China. Effective debt collection will become increasingly important as default rates rise because of the economic slowdown.

Traditionally, collections practices have been mostly manual, batch based and reactive, with the number of touchpoints and communication increasing as delinquency ages. However, with today’s increasingly digital consumer, a manual collections process isn’t sustainable.

Now, collections need to become more automated and intelligent than ever before to improve promise to pay rates and reduce default rates. While this may seem like a daunting task, artificial intelligence and cloud technologies can help.

Improving promise to pay rate with better communication

The collections process typically involves various steps depending on which stage of the collections process the customer is in, ranging from pre-delinquency (usual reminder notes) to past due (late fees, credit bureau reporting), and finally late stage collection/write off (which usually involve a third party debt collection agency).

One of the major challenges is a real time view of the customer’s activity so that communication can be optimized. The amount of data exchanged can quickly become unwieldy and hard to manage if processing isn’t automated.

Finally, debt collection can be a very sensitive issue, and customers don’t want to be handled like numbers or criminals – they want personalized communication that takes into account their circumstances for the debt, such as loss of job from the COVID crisis. By analyzing demographic, behavioral and transactional data, businesses can provide tailored communication and payment plans to the customer. This improves customer response and ultimately promises to pay.

Adopting a proactive approach to delinquency

Machine learning with real time information can be a powerful tool to predict delinquency. Assessing internal transactional data from the customer as well as external information enables lenders to better predict who will default and deploy preemptive strategies to reduce default rates.

For example, deploying these predictions with real time data, lenders can be both more proactive with their communications, but also potentially take steps to adjust lending terms based on the current situation of the customer to prevent a default on the loan. Similarly, a model can be used to predict the likelihood and even amount of the repayment. It’s the speed and intelligence that can be a step change for lenders.

Unlocking customer data to make better decisions

In order to provide a personalized experience, we need to bring together the data for that customer, to get as much detail about their past history, current behavior and predictions as to what they may do in the future. For this, the right integration tools are required to connect data from these disparate sources.

Oftentimes, machine learning models are used to provide insights from the data to create the best experience under the current circumstances for the customer. Data models change as behaviors change, so over time having an open, flexible and cloud-native toolset enables a best-of-breed approach that helps data scientists make the most out of the data.

It is also important to understand that, in addition to the data intelligence, the best judgment of a knowledge worker is also critical in ensuring the system can face the changing market needs. Use of an optimal decision tool that gives them the transparency they need, with the ability to easily modify decisions are key to staying on top of policy changes and refinements.

Taking an open source approach

Open source has emerged as the prominent way software is created across the world. It is powering the digital revolution and has accelerated innovation in both cloud and artificial intelligence technology. These projects are managed in foundations that are designed to protect the intellectual property for both the contributors and consumers.

The Apache Kafka and Apache Spark are two notable open source communities in the Apache Foundation that provide the ability to stream and analyze large datasets in real time. They are both essential tools in any organization’s machine learning toolkit. The Cloud Native Foundation with communities such as Kuberntes, Isitio and Kogito, has likewise been the driving force behind cloud technology. 

Open source is also about putting you in control. It gives you the ability to choose from a range of partners who include these capabilities in their collection platform or commercial vendors who provide training and support for the components you need. It is your choice on whether you want a more hands off approach or want to co-create together.

Flourishing in the new normal

Embarking on a roadmap to update both collection processes and the technologies that support it will be critical, as an increasing number of customers default on their debt. Fortunately debt collectors can take incremental steps today to improve overall collection performance. Cloud and artificial intelligence technology can help.

The post Personalizing and Improving Debt Recovery Using Open Source and Cloud Native Technology appeared first on PaymentsJournal.

This posting in Cision PR Newswire presents further evidence that cryptos (at least some of them) are moving towards the mainstream in expanding payments use cases.  More common in C2B and P2P scenarios, this particular use is B2B as Corporate Intelligence Services LLC (C.I.S) is announcing acceptance of bitcoin as a settlement currency in its commercial debt collection division. We recently released a member viewpoint on the subject of cryptos and the expanding methods of buying and using them.

‘Roger Barter, co-owner of C.I.S. says, “Bitcoin has become more and more accepted as a form of payment. Bitcoin has several advantages over checks and credit cards. Transactions are instantly verifiable and are peer-to-peer without a 3^rd party facilitator. P2P transactions have significantly lower transaction fees. Additionally, unlike merchant credit cards, Bitcoin payments are peer-to-peer and there is no 3^rd party that can reverse the transaction, or give the payment back to the customer or debtor. In the world of high-balance collections, this is a game changer.” ‘

Interesting about the emphasis on risk versus checks and credit cards given the absence of 3^rd parties.  Obviously there has to be some careful wording in these debt payment agreements, given the valuation instability of cryptos, but we would expect that C.I.S. has relatively immediate exchange agreements in place with the Coinbases and Krakens of the world.

It is also not clear how often a bitcoin might be used to cover a debt, so likely these are used as a last ditch method in privately held situations where crypto assets are a fallback. 

‘In its eleventh year, Corporate Intelligence Services actively pursues leveraging the most cutting-edge technologies to offer their clientele better service, and this is why they believed it was time to accept and embrace Bitcoin as a payment mechanism.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

The post Corporate Intelligence Services Now Accepts Bitcoin as Payment for B2B Debt Services appeared first on PaymentsJournal.

If you owe money, it just got harder to hide from the debt collectors.

The Consumer Financial Protections Bureau (CPFB) has recently ruled that debt collections agencies can now use social media outlet like Facebook and Twitter to try to recover outstanding debt. Further, email and text dunning notices are also fair game. The CPFB says it is simply modernizing the debt collection process to allow it to use more modern means of connecting to those who owe money.

According to an article in The Register, the CPFB was simple updating old rules:

The CFPB claims that the new rules were the result of “a deliberative, thoughtful process spanning more than seven years and reflects engagement with consumer advocates, debt collectors, and other stakeholders.” It updates rules written 40 years ago, long before the advent of modern technology and smart phones.

But in the lengthy report and explanation on the new rules, it rejected significant public comment that social media should be completely off bounds for debt collectors, using the phrase “the Bureau declines to prohibit private social media communications and attempts to communicate” repeatedly in response to concerns.

I think it is important to point out that debt collection agencies cannot post to someone’s public site. In other words, the world will not be able to see Facebook timelines with “Where’s the money” posted next to the kitten videos. Rather the collection agencies will have to coerce the debtor to “friend” them or “follow” them (or however people connect on social media) on specific social media outlets and then, and only then, can they start sending them direct messages (DMs) asking for the money. The friending option isn’t required for email or text messages.

The ruling does allow some opportunity to consumers who feel that they are being harassed be debt collectors through the channels that are already available. It notes that the “general prohibition on harassing, oppressive, or abusive conduct” applies to these new ways of contacting consumers just as it has for phone calls and mail debt collection notices.

As you might imagine the consumer advocacy organizations are not at all happy about this ruling and they have already started to make their displeasure known to the CPFB.  As an article in Slash Gear reports:

Many people and consumer protection agencies are against the new regulations. Consumer Reports created a petition this week, aiming to stop abusive debt collection. The petition warns that the collectors could harass people even if they don’t owe money.

At first glance, this seems like a truly draconian move by the CPFB. After thinking about it, though, if a person chooses not to friend or follow or BFF a debt collection agency, on its face, where’s the harm? But, on the other hand, why even open up this door for the collections agencies? Rules are meant to be broken, right?

Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group

The post Your Debt Collector Wants to Friend You on Facebook appeared first on PaymentsJournal.

Credit cards face a battery of regulations, most of which make sense. Many country markets have local versions of Fair Lending, Fair Collections, Clear Disclosure, and Explicit Pricing. If you are a credit card lender that grew up in the banking system, you accept, comply, and execute. If you are a Buy Now, Pay Later (BNPL) lender, the regulations do not typically apply. You are not likely a bank lender or a credit card issuer.

Back in 1968, the U.S. enacted the first consumer protection requirement for credit cards. Long before the days of magnetic stripes, credit cards started to gain traction with high-end consumer segments. The Consumer Credit Protection Act of 1968 (CCPA) provided fundamental guidelines for interest rate disclosures, term requirements, and fairness. CCPA was a big step for fair lending, pioneered by the Lyndon Johnson administration.

Those regulations were inciteful, particularly when you consider that total revolving debt in the U.S. market was all of $1.8 billion in December 1968. Today, the metric is right below $1 trillion.

Now BNPL is gaining scale throughout the world, and regulators are beginning to take action. Today’s read comes from The New Daily, an Australian news source:

• Consumer advocates call for greater regulation of the buy-now-pay-later industry after corporate regulator ASIC found one in five users were regularly skipping meals to avoid late payment fees.
• ASIC’s widely anticipated review found that 21 percent of users had missed a payment, and 20 percent had gone without or cut back on essentials due to overspending.
• As a result, 15 percent had taken out additional loans to pay off their BNPL debts – prompting consumer groups to warn that self-regulation doesn’t work.
• The corporate regulator’s latest industry update found the total amount of credit extended to BNPL users over 2018-19 almost doubled compared to the previous financial year.

The Australian Securities and Investment Commission (ASIC) is taking the lead in regulating BNPL lending. Expect to soon hear from a regulator in your market:

• Transaction numbers also spiked by 90 percent, rising from 16.8 million in 2017-18 to 32 million over the following 12 months.
• ASIC said BNPL services, which do not require credit checks, encouraged some users to overspend and fall into serious indebtedness – contrary to their marketed benefits as a budgeting tool.

Mercator’s PaymentsInsight survey found that the sweet spot for BNPL borrowing is millennials and Gen-Z. This is similar to the findings in the article:

• And younger shoppers were overrepresented in that cohort.
• Roughly half of all users who took out an additional loan or skipped on essentials to afford their overextended spending were aged between 18 and 29.
• RateCity research director Sally Tindall said the report confirmed two pitfalls associated with BNPL: Impulse buying and overspending.
• “Young people are turning to BNPL services ahead of credit cards, and they are learning about the world of credit through these platforms, and there’s no question it becomes the school of hard knocks for some people,” Ms. Tindall told The New Daily.

Not everyone is on board with the upcoming regulations:

• It comes after Liberal senator Andrew Bragg last week told the Australian Financial Review that regulating the emerging BNPL industry risked “hacking to death fintech innovation.”

But, the counter-argument is clarity and fair lending:

• Consumer Action Law Centre CEO Gerard Brody, however, told The New Daily it was “concerning” that a lack of regulation had created the foundations for over-indebtedness, particularly among young people.
• With the Coalition also hoping to unwind responsible lending laws in the new year to stimulate the economy, Mr. Brody held concerns that ASIC’s preference for providers to self-regulate could entrench users’ financial woes as BNPL use continues to rise.
• “Because it’s unregulated, BNPL will rarely show up on a credit report – so moving lending to focus on credit risk rather than affordability risks over-indebtedness,” Mr. Brody said.

Will regulatory intervention be a buzz-kill for BNPL? We will have to see. But in the interim, fair is fair.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Buy Now, Regulate Never? No, Regulate Now, Buy Later appeared first on PaymentsJournal.

Buy now-pay later (BNPL) continues to cross global regions. Afterpay will expand its installment payment plan for cross border sales among Australia, New Zealand, the UK, and Canada.

The U.S. market will be open for merchant cross-selling in 2021 as well. As international e-commerce grows, this is a logical step to align a popular payment method for merchants and consumers alike.

The following excerpt from a The Paypers article reports more on the topic:

Afterpay has announced that its merchant partners can now offer their products to customers across the world. Shoppers will see items in their local currency and benefit from the flexibility and convenience of paying in four instalments over time, without incurring interest, fees, or revolving and extended debt. Participating retailers can open their store fronts to these shoppers without paying set up or currency conversion fees.

Overall, Afterpay first introduced cross border shopping in Australia and New Zealand (ANZ) in March 2019, which delivered YoY sales growth of nearly 576%. Because of such strong consumer demand, the number of ANZ merchants that are now selling outside their home country has grown 10 times.

“Cross border trade allows retailers to open their storefronts to the world – delivering new customers, higher conversion and ultimately more merchant sales, without additional set-up costs or fees,” said Nick Molnar, Afterpay’s Co-founder and CEO of North America. “We are particularly excited to offer cross border capabilities at a time when consumers are buying online more than ever and in advance of this busy holiday shopping season.”

Overview by Raymond Pucci, Director, Merchant Services at Mercator Advisory Group

The post Afterpay Launches Cross-Border Buy Now-Pay Later appeared first on PaymentsJournal.

Unlike the predictability (or recent unpredictability) of credit cards, marketplace lending has issues of its own. And, today we read that LendingClub is exiting the business, as P2P Finance reports.

• In light of recent news that LendingClub is closing its platform, investors can be assured that Prosper remains committed to growing its retail notes offering.
• Small business loans will be referred to Funding Circle

One of the reasons for the shift has to do with marketplace lending itself. From where I sit, part of the problem comes from optimistic credit standards, booking accounts that are not often bank-grade investments. The U.S. Department of Treasury summarized marketplace lending risks in this document written four years before the COVID crisis, and here we are with a recession on our hands.

1. Use of Data and Modeling Techniques for Underwriting is an Innovation and a Risk: RFI commenters agreed the use of data for credit underwriting is a core element of online marketplace lending, and one of the sources of innovation that holds the most promise and risk. While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations. Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.
2. There is Opportunity to Expand Access to Credit: RFI responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Although the majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
3. New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.
4. Small Business Borrowers Will Likely Require Enhanced Safeguards: RFI commenters drew attention to uneven protections and regulations currently in place for small business borrowers. RFI commenters across the stakeholder spectrum argued small business borrowers should receive enhanced protections.
5. Greater Transparency Can Benefit Borrowers and Investors: RFI responses strongly supported and agreed on the need for greater transparency for all market participants. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.
6. ​Secondary Market for Loans is Undeveloped: Although loan originations are growing at high rates, the secondary market for whole loans originated by online marketplace lenders is limited. RFI commenters agreed that active growth of a securitization market will require transparency and significant repeat issuances.
7. Regulatory Clarity Can Benefit the Market: RFI commenters had diverse views of the role government could play in the market. However, a large number argued that regulators could provide additional clarity around the roles and requirements for the various participants.

Financial Times covered the topic of credit risk on marketplace loans and showed sky-high risk before the recession. Most charge-offs trend above 10%.

A recession can really tilt the market, and with capital markets worried, funding can quickly dry up. There are two big questions here. When will the economy stabilize, and will fintech lenders, who optimistically put their clients money into the market, survive the long term?

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Marketplace Lending: LendingClub Flounders, is the Market Still Viable? appeared first on PaymentsJournal.

The line of sight on consumer credit risk are clouded with millions of payment deferrals, stimulus checks that often paid consumers more than they earned, and an uncertain horizon. Right now, two facts that we know are:

• Write-offs are stable at top issuers through the third quarter, at 3.8% in 2Q20, only 17 basis points worse than 1Q20
• Write-offs for smaller issuers have begun to boil, rising to 7.99% in 2Q20 from 7.46% in 1Q20

As bankers brace for increased losses into early 2021, bankrupt attorneys are beginning to swarm in anticipation of increased volume. While business bankruptcies, ranging from Lord and Taylors to Sizzler Steakhouse, are common, consumer bankruptcies have not seen a surge.

Forbes covers this issue in today’s read. The article, titled “After the Covid-19 Deluge, A Bankruptcy Tidal Wave?”, suggests that lawyers are now ramping up for incremental consumer bankruptcies.

• “All of us in the field are expecting bankruptcies to spike up dramatically, probably later this year and even more so into the New Year as the longer-lasting effects of the pandemic hit people in the wallet,” says Ike Shulman, a bankruptcy lawyer and co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA), a Washington, D.C.-based professional group.
• While the bankruptcy business has seen sharp increases in demand in the past—more on that in a moment—there is something different this time. “What we see with Covid-19 is that there are so many people that never dreamed they’d be talking to a bankruptcy lawyer or having to file bankruptcy. That wasn’t in their wildest dreams,” Shulman says. 

We all know that the COVID recession is different than the Great Recession. The COVID recession came out of nowhere and affected everyone. Credit card metrics looked wonderful at year-end 2019, then came the virus. In 2019, bankruptcies were less than 1 million, a pittance compared to the 2010 peak of 1,600,000 bankrupt consumers.

The American Bankruptcy Institute, a trade group, tracks filing as well.

• The ABI has also released a forecast: Chapter 11 filings by businesses will likely rise sharply—several large corporations have already sought Chapter 11 reorganization—and may conceivably best the 1986 record for filings under that chapter, the organization says. 
• However, Chapter 13 filings, which are often submitted by individuals with stable incomes and good prospects for eventually repaying creditors, will likely decrease in favor of Chapter 7 filings that don’t call for borrowers to repay debts. Overall, if the economy doesn’t recover and unemployment persists, bankruptcy records may be set in 2021, the organization forecasts.

The challenge is unemployment. People do not want to file, but there are often no options.

• All this leaves us in what is, in 2020, a familiar place: with an ominous feeling but a lack of clarity about what exactly it portends. With considerable logic and evidence to back him up, Shulman has little doubt that the not-too-distant future will feature more bankruptcy filings than we’ve seen in a long time, if not ever. “All these things haven’t hit the fan yet, but it’s coming,” he promises.

The stigma of bankruptcy usually helps forestall the process, but this time things are different. One way or another, we are all in the same boat.  What the world needs now is a practical, universally available, cost-effective vaccine.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Is Consumer Credit Bankruptcy the Next “Hot Thing” in Credit? appeared first on PaymentsJournal.

While many financial institutions brace for the long-term implications of COVID-19, very few people feel good about the economy.  A working, well-tested vaccine will undoubtedly help, but until then, many people are on edge.

Today’s read comes from the WSJ, and the topic is how COVID-19 will soon impact white-collar workers in the United States. With Stimulus-2 still waylaid by political debate, households need a solution quickly. Some metrics are looking better, but the full picture is gloomy, and now white-collar workers are experiencing pain.

• Unemployment has fallen from its pandemic peak of near 15%, but the rate stood at 8.4% in August, up from 3.5% in February, according to the Bureau of Labor Statistics. Unemployment for the arts, design, media, sports, and entertainment was 12.7% in August, more than triple its year-earlier level. In education, it more than doubled to 10.2%. Sales and office unemployment was 7.8% in August, up from 3.8% in August 2019.

The article cites a perspective by Discover’s CEO:

• It could get worse. “The pain so far in the economy has largely been at the lower end of the pay scale,” said Discover Financial Services Chief Executive Roger Hochschild, adding that many of “the white-collar layoffs are still to come.”

And, the insight is credible.

• By some measures, the outlook for higher-earning workers appears worse than during the 2008 financial crisis. In August, about 3.3 million people age 25 and over with bachelor’s degrees or higher were unemployed, up from 1.2 million in February, according to the Bureau of Labor Statistics. During the last downturn, that number peaked at about 2.2 million.
• Postings for jobs with salaries over $100,000 were down 19% in August from April, while postings for all other salary categories increased, according to job-search site ZipRecruiter Inc.

Part of the problem is the outstanding debt of all types. With deferrals ending, and financial cushions exhausted, credit can soon look very gloomy.

• The coronavirus has spared few industries and expanded unemployment benefits designed to replace the average American income didn’t cover all the lost pay of higher-earning workers, especially in or near expensive cities. The extra $600 weekly payments expired in July, putting them even further behind.
• “What I see happening here is a core assault on successful college-educated families, which are the new breed of middle-class American families,” said Anthony Carnevale, director of the Georgetown University Center on Education and the Workforce. “There’s a professional workforce that’s getting slammed.”
• Roughly six months into the pandemic, many lenders that let borrowers skip monthly payments now expect to get paid again. They have set aside billions of dollars to cover potential losses on soured consumer loans—an acknowledgment that America’s decadelong debt binge has come to an end.

It is the jobs, the jobs.

• Postings for jobs with salaries over $100,000 were down 19% in August from April, while postings for all other salary categories increased, according to job-search site ZipRecruiter Inc.
• America’s biggest banks have indicated they are preparing for a protracted downturn to hurt businesses in industries that weren’t immediately affected by shutdowns.
• JPMorgan Chase & Co. says it expects the U.S. to add roughly 5.4 million jobs in the third and fourth quarters. That would leave the U.S. economy with about 9.2 million fewer jobs since February.
• “The pandemic has a grip on the economy,” Citigroup Inc. CEO Michael Corbat said when the bank reported second-quarter earnings in July, “and it doesn’t seem likely to loosen until vaccines are widely available.” This month, the bank said many customers that previously enrolled in deferment programs are making payments.

There is no quick fix. Expect more info to come (after the mask of payment deferrals ages away, Stimulus-2 arrives, and perhaps a working vaccination).

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post The COVID-19 Recession Begins to Hit Middle-Class Credit Cardholders appeared first on PaymentsJournal.

Airline rewards are suitable for all players. Consumers love them because they can enable free travel, credit card issuers find loyal customers, and airlines get to fill passenger seats (at least until COVID-19).

Add one more item to the list. Airlines can back loans with credit card points and collateralize their customer relationships to stay out of bankruptcy court.

Nasdaq reported yesterday:

• It’s official: Delta Air Lines (NYSE: DAL) is following key rival United Airlines (NASDAQ: UAL) in raising debt backed by its loyalty program.
• On Monday, Delta announced that it had formed a new subsidiary to hold the SkyMiles program and its intellectual property in order to facilitate a $6.5 billion secured debt issuance.
• As part of the debt issuance, the airline revealed never-before-seen details about the SkyMiles program’s performance, which could have major implications for long-term shareholders.

Or, in simpler terms, American Express to the rescue.

• Delta describes SkyMiles as having “a broadly diversified stream of cash flows.” That may be stretching the truth a bit. Only 32% of SkyMiles’ 2019 cash sales came from the airline itself — i.e., from the reward miles, travelers receive from Delta after completing flights.
• The vast majority of the remaining 68% of SkyMiles sales came from just one of Delta’s various non-airline partners: American Express
• Delta’s co-branded credit card program with American Express launched in 1996, but it has only really taken off over the past decade.
• Last year, Delta revealed that the revenue contribution from AmEx doubled from $1.7 billion to $3.4 billion between 2012 and 2018
• The presentation released on Monday showed that the AmEx contribution jumped to $4.1 billion in 2019. Cash sales to AmEx totaled $3.9 billion, accounting for 64% of SkyMiles’ cash inflows.

This is not the first time for Delta to come hat-in-hand, and for American Express to save the day. In 2004, the WSJ reported a “$600 million cash infusion” to save its co-branded partner, ten percent of the current relationship.

As for me, I will keep my three airline reward cards in the family safe until COVID-19 comes to an end. For now, cashback rewards are the way to go!

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Airline Co-Branded Rewards: Delta is Ready When Amex Is appeared first on PaymentsJournal.

This article originally appeared on ABC Legal Services blog

The Fair Debt Collection Practices Act (FDCPA) was signed into law in 1978 to protect consumers from unscrupulous debt collectors’ actions. It was the government’s response when presented with abundant evidence of widespread “abusive, deceptive and unfair” debt collection practices. After being presented with evidence, Congress passed the law that these practices contributed to “personal bankruptcies, marital instability, and loss of employment.”

Many questions about how to interpret the FDCPA have arisen in more than 40 years since its passage, including how to handle new technologies such as email and texting. Pressure from consumers and debt collectors to update and clarify the rules led the Consumer Financial Protection Bureau (CFPB) to finally propose new rules that are likely to take effect in October 2020.

What Is The Federal Debt Collection Practices Act (FDCPA)?

The FDCPA prohibits debt collectors from engaging in unfair, abusive, or deceptive practices when collecting debts for:

• Credit Cards;
• Mortgages;
• Medical Expenses;
• Other personal, family, or household debts.

It does not cover the collection of business debts or collection efforts by the original creditor. Debt collectors are defined as collection agencies, debt buyers, debt collection companies, and lawyers that represent debtors.

What Rules Does The FDCPA Provide To Protect Consumers?

• Time and Place: It is prohibited to contact consumers to collect a debt before 8 a.m. or after 9 p.m. They must also refrain from contacting you at a place or time they know is inconvenient, such as calling at a place of employment or during the times they know a night worker is sleeping.
• Harassment: Collection professionals may not make repetitive calls or ones that are intended to annoy or abuse the person answering the phone. Obscene language or threats of violence are prohibited, and they may not publish lists of debtors or refuse to identify themselves.
• Attorney Representation: All direct calls to a debtor must cease as soon as the collection professional is informed that an attorney represents the debtor.
• Ending Contact: Once a debt collector is informed in writing that a consumer does not want to be contacted, they may only contact that consumer to say there will not be further contact and inform them that they may be subject to legal action.

It’s important to remember that when you refuse contact with a debt collector, they can still start legal action against you and report negative information to credit agencies.

Procedures For Debt Collectors Under The FDCPA

Debt collectors are required to provide you with the following information when they contact you:

• The name of the creditor they represent;
• The amount of money you owe;
• The fact that you have a right to dispute the debt;
• Inform you that you have a right to request the name and address of the original creditor.

It’s important to know if they fail to provide you with the information immediately, they must provide it within five days of the initial contact if you make this request in writing.

What Are The Most Common FDCPA Violations?

Despite the efforts of the CFPB to enforce the law, violations are not uncommon. Contact from people that don’t follow the law can also be a red flag that they are not debt collectors, but scammers. These are the most common violations :

• Calling excessively, at prohibited times and at the workplace;
• Lying about how much is owed to steal the excess money;
• Contacting third parties;
• Refusing to identify themselves and the creditor they represent;
• Refusing to validate a debt;
• Ignoring the request to cease communication;
• Threatening, slandering and harassing behavior.

Violations of the FDCPA should be reported to the CFPB website, where a complaint can easily be filed online.

What Are The Proposed Updates?

In May 2019, the CFPB announced its proposed updates to the FDCPA. The intention of the proposed new rules was to clarify the law’s intentions and to make it more compatible with modern technology. These are some of the new rules being proposed:

• Debt Collectors are limited to calling a consumer a maximum of 7 times in a week to try to reach them. If they succeed in reaching the customer and having a conversation, they must wait a week before calling them again.
• Consumers can be contacted by debt collectors using text messaging or email, but the communication must include instructions on how to opt out of receiving further texts or emails.
• Clarifies that consumers can restrict what media is used for communication, by either choosing or restricting certain types. For example, a consumer can choose to be contacted only with email and never by telephone.
• Consumers have the right to restrict the times and places for further contact, and the proposed new rules clarify that there is no specific language the consumer must use to communicate their preferences.
• The term “limited content message” is used to describe how much information can be left on a voicemail message without it being considered “a communication.” In other words, it will be possible to leave a message with an assistant or family member as long as it doesn’t provide too much detail.
• Debt collectors must disclose that a debt is time-barred and may not imply that legal action can be taken for time-barred debt.
• Clarifies that a personal representative of a deceased consumer must be treated the same as a consumer.
• Prohibits reporting debt to consumer reporting agencies before communicating with the consumer.
• Prohibits, with some exceptions, the sale, transfer, or placement for collection of a debt that they should know was either paid or discharged in bankruptcy.

Complaints From The Debt Collection Industry

When credit card companies, stores, and other parties are unable to persuade consumers to pay what they owe, they often send the account to a debt collector. When the debt collector fails, there are businesses that buy debt for pennies on the dollars, hoping to collect more than they paid. These industries claim that the FDCPA unfairly impedes their business and that the proposed new rules will make things even worse.

For example, when consumers sue for violations of the FDCPA, they can win back their attorneys fees if they prevail, but the debt collectors and debt buyers cannot. Lobbyists for the debt collection agencies claim that the FDCPA is being misused as a “debt evasion” statute and are increasingly willing to take their cases to trial.

Balancing The Interests of Consumers and Debt Collectors

The Consumer Financial Protection Bureau (CFPB) believes that creating a bright-line rule for compliance will benefit both consumers and debt collectors. For debt collectors, the clarifications should reduce litigation and threats of litigation about repeated or improper contacts. It will also be easier for consumers to identify unfair practices and to distinguish legitimate debt collectors from scammers.

The post The Federal Debt Collection Practices Act is Getting a Face Lift appeared first on PaymentsJournal.

Consumer revolving debt continues to dip, as June’s recently published numbers indicate. The number now sits at $992.4 billion, after sliding from $1.02 trillion in April and $995.7 billion in May, according to Federal Reserve reports of its seasonally adjusted numbers.

Consumer delinquency benefited from stimulus checks, as we saw in the Q1 improvement from 2.71% to 2.42% in June and the impact of millions of payment deferrals by credit card issuers. Unfortunately, those two remedies will soon shift. Federal unemployment enhancements, the extra $600 in weekly benefits, is now a political football. Also, payment holidays and deferrals will quickly begin to end depending upon when the scheduled extension booked and how long the credit card company set the term.

Today’s WSJ talks about the shift: “With Second Stimulus Checks on Hold, American Spend Less at the Grocery Store.” You can be sure that if households cut their food budgets, their credit card payments will soon begin to falter.  From a credit management perspective, the looming issue does not hold well for upcoming charge-offs.

• The emerging shift in food spending comes after the $600 in weekly additional unemployment checks expired in July. It has also prompted grocery stores to bring back something customers haven’t seen much of during the pandemic: discounts.
• Lump-sum stimulus checks consumers received in the spring and the extra unemployment money for people who lost their jobs in the pandemic has helped shore up consumer businesses amid widespread shutdowns and millions of workers claiming unemployment.

Practically speaking, you can not blame the household budget strategy. When people do their household budgets and payments, the first level of consideration is utilities. If there is water, gas, or electricity, that is usually at the top of the order. Most utilities, like New York’s Con Ed, extensions permit this necessary budget item to slip. Foreclosures and evictions are stayed from execution, and secured lending for automobiles is backed up or blocked.

The lowly unsecured credit card debt is likely the most vulnerable. And when you start seeing Walmart worrying, that is a sign of upcoming credit risk. 

The WSJ mentions:

• “People perceive they’re spending more money on food, despite eating out less,” said Walmart U.S. Chief Executive John Furner on a conference call last week. “So, we’ll be thoughtful about the way we plan the rest of the year and react to changes in the trends we see from our shoppers.”
• Sales growth of frozen dinners, for instance, averaged about 9% for the three weeks ended Aug. 16, compared with around 17% for the previous two weeks, according to the IRI CPG Demand Index. 

Credit card bankers need to watch the trend. This holiday season might be the year of the grinch. And for credit card lenders, that means purchasing is down, and unsecured lending will be stressed.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Delinquency: Anticipate the Uptick appeared first on PaymentsJournal.

The most recent minutes published for the FOMC meeting provide a glooming view of economic recovery, which directly affects the U.S. credit card business. The minutes covering the July 20 meeting were posted on August 19:

• The path of the economy will depend significantly on the course of the virus.
• The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.
• In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent

Just to peel this back, the FOMC is the Federal Open Market Committee, one of the results of the Banking Act of 1933, created as the United States exited the Great Depression. The first meeting notes, published in 1936 can be found here, at the Fed.

That is the same reform measure that established the FDIC and the Glass Steagall Act. FOMC is the “principal organ of the United States national monetary policy,” with rotating members from the Federal Reserve banks in Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. The NY Fed president is always a member of the FOMC.

When the Fed talks, bankers (have to) listen.

Enough history, let’s look at some of the comments. Jerry Powell, the Federal Reserve Chairman, is at the helm of the Fed at a time of global crisis. From where I sit, he is up to the task and adds well-balanced leadership. Some selected minutes:

• Financing conditions for consumer credit tightened a bit further during the intermeeting period. In the credit card market, lending standards at commercial banks tightened further according to the July SLOOS. (SLOOS is an acronym for Senior Loan Officer Opinion Survey on Bank Lending)
• Conditions in the consumer asset-backed securities (ABS) markets were stable during the intermeeting period. Yield spreads for certain highly rated credit card and auto loan ABS stabilized at pre-pandemic levels, while student and auto loan ABS issuance recovered to a pre-pandemic pace.
• Consumer credit quality remained stable, partly due to forbearance programs.
• …high-frequency indicators (such as credit and debit card transactions and mobility indicators based on cellphone location tracking) as suggesting that increases in some consumer expenditures had likely slowed in reaction to the further spread of the virus. Participants noted that households’ spending on discretionary services—such as leisure, travel, and hospitality—would likely be subdued for some time and thus would be a factor restraining the pace of recovery.

There are no great pearls of wisdom as to fixing the issue. Given the global scope of COVID-19, there is no silver bullet; but market stability is essential.

• A number of participants commented on various potential risks to financial stability. Banks and other financial institutions could come under significant stress, particularly if one of the more adverse scenarios regarding the spread of the virus and its effects on economic activity was realized. 

Behind much of the recovery will be the Fed’s ability to support the financing function of retail credit.

• To support the flow of credit to households and businesses, members agreed that over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency RMBS and CMBS at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

Perhaps the big worry is not 2020. It looks more like worrying about 2021 and 2022 is in order.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Lenders: When The Fed Worries, So Should You appeared first on PaymentsJournal.

Consumers may be watching their spending, but lenders are watching their lending.

Credit card lenders tightened their underwriting standards to a record high level, as the Federal Reserve indicated for Q3 2020. In fact, with 71.7% of loan officers stating that their standards tightened, the previous record of 66.7%, set during 3Q 2008, was displaced by 400 basis points. 

There are three critical factors to consider, none of which should be a surprise:

• Tightening standards means less new credit available, and implicitly means that current credit lines will be scrutinized.  Credit card issuers need to right-size open credit.  With high unemployment, anticipated small business failures, and an uncertain end to COVID-19, this only makes sense.  Americans still have almost $4 trillion open credit lines, so there is plenty of room to tighten up the risk.
• Yesterday’s comments on a decrease in revolving debt is not a surprise. Discretionary spending is down, entertainment spending on credit cards fell 55.4%, travel spending plummeted 60.2%, and restaurant spending with credit cards dropped 27.8%.  The decrease in revolving debt is of no surprise, as PSCU, a top credit union service organization, reported.
• Federal unemployment checks are still in limbo, and as the NYTimes reports, “roughly one in five workers are collecting unemployment.”

Experience in the Great Recession was that there would be approximately a 15% drop in revolving debt, and from the looks of it, U.S. consumers are near that point.  Mercator Advisory Group’s view is that the metric will drop even further as two events occur: sluggish resolution to bailing out consumers with needed government funds and the increase in charge-off rates, which will come as unemployment continues and payment holidays age off lender books.

In the interim, consider the Loan Officer’s view of lending for the current economy. With a new record set, loan officers seem at least uncomfortable than consumers about the economy. The economy will rebound but expect a disrupted business model well into 2Q21.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Lack of Confidence: Credit Card Lenders Tighten Standards to a New Peak appeared first on PaymentsJournal.

Today’s WSJ has an optimistic view of consumer credit amidst the current recession. It appears a bit too rosy. Is it that consumers are borrowing less, or is it that lenders are lending less? That is the real question. According to the Federal Reserve, 38.5% of consumer lenders reported tightening standards in credit issuance in Q2 2020, up from 13.6% in Q2 2020

• When unemployment soared this spring at the start of coronavirus lockdowns, credit-card debt and delinquencies were widely expected to surge as struggling households borrowed more to make ends meet.
• Instead, amid the deepest economic crisis since the Great Depression, the opposite happened. Credit-card debt in the U.S. and other advanced economies has fallen. Fewer people are late on their credit-card payments. Consumer demand for new borrowing—through credit cards, personal loans, and even pawnshops—is down sharply.
• “We’re not seeing consumers increase credit-card balances; in fact, they’re continuing to pay down balances,” said Peter Maynard, senior vice president at Equifax, the credit-reporting firm that tracks consumer borrowing in the U.S., Canada, the U.K., and other countries.

The article cites debt from Equifax, similar to what the Fed presents in its G-19 report. The indication is that revolving credit is decreasing, from the trillion-dollar mark to the $800 billion range. Note this is the same trend experienced during the Great Recession.

And, while the WSJ points out:

• Just four months ago, large credit-card issuers expected Americans’ debt levels to be a problem and forecast surging missed payments by the second half of the year. Millions of cardholders had signed up for deferment programs because they were unable to make their monthly minimum payments.
• U.S. government stimulus has delivered an immediate economic boost worth more than 9% of gross domestic product, according to economists at Brussels-based economic think tank Bruegel. That includes $1,200 checks sent to eligible adults, the extra $600 in weekly unemployment benefits, and $500 for dependent children.

We say that the economy is being propped up by the funds, which will not last. The $600 benefit ended in July, and a replacement is still in the works. When it returns, it will be less generous. The WSJ reported on “Fed Chief Jerome Powell” that the economy is on an “Extraordinarily Uncertain Path.”

Small business bankruptcies are expected to surge. If you ask N.Y. Times, you will find headlines like “Hiring Outlook remains Dim with ‘Scarring in the Economy.’”

The biggest driver in consumer credit is how much debt goes to charge-off.  That is one of the driving factors for net profit in the business. The latest numbers, published by the Fed on June 15, 2020, for Q1 2020 indicate a healthy loss rate of 3.61% for top banks, which is only slightly higher than the previous period.  Smaller banks, however, are twice that rate at 7.41%. 

Then look at other factors like rent payments. Here, the San Francisco Chronicle notes that “Rent is coming due in California: Two Weeks to Avoid Complete Catastrophe.”

• Millions of residents who lost their jobs this spring as the state shut down to slow the spread of the coronavirus now fear they will lose their homes as well. One in 7 tenants in California did not pay rent on time last month, according to a survey by the U.S. Census Bureau, and nearly 1 in 6 doesn’t expect to pay on time in August either.

I’d say the WSJ is probably too optimistic on this topic. Look at loan loss reserves- that is where everything comes out in the wash. For that, I suggest reading Standard and Poor’s market view, which carries the headline “U.S. Bank Loan Loss Projections Tower Over Allowance Levels.”

We still need another stimulus package, but the long-range concern is how economies can handle it. According to Statista, the U.S. now has 13.2% of its GDP committed to COVID. That certainly is a record for the United States, but other countries are worse. Canada is at 15%, and Japan is a whopping 21.1%. …Watch those loan-loss reserves; that is where the risk sits.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Gloom and Doom: It Depends Whom You Ask appeared first on PaymentsJournal.

Mercator Advisory Group’s early view on Current Expected Credit Loss (CECL) was that the Financial Accounting Standards Board (FASB) would increase loan loss expenses and diminish profitability. However, the view was that CECL would also help brace the industry against financial shock in a downturn. The regulation did its job and helped the industry keep a steady ship as we navigate through the COVID Crisis.

This article from Fortune talks about some of the nuances of the accounting policy, which is in place since January 2020.

• Now, as the effects of the pandemic on consumers’ wallets begin to emerge, that rule has taken on new importance.
• The reason: The new regime requires lenders to look far into the future and book all the losses they expect on credit cards and other borrowings—over the entire life of the loans—right now.
• That new practice should give investors a much clearer window into where the consumer is headed than the old regime, which mandated estimating defaults only for borrowers who had ceased paying interest and hence furnished only a short-term picture.
• Giving a more comprehensive view of losses to come also provides one of the best road maps for where the overall economy is headed.

There are two categories: credit cards and everything else.

• Bank loans can be divided into two general categories for accounting treatment: the first for credit cards, and the second for other consumer credit such as mortgages, and for business loans.
• Before CECL, the banks took provisions based mainly on the volume of loans in their portfolios that became “noncurrent,” meaning borrowers had ceased paying interest.
• Those problem credits were labeled as “nonaccrual,” meaning that the bank had stopped recognizing revenue from the interest it was billing the borrower, but the borrower wasn’t paying.
• That traditional system was called the “incurred loss model,” meaning that banks started taking provisions on loans mainly when borrowers stopped making payments.

For non-credit cards:

• When it became clear the loan would never be repaid, the remaining principal amount went to “charge-offs” or what’s called “loan losses” in the industry that are subtracted from reserves. Put simply,  provisions for future losses that increase reserves and charge-offs that lower them.

But, for credit cards:

• The provisions depended on the “roll rate” of the portfolio. As different borrowers went from 30 to 60 to 90 or more days delinquent, their loans descended from one credit bucket to the next.
• The bank booked provisions based on its estimates of which noncurrent loans in each bucket would never be repaid. The longer the loan remained delinquent, the larger the portion of the principal amount that the bank estimated wouldn’t be repaid, and the larger the provision on that loan became.
• But once the credit became 180 days delinquent, it went to charge-off status and was written off as a 100% loss. That loss was then deducted from reserves. 

Given the option of “paying the piper” early or later, early is often best when dealing with losses.

• The new rule is designed to give investors and regulators a much more accurate picture, far sooner, of how bad things will get in a recession.
• In Q2, BofA and the other big banks supplied their best estimate for all of the damage they expect the pandemic to inflict going forward.
• If BofA is correct, it has already charged earnings for the bad stuff to come from the COVID-19 crisis. 

As we said in our original view of CECL, 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 a single view of the customer as a segment of one. Scoring and a vision of managing the account from acquisition to maturity is essential.

Timing is everything. Had CECL not been in effect before the COVID-19 issue, credit card issuers would have been ill-prepared for the current economic shift. With CECL, at least card issuers (and investors) are braced for an extended economic recovery.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Current Expected Credit Losses: The Credit Card Industry is Lucky the Regulation was in Place appeared first on PaymentsJournal.

Payment holidays, also known as payment deferrals or forbearances, were an excellent way to stabilize the payments industry as COVID-19 took hold. The problem is that many holidays will begin to expire soon, causing a bubble in credit card aging and stress in households across the world.

The New York Times points out, in a Reuter’s pick-up, that:

• “People are now making some real decisions about their businesses and the ongoing viability of them without having a temporary support system to keep them going. We’re in for a pretty difficult next six months.”

The critical issue about payment holidays is that they do not forgive the debt. Forbearances freeze the account aging for a specific period. They follow company-driven standards rather than an industry mandate. In some cases, interest will continue; in others, it might be forgiven. Unless the creditor extends the deferral, consumers will need to deal with the expiration.

• “Significant credit card losses won’t show up until 180 days past the end of (forbearance) programs,” Bank of America Chief Financial Officer Paul Donofrio said on Thursday. “I would not expect to see significantly higher losses until 2021.”
• JPMorgan Chase & Co, Bank of America, Citigroup, and Wells Fargo & Co have all extended programs launched this spring that allow customers to delay payments on their credit card balances or loans without incurring late fees or hurting their credit.

This issue extends far beyond the U.S. HITC notes that U.K.-based Barclays is likely to extend the term another three months, but that policy does not look consistent throughout the globe.

• The payment holiday for personal loans is typically for three months. Once the period has ended, customers need to resume their regular monthly payments.
• In the ‘Barclayloan payment holiday ending’ page, the bank has explained that customers have two options should they wish to extend their payment holiday.
• First, people can make reduced payments every month in case they need further support.
• Second, customers may have the option to extend their payment holiday for a further three months.

And the BBC notes that the FCA plans to continue the deadline until October 31 for some lending products.

• The Financial Conduct Authority plans to extend the deadline to apply for a payment freeze until October 31.
• People who have already applied for support will be able to ask for a further payment deferral.
• The proposals cover motor finance, buy-now-pay-later, rent-to-own, and pawnbroking schemes.
• “It is vital that people facing temporary payment difficulties because of the impact of coronavirus get the assistance they need,” said Christopher Woolard, interim chief executive at the FCA.

We have not seen a mainstream answer in how the U.S. will contend with extending the payment holiday, and it is essential. The challenge is that the discretion for forbearance programs remains in the hands of issuers.

This will make a difference come August (or in markets that adjust by another 90 days, in November). Write-offs will surge on a six month lagged basis, particularly if supplemental unemployment compensation does not renew.  And that is the day of reckoning in payments and COVID-19.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Payment Holidays: The Day of Reckoning is Upon Us appeared first on PaymentsJournal.

Reports are out for second-quarter 2020 results, and as expected, they reflect the impact of COVID-19. Here are what top bankers say:

From CNBC, Jamie Dimon expects continued uncertainty, but believes Chase is on a healthy path:

• “Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,” CEO Jamie Dimon said in the release. “However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm.”
• Dimon said in May that the odds were “pretty good” that the economy would rebound in the second half of the year, driven by the reopening. But that scenario could be threatened by the recent progression of the coronavirus, which has already forced some states to reverse course and shutter businesses again

Chase’s retail bank saw a massive swing, delivering a $176 million loss, in contrast to year-over-year results where it generated more than $1 billion in profit a month. Trading functions helped deliver stronger than anticipated results at Chase this quarter.

Across the street, at 399 Park Avenue comes Citi, where trading also protected revenue. Reuters reports CEO Michael Corbat on an earnings call:

• “We are in a completely unpredictable environment… The pandemic has a grip on the economy, and it doesn’t seem likely to loosen until vaccines are widely available.”

Regarding forbearances:

• So far, Citi, the third-largest credit card issuer in the United States, has offered forbearance on 2 million credit card accounts representing 6% of balances, the bank said.

Similar to Chase, trading revenue saved the quarter:

• Bond trading revenues surged 68% and also helped offset rock-bottom interest rates that make it harder for banks to earn money on lending.

Wells, with no trading function, reported a more severe loss, according to CNBC.

• Wells Fargo on Tuesday posted its first quarterly loss since the Great Recession as the bank set aside $8.4 billion in loan loss reserves tied to the coronavirus pandemic.
• The bank had a net loss of $2.4 billion in the second quarter, or a loss of 66 cents a share, worse than the 20 cents a share loss expected by analysts surveyed by Refinitiv. Revenue of $17.8 billion was also weaker than analysts’ $18.4 billion estimates.
• The bank’s quarterly loss is a sharp reversal from the firm’s pre-coronavirus results: A year ago, the bank posted $6.2 billion in second-quarter profit. 
• Shares of the bank plunged 8% in early trading. 

Wells CEO was less optimistic than Citi and Chase.

• “We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend,” CEO Charlie Scharf said in the release. “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”
• One factor keeping bank stocks down: Low-interest rates have pressured net interest margin, a key measure of profitability in the banking sector. The industry’s loan books have also begun to shrink, driven in part by lower credit card usage and the fear of rising defaults

More numbers will come in later this week, but considering that two top banks relied on trading to save revenue, do not expect credit cards to bring in revenue, at least not at this time of the business cycle.

Right now, it is all about risk management in credit cards and consumer banking.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Three Top Bankers Report on 2Q20 Results: Expect Tighter Credit Card Lending appeared first on PaymentsJournal.

Act 1, Scene 1 of Shakespeare’s Macbeth comes to mind when considering the challenge of credit card lenders today, as three witches chant about the unclarity of what is good and evil.

An article in today’s WSJ talks about how lenders “pulled back sharply on lending” because they can’t tell who is creditworthy anymore. The government’s stimulus package is part of the issue.

• The law says lenders that allow borrowers to defer their debt payments can’t report these payments as late to credit-reporting companies.
• From March 1 through the end of May, Americans deferred debt payments on more than 100 million accounts, according to credit-reporting firm TransUnion, a sign of widespread financial distress.
• Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards, auto loans, and other consumer debt.

The confusion comes from an array of issues. The CARES Act, which added $600 per week to state unemployment, made unemployment more profitable than work in many states, allowing for improved credit performance. The long-range concern comes from the unknown time frame. 

In a worst-case scenario, where unemployment remains high, and the economy doesn’t bounce back for a few quarters, the 33 largest U.S. banks would suffer heavy loan losses that would erode the capital buffers meant to keep them on stable financial footing, the Fed said when it announced the results of its annual stress tests.  Stress testing seemed overly aggressive, but an extended downturn can send shivers down the spine of every credit manager:

• The Federal Reserve on Thursday said a prolonged economic downturn could saddle the nation’s biggest banks with up to $700 billion in losses on soured loans and ordered them to cap dividends and suspend share buybacks to conserve funds.
• Reflecting the uncertainty about how the economy will fare in the year to come, the Fed’s analysis looked at three extreme scenarios to gauge their effect on banks. The first was a “V-shaped” recovery, in which the economy bounces back rapidly from a severe downturn. That would result in nearly $560 billion in loan losses across the nine quarters that the Fed studied.
• A more prolonged downturn that led to a “U-shaped” recovery would cause $700 billion in loan losses. A “W-shaped” recovery in which the economy bounces back quickly but then takes another dip, would result in $680 billion in loan losses.

The certain defensive play is to tighten up lending, as the WSJ indicates from lender surveys.

Banks started tightening their underwriting standards in March when the first wave of coronavirus layoffs began.

• By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.
• Loan originations have fallen, a result of both of the tightening and a decline in consumer demand. An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, according to Equifax Inc.

The WSJ points to an upcoming product enhancement by FICO, the global credit scoring leader. The firm is “is rolling out an index that will appear next to loan applicants’ scores and inform lenders how likely the applicant is to withstand financial difficulties during the downturn.”  CEO Will Lansing mentioned that the new metric “… gives [lenders] that extra filter of how a person is going to handle an economic downturn.”

And, that will be a game-changer to rebuild lending confidence and get the industry back into the business of lending and controlled risk management.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Credit Card Lending: Fair is Foul and Foul is Fair appeared first on PaymentsJournal.

A general premise about credit cardholders is that there is a sincere commitment to repay.  As with everything, there are a few bad apples, but generally speaking, people understand the importance of managing their debt.  You can see it in the most recent revolving debt number published by the Federal Reserve.

Employment numbers across the globe are dismal as COVID-19 continues to take its toll.  Goldman Sachs research pegs the “real-time” estimate at 21.5% in May, as MarketWatch reports. The Department of Labor will report May’s actual numbers on Friday, June 5, but the last report of 14.7% indicated a post-WWII high.  Things are not stable enough to predict where the numbers will land, but as it stands, 1 out of 5 people is out of work is significant.

But limited evidence from state reopenings indicates a greater number of workers might end up returning to their jobs, and do so somewhat faster than expected.

The number of people collecting traditional state unemployment benefits, for instance, fell by 3.9 million to 21.1 million in the seven days ended May 23. It was the first really good news on the labor-market front in months.

It is still likely that credit card companies will see charge-offs surge come 3Q20 and 4Q 20.  Payment deferrals and out of synch budgets are behind the issue.  Unlike the Great Recession, which preceded with aggressive lending, the problem of the day is simply cashflow.  In credit card management jargon, that is an ability to pay issue.  Plain old cash flow problems.

Here is an interesting issue to watch.  Revolving debt is down again.  In an industry that earns more than a third of its income from interest payments, decreasing debt is not usually a good thing.  However, with high unemployment, it is a good event.

Barron’s summarized the current condition well: The reason credit card debt has shrunk so rapidly is that Americans have cut their spending even faster than they have lost their jobs.

The 10.5% drop in the space of 11 weeks is the steepest decline in American credit card balances on record. Credit card debt fell by 22% during the Great Recession, but it took more than a year.

The trend is not unique to the United States.  In India, FinancialExpress reports:

Outstandings on credit cards in the system fell for two straight months — in March and April — as the Covid-19 outbreak and the associated lockdown hurt consumption, data released by the Reserve Bank of India (RBI) show.

In the UK, The Independent notes:

UK households paid off their credit cards and loans at a record rate in April as people stayed home, and shops remained closed through the lockdown.

Consumers collectively reduced their credit card debt by £5bn, more than double the previous record net repayment of £2.4bn set a month earlier. Outstanding balances on loans fell by a further £2.4bn, taking total consumer credit lending to £64bn, the Bank of England said.

The fall in net borrowing was primarily driven by consumers taking out less new credit than in previous months.

So the takeaway is useful.  People realize economies are in messy shape and slowed adding new debt.  A skeptic might say, “there’s nowhere to spend money, so what do you expect?” but I’d say it is a sign that people are pulling back because they lack confidence in the economy.

The next trick is on the shoulders of politicians.  How do you make people confident again to resume spending?

..that’s the real issue.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.

The post Unemployment Up, Credit Card Debt Down appeared first on PaymentsJournal.

After spending more than enough time in risk management, one can have an informed view that credit card users care about their spending and repayment.  The gut feeling is that people are good and do not abuse credit; instead, they pull back spending and take their responsibilities seriously.  Yes, there are a few bad apples, but on the whole, self-governance outweighs irresponsibility.  This premise was outlined in a recent Mercator Advisory report on Collections: Credit Card Charge-off Collections Takes Brains, not Brawn.

Three interesting stories today support Mercator’s view.

The first comes from UCLA’s Anderson School of Management.

With the U.S. suffering its worst job losses since the Great Depression — 30 million unemployment claims filed in just six weeks — a big question is how deep, and long-lasting the decline in consumer spending will be.

Consumer outlays, after all, account for nearly 70% of the economy.

The study found that consumers overall responded quickly, and negatively, to the news that the local unemployment rate reached a new one-year high: In the two weeks after such news, consumers in those areas collectively cut their discretionary spending (outlays on non-essential things) by an average of 2%, compared with areas with many similar economic fundamentals that didn’t post a new 12-month jobless-rate high.

Not surprisingly, consumers’ first instinct when facing a troubled economy is to cut spending on relative luxuries, as opposed to necessities. The average 2% drop in discretionary spending in the two weeks after a new 12-month high in local unemployment was fueled by lower spending in sectors that included restaurants, travel, and jewelry, the study says. “Consumers who experience a local unemployment maximum spend approximately 1.5% less in restaurants in the subsequent two weeks,” the authors write.

The JP Morgan Chase Institute, one of my personal favorite research sites where there is plenty of transaction data to consider, has a similar spin of the battered consumer.  In a news pickup by Reuters, we read:

Spending on non-essential goods and services, like retail, restaurants, and entertainment, fell sharply across income brackets accounting for nearly all of the drop in spending during that period, the JP Morgan Chase Institute said.

This is primarily due to the stay-at-home orders put in place by many U.S. states, and less due to job loss, at least for now, said Diana Farrell, president, and chief executive of JPMorgan Chase Institute.

“While surprising, we expect this may change over time as layoffs, furloughs, and unemployment insurance further impact families’ bank accounts,” Farrell said in a statement.

The overall fall in spending was 8 times larger than the average drop in household credit card spending in the first month of unemployment during regular times, according to the report.

Credit card users who report household incomes of less than $26,000 reduced spending by 38%, while wealthier cardholders, with incomes of more than $95,000, reduced spending by 46%. The group says the difference largely reflects higher average spending by wealthier households.

And Politico, a source that is typically to the left of my centrist view, had a similar pickup.

“Average American household credit card spending has fallen sharply by 40% year-over-year across all household income levels. As of the second week of April, this drop in spending appears to be primarily driven by the pandemic and social distancing … and, to a lesser extent, by initial income losses.

Here are three simple takeaways. 

• Envision a 2 x 2 grid. Consumers will fall into one of four boxes: those that can and can not pay, and those that are willing and unwilling to pay.  Credit behavior and scoring easily classify cardholders into these boxes.  Those willing and able to pay are easy. Those willing but unable to pay are the ones that need coddling.  Those unwilling and unable need a different treatment than those unwilling and able.  Simple enough.
• Credit card companies need to modify their strategies to adapt to the current, unexpected credit crisis.  Rather than dumping out accounts to collection agencies, credit card issuers must extend their back-end collection process.  This will save millions in non-interest expense.
• Sooner or later, the economy will recover.

The long game for credit card issuers is essential for business continuity, growth, and continuity.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.

The post Credit Card Holders Pull Back as the Economy Tanks Under COVID-19 appeared first on PaymentsJournal.

Elected officials and regulatory agencies have issued a series of emergency orders, regulations, and guidance in response to the global health and economic crisis. The financial and legal implications of these actions impact a wide range of financial activities.

Focusing on consumer impact, Richard Cordray (former Director CFBP), John Roddy (Partner Bailey & Glasser LLP), Alan S. Kaplinsky (Consumer Financial Services, Ballard Spahr), and Christopher J. Willis (Consumer Financial Services Litigation, Ballard Spahr) addressed a number of pressing legal issues in the Ballard Spahr webinar: Consumer Financial Regulatory and Litigation Fallout from the COVID-19 Crisis.

Fraud

The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), among others, are warning consumers about the need for caution amidst the proliferation of fraud as bad actors take advantage of the COVID-19 crisis to line their own pockets. Predatory lenders are likely to target those who have suddenly been laid off with high cost loans. Scam artists may use tactics similar to those seen during the 2008 recession relating to foreclosure rescue, debt relief, and credit repair.

Debt Collection

Numerous states are enacting emergency debt collection regulations that limit debt collection during the pandemic. The Massachusetts attorney general has issued emergency regulations making it a UDAP (Unfair and Deceptive Acts and Practices) violation “to file a collection suit, garnish wages, repossess a vehicle, serve a capias warrant, or threaten any such action until 30 days after the governor lifts the emergency declaration. These regulations prohibit debt collection calls for the same period.” The federal CFPB could adopt similar debt collection measures.

Fair Debt Collection Practices Act (FDCPA) and State collection law violations are bound to happen. As more people start to fall behind on their bills, they become subject to increased collection activity, resulting in more problems with lenders, servicers, and debt collectors, and potential litigation. According to Willis, it will be necessary to take a “looser approach with debt collection right now” and companies that fail to do so will have to answer to the regulators when the crisis starts to resolve.

Credit

Corday suggested that the CFPB should be more proactive in assisting consumers during the economic crisis. The CFPB could take a number of steps, such as: enforcing government backed mortgage protections, waiving bounced check and late/insufficient payment fees, and encouraging CRAs to use “natural or declared disaster” flags to prevent credit scores from collapsing.

The CARES Act provides that if an institution grants an accommodation on a credit obligation because of the COVID-19 pandemic, then the institution must report the account as “current” if the account was current before the accommodation.

At the state level, any changes that impact the terms of credit (e.g. late fees, payment due dates, interest accrual) will only apply to state chartered entities. National banks and financial institutions will not be legally obligated to comply, though they may be compelled to do so or risk reputational damage.

Housing and Mortgages

The CARES Act provides a foreclosure moratorium and a right to forbearance for federally held residential loans. Furthermore, the CARES Act has simplified the paperwork required to get a foreclosure deferral. Roughly 70% of home mortgages are federally backed, leaving 30% that are not covered by the CARES Act. Several state governors are working to expand mortgage moratoriums while the CFPB is providing guidance to lenders, and servicers, and borrowers impacted by the pandemic.

In comparison to the 2008 recession, there is an expectation that lenders will take a “more reasoned and thoughtful approach” to foreclosure issues. Nonetheless, legal experts anticipate an “avalanche” of foreclosure activity in the wake of the pandemic, including wrongful foreclosure and failure to comply with emergency restrictions.

Several state governors are addressing the concerns of renters by issuing emergency orders restricting evictions or implementing measures to impede the process.

Student Loans

Payments and interest on certain federal student loans (primarily Family Federal Education Loans) have been suspended payments for 180 days. The roughly 30% of student loans that are not government owned do not qualify for suspended payments and interest, potentially resulting in financial hardship for millions of borrowers.

Lenders and servicers of these loans are facing an even more difficult financial situation, as evidenced by the fact that Navient (one of the largest student lending institutions) saw its stock price drop 75% in one week.

Due to continual changes in guidance and regulation surrounding student loans and mortgages, call center representatives are not always aware of the most up to date information. As a result, borrowers are being given incorrect information. The rapid changes and effect of misinformation will likely hurt a large number of borrowers, leading to both individual and class action lawsuits.

Other student loan issues that could lead to litigation include: “charging fees for no or suspended service, loan grace period abuses, and predatory practices.”

Businesses that Remain Open

Businesses that remain open need to prioritize the health and safety of their employees and customers. Business owners want to know, from a legal standpoint, what to do if one of their employees is diagnosed with COVID-19. It is important that businesses tell people what risks may exist and that they take sufficient preventative measures to ensure, in the event of a lawsuit, that they have done everything reasonably possible to secure the safety and health of their employees and customers. “The number one duty that sellers have is to fully disclose all of the material considerations that a reasonable consumer would think about in deciding whether to enter into a transaction.”

Financial Institutions

Working remotely could negatively impact a number of operational areas which, if not functioning correctly, could lead to regulatory problems or litigation. To reduce exposure to increased regulation and litigation, financial institutions would be wise to consider the long term implications of their actions.

Conclusion

The barrage of emergency orders and increased regulation at the federal, state and local levels have made it difficult for businesses to stay informed of and in compliance with the most current guidance. Regardless, those in violation will be subject to enforcement and penalties. Emergency orders are given a lot of leeway in benefit of the consumer, so if in doubt, business would be well advised to favor the consumer.

The post Don’t Bank on Avoiding COVID-19 Fallout appeared first on PaymentsJournal.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – 2019 U.S. PaymentsInsights – Technology and Fraud: Consumer Concern Is Real.

Even before Coronavirus, there were doubts in the U.S. about paying bills:

• Only 55% of U.S. adults rated themselves ‘satisfied’ (8, 9, or 10 out of 10) to meet financial obligations
• Only 43% of U.S. adults are satisfied with their ability to ‘communicate their financial matters’
• Only 22% of U.S. adults are satisfied with their plans to finance their children’s education
• Only 27% of U.S. adults are satisfied with the earning potential of their current job
• 34% of U.S. adults are satisfied they’re on track to have enough money in retirement
• 41% of U.S. adults were satisfied with their emotional response to personal finance
• 40% of U.S. adults were satisfied with the level of debt they carry

About Report

Mercator Advisory Group’s most recent consumer survey report, Technology and Fraud: Consumer Concern Is Real, from the bi-annual North American PaymentsInsights series, takes an in-depth look at U.S. consumers’ current perspectives on technology and fraud.

This report explores how technology and fraud impact consumers lives and, in particular, the way they shop and pay for things. This includes detail on not only what they do but also how they feel about these two important consumer issues.

The post Even before Coronavirus, There Were Doubts in the U.S. about Paying Bills: appeared first on PaymentsJournal.

At issue is the credit card aging process.  In the U.S. market, for instance, credit card accounts will age to bad debt write-off once they become 180 days contractually past due (For a detailed discussing on the credit loss cycle, please see Mercator Advisory’s report Credit Card Write-off Collections Takes Brains, not Brawn).

Card issuers across the globe are quick to offer deferments; however, this does not necessarily mean agings will freeze. Top issuers, from American Express, Bank of America, Chase, Citi and Discover each have compassionate positions in the U.S., as do many others across the world, such as ANZ (Australia), Barclaycard (U.K.), BNP (France), CIBC (Canada), Itau (Brazil) and to name a few.

But the best proposal so far comes from the country of Malaysia, where Prime Minister Tan Sri Muhyiddin Yassin announced a country-wide solution for the developing market. 

Malaysia is a progressive country of 31 million people, classified as an upper-middle-income group by the World Bank.  Interestingly enough, only 4% of the market falls below the poverty line.  While more than half of the country has a financial account, credit card penetration was only 21% in 2017.  But top banks, including CIMB and Maybank, have been aggressively advancing financial inclusion with the help of the Malaysian Central Bank.

The country’s solution to the cash flow issue uses a classic credit solution for cash-strapped customers: forestall aging, and convert the revolving debt into an installment loan. The Edge reports:

Prime Minister Tan Sri Muhyiddin Yassin has announced a six-month postponement of loan repayment and restructuring of credit card balance and business loans following the COVID-19 outbreak involving at least RM100 billion.  

“People of all walks of life whether entrepreneurs, farmers, fishermen, daily workers are wondering about their economic position.

“Among the major concerns raised are the repayment of bank loans, both in the case of private borrowers and Small and Medium Enterprises (SMEs) whose businesses have been affected by the outbreak,” he said in a statement today.

Beginning on April 1, local banks will offer a moratorium or postponement of repayment up to six months to individual borrowers and SMEs during this very difficult time, according to the Prime Minister.

For credit cardholders facing financial constraints, they may choose to convert their credit card balance to term loans.

Borrowers can take advantage of the flexibility of the postponement to defer their credit card repayments from April 1 to December 31, 2020, he said.

The conversion from revolving credit to an installment loan has been used anecdotally over time, but Malaysia appears to be the first to invoke the strategy here.

This solution can work well in every market.  One alternative that central banks could offer would be even simpler: extend the write-off mandate by “x” months.  In the U.S., this would mean that instead of 180 days as a write-off standard, advance the limit to 240 days.

Credit card issuers must plan ahead.  Right now, agings have not advanced, but beginning in April 2020, 30 day delinquency will start to grow;  unresolved credit card accounts in May will fall into the 60 day bucket, on the way to write-off in 4Q20.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post A Novel Approach to Managing Credit Card Losses in a COVID-19 World appeared first on PaymentsJournal.

The pandemic has taken a toll on many aspects of life, and one of the areas that has been hit hard is finances. In particular, household debt has risen sharply as people have been forced to rely on credit cards and loans to make ends meet. While some debt is necessary and can be managed responsibly, too much debt can quickly become a burden. Not only does it put a strain on finances, but it can also lead to feelings of anxiety and stress. There are options available. Many lenders are offering debt deferment programs that can help get through this difficult time.

With unemployment claims expected to surge from 281,000 to 2.3 million this week, Forbes reports that sick pay policies and uneven state-based unemployment insurance claims are under review.  Benefits vary significantly, as the article cites data from the Center on Budget and Policy Priorities: “weekly benefits averaged $213 in Mississippi and $546 in Massachusetts.”

Politico presents a new view on dealing with the concurrent storm of delinquent consumer debt, which adds value.  Defer debt until the dust settles.  It is a practical solution that can help stabilize consumer markets.

Direct cash payments to American households will be a significant portion of the U.S. government’s response to the coronavirus crisis. The logic is clear: When people can’t leave their homes and businesses shut down, workers lose their paychecks. Cash injections from the government – whether in the form of checks or unemployment insurance – help cushion that blow.

But that is only part of the equation for American families trying to get through this challenging period. It’s not only about cash coming into households, but also the cash going out.

The debt deferment is not a gift.  The intention is to provide breathing room.

This is not just a humanitarian imperative. It also reflects a sound and established principle in responding to debt problems, from ancient Mesopotamia to modern financial crises. When borrowers face a “liquidity shock” – a sudden and potentially transitory loss of ability to pay – the correct response is to give more time to repay. Pursuing repayment in such circumstances produces unnecessary, avoidable, and lasting harm.

Taxes, mortgages, and credit cards are the focus, as the article continues.

Tax payments, student loans, and other obligations to the government. At the federal level, announcements have already been made regarding the delay of required tax payments, as well as interest on student debt. Principal repayments on student loans are now also eligible for deferral. Similar relief should be extended to obligations associated with other government programs, such as loans to small businesses and other credit lines.

Mortgage payments. Lenders should establish expedited processes for facilitating forbearance on mortgage payments for stressed borrowers. The federal government has just directed lenders that work with mortgage agencies Fannie Mae and Freddie Mac to offer affected homeowners payment flexibility for up to 12 months. Federal guarantees backstop any risk of credit losses on associated agency mortgage-backed securities. All mortgage servicers in the United States should use maximum possible latitude to facilitate deferred payments. Landlords receiving relief for mortgages on rental properties should pass through that benefit to their tenants by deferring rent payments.

Auto loans, credit card payments, and other debt. Financial institutions should work in an expedited fashion with vulnerable borrowers to implement interest-free deferrals of payments due on auto loans, credit cards, and other forms of consumer and business debt. These should be implemented with no penalties, fees, or negative reports to credit bureaus.

As the article closes, it provides a thoughtful summary: Banks were the cause of the last crisis. They can be part of the solution of this one.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post A Coronavirus Solution: Defer Household Debt as the World Gets Back on its Feet appeared first on PaymentsJournal.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You.

The rise of Marketplace Lending:

• Marketplace lending connects those seeking to borrow money with investors through online platforms
• A marketplace loan requires equal installment payments over a prescribed term
• Goldman Sachs projects marketplace loans to capture $386 billion in lending by 2025
• Marketplace loans were formed while the Fed held interest rates at 3.5% and have not seen a full economic cycle
• In 2017, marketplace lenders overtook banks in the percentage of total stallment lending in the U.S.

About Report

Marketplace lenders and non-bank point-of-sale finance lenders are not likely to disrupt the course of credit card lending.

Marketplace lenders now dominate the installment loan industry, a segment previously dominated by banks. Loan options are appearing everywhere, but fintechs are simply repackaging old lending products for loans and point-of-sale finance. Credit card issuers should focus on their products’ benefits rather allowing these aspiring disrupters to change the playing field.

The post The Rise of Marketplace Lending: appeared first on PaymentsJournal.

Pay Day Loans are an ugly business.  They focus on the credit impaired, and it is not unusual to see interest rates north of 500%.  Note that according to the most recent data from the Fed, the average credit card interest charged is in the range of 16%. Indeed, risk-based pricing on credit cards follows a higher range, but it is nowhere near the realm of payday lending.

The core problem with Pay Day lending is that they are lenders of last resort.  Defaults are high, credit quality is low, and the expectation is that the borrower has nowhere else to go.

Th Consumer Federation of America released an interesting report that discusses the collection practices of Pay Day Lenders.  The essence is that many small claims courts are jammed with litigation for non-payment and that the courts have now become an extension of the collection process.

This study explores the intersection of the growth of payday, vehicle-title, and other high-cost loans with the routinized use of supplemental collection proceedings in small-claims court. To do so, we gathered an original data set on small-claims court supplemental proceedings in the state of Utah.

Applying these methods leads to three empirical findings: (1) high-cost lenders dominated small-claims court dockets, accounting for a super-majority of all small-claims court lawsuits; (2) as a group, high-cost lenders were the most aggressive plaintiffs in small claims courts, suing over smaller amounts of money and for longer periods than other litigants; and (3) high-cost lenders are far more likely to obtain warrants for the arrest of their customers than plaintiffs in other cases.

Arrests for debt are not something you will typically find in credit cards.  But for Pay Day lenders, particularly in the state of Utah, the long arm of the law will get you for non-appearance and contempt.   In a table within the report, CFA points to 17,008 small claims filed between 2017 and 2018.  Of these, 11,225 filings were for payday lenders, auto-title lenders, and other high cost creditors.

Moreover, in many lawsuits, high-cost lenders obtained arrest warrants on more than one occasion. For example, a high-cost installment lender petitioned for eight different post-judgment hearings in an Orem small-claims court case leading to three different arrest warrants for the borrower.

A high-cost lender called “Raincheck” initiated a 2016 lawsuit in the rural town of Vernal that led to five post-judgment hearings and three arrest warrants for a borrower with a $1,050 payday loan. Money 4 U’s 2015 lawsuit in Salt Lake City to collect a triple-digit interest rate loan of $1,170 led to years of litigation and four arrest warrants.

And, in a West Valley City case, Mr. Money sued to collect a mere $160.50 in 2014. After obtaining a judgment of $225.50, the lender continued to litigate for nearly half a decade, repeatedly demanding the borrower’s presence in court to answer questions about employment, bank accounts, and other assets.

These practices are a far cry from credit card collections, where Mercator says it takes Brains, not Brawn, to collect money.  Debtor prisons don’t work.  Shaming, penalizing, and punishing well-intended debtors does not work. 

Sometimes, credit losses are simply the cost of doing business in consumer lending.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post May Day In Pay Day Loans: If Credit Card Interest Bothers You, Read This appeared first on PaymentsJournal.

The Fed just released its December borrowing totals. It was a good year for retailers and, by extension, those involved in the credit card business. Revolving credit, which includes credit cards, rose $12.6 billion.  This increase comes on the heels of a November decline of $2.9 billion.

As the summary of the fed press release in the Washington Post reports:

The overall December surge was led by a $12.6 billion increase in the category that includes credit cards. It was the biggest one-month gain in credit card debt since a $19.5 billion increase in April 1998.

December’s jump came after a $2.9 billion decline in credit card borrowing in November.

The surge in credit card borrowing in December was another sign that retailers had a good holiday shopping season, although a growing share of those purchases are going to on-line retailers rather than brick-and-mortar stores.

This can raise red flags for some, but the Fed seems less pessimistic than one might think. “Household debt to GDP has been coming down since the financial crisis…it is in a very good place,” said Fed Chairman Jerome Powell at news conference Jan. 29.

While the Fed may be sanguine about the outlook on consumer debt, there are others who may see this increase in debt as a harbinger of something bad in the future. To them I would say, “Give it some time.” This only one data point and we need to look at it relative to many other statistics. Perhaps the most telling will be the rate at which these credit card debts gets paid off.

Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group

The post It Was a Merry Christmas for Credit Cards appeared first on PaymentsJournal.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management.

The informal payment hierarchy among households:

• Water, gas, and electric bills are at the top of the order, and housing payments are a must
• Car loans are secondary to housing payments, but these are often collaterallized with lenders
• Unsecured loans, whether credit card or personal loans, are often the first lending types become subject to stress
• Credit card aging follows a regimen of defined 30-day periods tied to billing statements
• At 180 days delinquent, U.S. credit card issuers are required by law to charge off the account
• The greatest volume of delinquent accounts sit in the 30- day aging bucket
• “Managing the roll rate” from each 30 day bucket often reduces delinquency by 40-70%

About Report

Mercator Advisory Group released its latest research report, Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management. The report, the second in a series of three on collections, explains the importance of preparing collections operations for the next economic cycle, a downturn that is long overdue. It also gives an overview of the U.S. revolving debt market and defines strategies for each stage of credit card delinquency.

This report complements an earlier report on back-end collections, Credit Card Charge-Off Collections Takes Brains not Brawn. The pair give credit card managers a comprehensive view of credit card collections from cradle to grave. A forthcoming report in early 2020 will discuss underlying technologies that support this market space and will compare the vendors listed in this report.

“The U.S. market is long overdue for a recession. Unemployment levels are low, gasoline is cheap, inflation is at bay, but the indicators have been good for too long,” comments the author of the research report, Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “Experience shows that the best time to hone collections is when times are good. It is much better to test strategies when you don’t need to than have to react as the economy shifts.”

This document contains 17 pages and 10 exhibits.

Companies and other organizations mentioned in this research report include: ACI Worldwide, A.R.M Solutions, CGI, Equifax, Experian, edgeverve, FICO, Infosys, Lending Solutions, SkyCom, TransUnion

The post The Informal Payment Hierarchy among Households: appeared first on PaymentsJournal.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management.

With a delinquency rate of 2.58%, credit card delinquency hit a 7 year high in Q1 2019

• Delinquency primarily arose from cardholders aged 18-29 — generations Y & Z, also known as millennials
• The dual challenges of learning household budgeting combined with student debt seems to be the culprit
• Almost 1.6 million Americans resorted to bankruptcy during the economic crisis
• Since then, bankruptcies have fallen by half but are forecasted for modest growth to 2022
• At the peak of the recession, $10 of every $100 in card portfolios was charged off
• Charge off rates hit a 10 year low in 2015 at 2.92%, but have risen to 3.74% recently

About Report

Mercator Advisory Group released its latest research report, Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management. The report, the second in a series of three on collections, explains the importance of preparing collections operations for the next economic cycle, a downturn that is long overdue. It also gives an overview of the U.S. revolving debt market and defines strategies for each stage of credit card delinquency.

This report complements an earlier report on back-end collections, Credit Card Charge-Off Collections Takes Brains not Brawn. The pair give credit card managers a comprehensive view of credit card collections from cradle to grave. A forthcoming report in early 2020 will discuss underlying technologies that support this market space and will compare the vendors listed in this report.

“The U.S. market is long overdue for a recession. Unemployment levels are low, gasoline is cheap, inflation is at bay, but the indicators have been good for too long,” comments the author of the research report, Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “Experience shows that the best time to hone collections is when times are good. It is much better to test strategies when you don’t need to than have to react as the economy shifts.”

This document contains 17 pages and 10 exhibits.

Companies and other organizations mentioned in this research report include: ACI Worldwide, A.R.M Solutions, CGI, Equifax, Experian, edgeverve, FICO, Infosys, Lending Solutions, SkyCom, TransUnion

The post Credit Card Delinquency Hit a 7 Year High in Q1 2019 appeared first on PaymentsJournal.

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management.

6 critical credit stats for 2020:

• According to the Federal Reserve, consumer debt reached $4.15 trillion in 2019
• In Q3 of 2019, consumer debt was increasing at a 5% rate
• U.S. consumers devote 10% of their disposable income to non-mortgage debt: credit, auto, loans
• Revolving credit card debt is currently at $1.08 trillion
• By 2023, revolving credit card debt will expand by another $100 billion
• In 2019, revolving consumer debt increased 2.25% annually; non-revolving debt increased 6%
• Average credit card balances increased 8% from 2016 to 2019: from $5,247 to $5,645

About Report

Mercator Advisory Group released its latest research report, Credit Card Collections: The Foundation for Safe and Sound Card Portfolio Management. The report, the second in a series of three on collections, explains the importance of preparing collections operations for the next economic cycle, a downturn that is long overdue. It also gives an overview of the U.S. revolving debt market and defines strategies for each stage of credit card delinquency.

This report complements an earlier report on back-end collections, Credit Card Charge-Off Collections Takes Brains not Brawn. The pair give credit card managers a comprehensive view of credit card collections from cradle to grave. A forthcoming report in early 2020 will discuss underlying technologies that support this market space and will compare the vendors listed in this report.

“The U.S. market is long overdue for a recession. Unemployment levels are low, gasoline is cheap, inflation is at bay, but the indicators have been good for too long,” comments the author of the research report, Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “Experience shows that the best time to hone collections is when times are good. It is much better to test strategies when you don’t need to than have to react as the economy shifts.”

This document contains 17 pages and 10 exhibits.

Companies and other organizations mentioned in this research report include: ACI Worldwide, A.R.M Solutions, CGI, Equifax, Experian, edgeverve, FICO, Infosys, Lending Solutions, SkyCom, TransUnion

The post 6 Critical Credit Stats for 2020: appeared first on PaymentsJournal.

I don’t think anyone can argue that the middle class in America is not in trouble.  Declining job opportunities, rising healthcare and education costs, to mention a few, are real burdens faced by all Americans, but the middle class American seems to be the hardest hit.  These hardships often manifest themselves in the form of financial struggles, which often lead to debt.

Forbes Senior Contributor Christian Weller points out the enormity of this problem in his recent article It Is Not Healthy When Middle-Class Families Drown In Debt In A Growing Economy.  I think the following excerpt does a very good job of making his point:

Consumer credit has grown faster than after-tax incomes since the Great Recession. It grew from an average of 14.9% of after-tax income in June 2009, when the Great Recession ended, to 18.5% in September 2019 (see figure below). Families would have had $653 billion less in debt in September 2019 if consumer credit had just grown at the same rate as income since the end of the Great Recession. That consumer debt has outpaced incomes in an expanding economy is not a sign of middle-class wellbeing.

As I read the article, I couldn’t help but think that we are on the precipice of another type of financial crisis that will be very difficult to dig out of. What happens when people cannot bear the weight of this debt any longer?

In fact, Business Insider cites statistics from the American Journal of Public Health that show 66.5% of personal bankruptcies are tied to medical expenses and 25.4% are in some way related to education expenses. These are not people living beyond their means, or trapped in a regrettable mortgage. These are people just trying to get by.

The financial and social disruption this kind of a crisis could bring has the potential of significantly disrupting this country on financial, social, and personal levels in a way that could destabilize the U.S.

Sadly, I don’t have the necessary public policy chops to provide meaningful solutions.  What I do know, however, is that there is no way this issue will solve itself.

Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group

The post We Need to Deal with Debt NOW appeared first on PaymentsJournal.

Twelve actions to improve net interest income for issuers:

• To increase net interest revenue, underwrite to risk with a range of rates & test markets with higher rates
• To decrease interest expense, large issuers should use capital markets & small issuers should increase deposits
• To decrease interest expense, also focus on high-risk accounts and aggressively close credit lines when risk warrants
• To increase non-interest revenue, maximize delinquency fee structure & improve collection charge-off recovery process
• To increase non-interest revenue, also drive product offerings to interchange friendly card products
• To decrease non-interest expenses, protect against abuse of credit card rewards & tighten underwriting in reaction to growth of installment loans
• To decrease non interest expense, also strengthen collection functions and policies in advance of next economic downturn

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020.

About issuers Report

Credit cards remain one of the most profitable offerings by retail banks in the United States. Still, margins began to slip between 2014 and 2017 as credit card issuers rebuilt their portfolios after the recession and normalized strategies in response to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act). Return on Assets (ROA) for credit card banks fell from 4.94% to 3.37% during that period.

The tides turned in 2018, when the ROA metric improved 42 basis points to 3.79%. Credit card issuers increased their lending margins and benefited by improved credit quality.

The analysis presented in Mercator Advisory Group’s latest research report, Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020, explains the Return on Assets metric, illustrates which components affect the results, and describes why momentum should keep top credit card issuers profitable in the coming decade.

“Credit card issuers began to increase credit card interest margins in 2017 when the prime rate was 3.75%, and they continued to improve their margins in 2018. Indications are that the interest spread, or margin, will rise slightly into 2020,” Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “The momentum will likely continue through 2020 as almost 200 million cards were issued since 2017.” Riley also notes that the increased margin protects the credit card Return on Assets metric and helps shield against credit losses if the U.S. market should experience a downturn.

This research report contains 20 pages and 9 exhibits.

Companies and other organizations mentioned in this research report include: American Express, Barclaycard, BMO, Capital One, Chase, Citi, Discover, Equifax, Experian, Scotiabank, TD, TransUnion, U.S. Bank, and Wells Fargo 

The post Twelve Actions to Improve Net Interest Income for Issuers: appeared first on PaymentsJournal.

Credit card interest rates and revolving debt hit historic highs in 2019:

• Credit card interest rates hit a 25 year high in 2019 as lenders increased their rates
• Mercator expects momentum to continue through 2023 with interest rates at 17.10%
• At 17.10% and a prime rate at 6.5% – the interest spread will likely be 10.6% in 2023
• Revolving debt hit historic highs at $1.03 trillion in 2019
• Revolving Debt by year:
  2004: $781 billion
  2008: $988 billion
  2011: $815 billion
  2019: $1.03 trillion
• Mercator expects revolving debt to climb to $1.117 trillion by 2023

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left corner of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020.

About Report

Credit cards remain one of the most profitable offerings by retail banks in the United States. Still, margins began to slip between 2014 and 2017 as credit card issuers rebuilt their portfolios after the recession and normalized strategies in response to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act). Return on Assets (ROA) for credit card banks fell from 4.94% to 3.37% during that period.

The tides turned in 2018, when the ROA metric improved 42 basis points to 3.79%. Credit card issuers increased their lending margins and benefited by improved credit quality.

The analysis presented in Mercator Advisory Group’s latest research report, Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020, explains the Return on Assets metric, illustrates which components affect the results, and describes why momentum should keep top credit card issuers profitable in the coming decade.

“Credit card issuers began to increase credit card interest margins in 2017 when the prime rate was 3.75%, and they continued to improve their margins in 2018. Indications are that the interest spread., or margin, will rise slightly into 2020,” Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “The momentum will likely continue through 2020 as almost 200 million cards were issued since 2017.” Riley also notes that the increased margin protects the credit card Return on Assets metric and helps shield against credit losses if the U.S. market should experience a downturn.

This research report contains 20 pages and 9 exhibits.

Companies and other organizations mentioned in this research report include: American Express, Barclaycard, BMO, Capital One, Chase, Citi, Discover, Equifax, Experian, Scotiabank, TD, TransUnion, U.S. Bank, and Wells Fargo 

The post Credit Card Interest Rates and Revolving Debt Hit Historic Highs in 2019: appeared first on PaymentsJournal.

In the U.K., it is called ‘persistent’ credit card debt, but the U.S. credit card companies use a better phrase: perma-debt.  It might sound like a credit card issuer’s dream, but it is a nightmare. The condition happens when consumers make minimum due to payments, or less, rather than extinguishing the debt. 

Credit card issuers make plenty of money on these accounts because cardholder credit profiles tend to be priced higher than transactor accounts, and payments perpetuate almost forever. Classically, those that only pay the minimum due will take 20 years to pay off their credit card debt.

On the one hand, you might think that these interest-generating accounts should be targets for credit card issuers, but sound issuers do not prefer these accounts because the risk is exponentially higher. The preferred model is someone who quickly pays down their bill, then charges again next month. They might revolve or pay less than the minimum due a few times a year, but indeed not every month.

In the U.S., the CARD Act took a novel approach by requiring issuers to indicate how much the bill would cost, and how long it would take to pay off the debt.  We explained the strategy in this recent PaymentsJournal article published on January 7, which appears to work well based on current delinquency volumes. 

The report also mentioned that U.K. regulators are taking an aggressive stance to close these accounts from future credit access. According to the U.K.-based Mirror, several banks are actively implementing closure strategies against perma-debt customers.

• New rules mean from next month, banks could be forced to take drastic measures to help people in debt – here’s what it means and how it will affect you if you’re a Halifax or Lloyds customer
• Halifax, Lloyds, and Bank of Scotland customers are being warned their cards could be suspended next month under new plans to help those in ‘persistent’ debt.
• The move coincides with changes set out by the Financial Conduct Authority (FCA) last year to offer better support to those who have to been struggling to keep up with repayments.
• The financial regulator first told credit card providers to start notifying customers in long-term debt of the changes last September.

This is a large segment.

• The FCA said its new rules were brought in after a market study found around two million cardholders are trapped in persistent debt.
• At present, it said people are making minimum payments end up paying £2.50 in interest for every £1 they owe.

There is a mutual benefit in correcting the perma-debt issue; it is best resolved at underwriting with stronger credit policies. The back-end solution is a late effort to mitigate a problem. My concern is this: Once you cut off the ability to use the card, payment habits tend to deteriorate quickly. The U.S. method seems to better-educate the customer that if they pay only the minimum due, they will be likely paying the debt off in the year 2040. 

That’s enough to scare me away from revolving debt!

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Targeting Perma-Debt, U.K. Banks Get Serious About Credit Card Minimum Dues appeared first on PaymentsJournal.

Credit cards in the United Kingdom are a mature market, being one of the first areas of global expansion by U.S. credit card networks such as American Express, Mastercard, and Visa.  Barclays was a first-adopter, with its sizeable retail base and secure branch network.  The market was a natural, with only a few tweaks in language for words like license and licence.

Brits proved to love credit cards even more their American brethren, and the market of 66.4 million in the UK, compared to 327 million in the US. Growth of revolving debt was almost linear, with an uptick on the UK side.  With the U.S. market at $1.1 trillion in revolving debt, UK carried £225 bn ($296 billion in USD).

In a strategy to drive down revolving debt, UK regulators are attacking the minimum due, as The Guardian reports.  The goal is to break the bad habit of customers who only end up paying the least amount possible on their credit card balance, to reduce total interest and the principal balance. 

The U.S. strategy, to either shame or educate, is based on a requirement of the CARD Act of 2009.  It is an educational message: show the consumer the cost of making minimum due payments.

Every American credit card holder has seen an effort to increase awareness of the bad habit of paying the minimum due.  If you look at your credit card statement, you will see a display of how long it will take you to pay off the balance on your account if you only pay then minimum due. 

Pay the minimum due on your American Express balance of $7,541, at $147, and expect to pay it out in 2040, for a total of $20,089.  Pay $272, and you will extinguish the debt in 2023, with a $10,313 savings.  The difference is striking and intended to scare you into making larger payments.  It works like a champ.  Double up and accelerate the paydown. 

In contrast, the UK is going to require that those borrowers that do not reduce principal balances will lose their credit card lines, as the Daily Record says:

Regulators required banks to identify at-risk customers in September 2018 and give them 18 months to begin bringing down the capital sum they owed rather than making minimum interest payments.

Credit card providers­, including high street banks Barclays, Lloyds and Royal Bank of ­Scotland, had to contact ­customers in 2018 who had been in debt for at least 18 months.

But it means that further action – including suspending and closing accounts – is expected to kick in during ­February against those who have failed to respond.

The Financial Conduct ­Authority (FCA) regulations are designed to help people in ­persistent debt by forcing them to agree to a repayment plan.

As for credit card issuing banks, this will cause a financial shift:

Bank of England figures show borrowers shaved £120million off Britain’s total card debt in November.

The rules are expected to cut into revenues for credit card firms by up to £1.3billion a year.

Firms must then offer ­alternative ways of repaying more quickly, usually for three to four years. These could include transferring a credit card balance to a ­personal loan with lower interest.

Households are estimated to have paid back more than they spent on credit cards in the ­run-up to Christmas for the first time in six years.

From a risk management perspective, allowing consumers to pay the minimum due is a money maker, but it weakens credit quality.  It is fine when consumers pay the minimum due around holidays, or perhaps a few times a year, but if the portfolio relies on the interest generated by consumers who can only may the minimum due, the risk is implicitly higher than one which has an accelerated payment stream.

I, for one, prefer the shaming method.  People react to the fact that doubling their payment might take seven years off the term of repayment.  Shut off their cards for paying the minimum due and you can hurt the household budget.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Minimum Dues and Minimum Don’ts: UK versus US Credit Cards appeared first on PaymentsJournal.

An article in The Guardian refers to the upcoming deadline under the Financial Conduct Authority’s Affordability Rules for lenders to accelerate cardholder payments or suspend cards. The FCA regulates the conduct of the UK’s 59,000 financial services firms. The rules went into effect on September 1, 2018, and covered cardholders who have been revolving balances for at least 36 consecutive months. 

Since the FCA’s Credit Card Market Study found that borrowers in such a situation often are paying more in interest than the original charge was worth, the regulator decided to give relief by requiring issuers to offer accelerated payment plans; if those plans proved unaffordable, the issuer would then have to forgive part of the debt so as to make the payment plan affordable. 

Issuers could also waive interest and fees. To encourage cardholders to cooperate, issuers could be required to suspend the cards, hurting the cardholders’ credit lines.

Over a year later, issuers and cardholders will soon be facing the consequences.  Having had the 18 months allowed under the regulations to convince cardholders to increase their payments, issuers will have to start suspending cards as early as February 2020.  According to the article:

About 60% of the UK’s adult population – about 30 million people – have credit cards. The FCA has estimated that about 5.6m credit card accounts may be held by customers who are struggling financially, and that nearly 2 million may fail to raise their payments before the 36-month period is up.

While the exact number is, of course, uncertain, it seems clear that about 2 million cards are facing suspension, cutting into issuer profits, but also disrupting the cardholders’ financial stability, especially if the minimum payments are masking underlying problems.  If anything, the headline of the article seems to understate the extent of the problem. 

According to the FCA policy statement, “We would expect firms to suspend the cards of customers that have been shown forbearance, and those who do not respond.”  The FCA expects consumers to save up to £1.3 billion a year, but this is definitely “tough love.”

On the other hand, while there is going to be short-term pain for issuers, it will ultimately be helpful to flush bad credits out of the system before a downturn, rather than have them all show up at once.

The disruption from Brexit, which will definitely happen following the Conservatives’ lopsided victory in the recent election, is very likely to tip the UK into recession, so the reckoning will come sooner rather than later.  I just hope the government is prepared to offer assistance to residents who are going to be hit simultaneously with job losses and the loss of their cards, or it could be a grim 2020.

Overview by Aaron McPherson, VP, Research Operations at Mercator Advisory Group

The post One Way to Resolve Rising Credit Card Debt – Take the Card Away appeared first on PaymentsJournal.

Consumer spending is an important economic indicator and can be a great way of evaluating the health of an economy. During times of prosperity, consumer spending often increases as people have higher disposable incomes to purchase goods and services. On the other hand, during periods of economic hardship or recession, consumer spending usually declines as people tighten their belts in terms of disposable income and focus more on saving than purchasing.

Yesterday, Bloomberg News reported that retailers had overcome a short holiday selling season to notch decent growth over 2018, and that this had boosted big bank stocks in turn, because it signaled that the U.S. consumer spending is not quite done yet. According to the article:

All are exposed to consumers, who seemed healthy as Amazon.com Inc. said its holiday season this year was “record breaking,” and Dow Jones reported retailers fended off an unfriendly calendar to draw more shoppers ahead of the holidays, citing data from Mastercard SpendingPulse.

This is not especially surprising, as the record-breaking economic growth, and consumer spending, shows no signs of abating, with at least 235,000 jobs added in October. Wages continued to increase, and unemployment remained below what used to be considered the floor. 

However, what goes up must come down, and with Americans at near-record levels of credit card debt, the inevitable downturn could bring a wave of defaults that would seriously undermine the banking sector. Not being an investment advisor, I nonetheless would be looking to reduce my exposure to the industry.

The end of the year is a great time to rebalance investments.  We have seen booms turn to busts, and this one is very overdue.  Nevertheless, it is good to celebrate another successful year, and hope against hope it will continue in 2020.

Overview by Aaron McPherson, VP, Research Operations at Mercator Advisory Group

The post Consumer Spending Keeps on Going. Will it Continue? appeared first on PaymentsJournal.

The regulatory framework for oversight of the consumer debt collection industry has long been a patchwork of dated legislation. Beginning in the 1970s, the federal government passed a series of laws aimed at protecting consumers from abusive and predatory practices in the financial services industry.

The foundational Federal Debt Collection Practices Act (FDCPA) was passed in 1977 and has been updated through the years. It was followed in the early 1990s by the Telephone Consumer Protection Act, which focused on limiting the use of telephone communications in debt collection. In 2010, the Consumer Finance Protection Bureau (CFPB) was created as an outcome of the Great Financial Recession.

The patchwork nature of the regulatory framework, combined with significant ambiguity with respect to interpreting dated legislation in the modern era, has resulted in a challenging environment for industry participants. Most legislation pre-dates and did not envision the Internet and texting, for instance.

This year, though, a transformative set of new proposed regulations was published by the CFPB in an attempt to address such challenges. In May, the CFPB published the first set of substantive proposed rules seeking to modernize and clarify the industry regulatory framework. In addition to limiting the quantity of outbound telephone contact attempts (seven calls per seven-day period per outstanding loan) that debt collectors can make to delinquent consumers, the regulations also address, for the first time, permissible uses of new technologies like text messaging and email.

For industry participants, there are two key takeaways from the new regulations. The very good news is that the CFPB’s proposed rule-making seeks to create clearer, brighter lines around permissible activity. Put simply, creditors and debtors may now interact through modern channels with clearer rules of the road. But also, the CFPB is putting the industry on notice, backed by its enforcement authority, to dramatically improve the customer experience for delinquent customers. Expect severe sanctions and enforcement actions for rogue players once the rules are formalized.

Outbound calling is outdated

For the last 40 years, many debt collection agencies have been stuck in a simple business model based on the guidelines of the initial FDCPA, in part because they feared sanctions. Seen in the context of today’s mobile and digitized world, those guidelines were clear only with respect to telephone calls (for example, prohibiting outbound phone calls at unusual and inconvenient times).

As almost every modern citizen can attest, outbound calling is inefficient and almost archaic today, both with regards to customer experience and collection rates. According to an industry report, returns between 18% and 20% were the norm a decade ago, but that’s been cut in half. The unmistakable and persistent decline in the success of phone calls to recover debt is the result of myriad factors, including the rise of illegal spam calls and robo-callers, which has bred distrust and a reluctance to answer one’s phone across the board.

Consumer behavior has changed dramatically in the last ten years, too; I do my banking on my smartphone and can stream movies on an airplane. We all live in the iPhone era, which means bouncing between text, email, and apps is the norm. The proposed rules from the CFPB acknowledge and embrace this shift, which means debt collection agencies can feel confident in employing omnichannel communications to engage with customers when accounts are delinquent. In one sense, CFPB is demanding a shift from outbound telephony strategies to a more customer-centric omnichannel strategy.

This is good news for customers. According McKinsey, delinquent customers actually prefer to be contacted by email or text. Lenders and collection agencies should have reassessed the use of outbound telephone outreach as their primary means of communication anyway.

Implementing omnichannel is not difficult

For many debt collection agencies, though, the fear is not just about regulatory sanctions—it’s about the cost and time involved in a perceived large-scale IT overhaul. But the technology framework has transformed as well—the other side of the coin from the consumer revolution. Driving the consumer mobile revolution has been an explosion of new technologies and digital offerings, as cloud-based and SaaS products are being developed and brought to market.

Digital communications can be complementary to existing “legacy” IT strategies and to each other. It’s okay to choose different vendors for SMS and email, as long as you have a platform that can integrate all your channels. Technology that improves an integrated customer experience and return rates can be implemented without tremendous investments—and with substantial payoff.

Debt collection agencies should view the proposed CFPB regulations as a catalyst for an exciting technology transformation—particularly because embracing such technology won’t be optional for very long. The normal cycle for lenders and collections agencies to upgrade technology has been delayed by a good economy; delinquencies are low, even as Americans borrow more than ever, so companies are pushing tech investments down the road. But, to be blunt, the economy won’t roar forever. And the CFPB has laid out the road map for desired outcomes. Debt collectors who embrace the mobile revolution now will see a positive impact on today’s revenue and will set themselves up to weather any economic storm that may blow our way. Used strategically, the new rules are a win:win for everyone. 

The post A Whole New World is Opening up for Lenders and Debt Collectors appeared first on PaymentsJournal.

Conventional wisdom holds that providing a new loan to a currently delinquent borrower is not generally a profitable idea—“throwing good money after bad,” some would call it. A recent study* conducted by TransUnion challenged this truism, suggesting lenders may want to revisit their lending guidelines.  The study found that, in some instances, both lenders and delinquent borrowers mutually benefit from an injection of liquidity via an unsecured personal loan.

While still well below recessionary levels, borrower delinquency has grown in recent years. According to TransUnion’s Q3 2019 IIR, in September 2019 1.81% of bankcard consumers were late by 90 days or more on their bankcards, up from 1.71% the year prior. For lenders, this uptick stresses the importance of active account management and a deeper understanding of how to best serve struggling borrowers. Forgetfulness and over-borrowing are two commonly discussed triggers of borrower delinquency; however, a sudden acute situation, such as a car accident or short-term reduction in weekly work hours, can have a similar impact. In an ideal world, understanding the underlying cause of delinquency should drive lender treatment.  For example, forgetting to pay a bill, which TransUnion identified as the issue with 46% of bankcard delinquencies and nearly a third of auto delinquencies in 2018, may resolve itself with a simple borrower reminder like a (relatively inexpensive) statement message. Alternatively, bringing an overextended borrower current becomes more challenging, and can be significantly more expensive operationally.

TransUnion’s study focused on the struggling borrower, defined as those late on at least one payment for consecutive months, or hitting 60+ days past due in a given month. The goal was to identify if a struggling, delinquent borrower would cure an existing delinquency if extended additional credit via an unsecured personal loan.  TransUnion compared delinquent borrowers with a VantageScore® 3.0 credit risk score of 660 or below, half of whom originated a personal loan and half of whom did not. Only borrowers considered recoverable, which the study generously defined as holding an early stage delinquency of 30-119 days past due, were included. To best simulate the strict criteria many lenders maintain, borrowers with a bankruptcy or charge-off on file in the past two years were also excluded.

The findings were unexpected. In total, 24% of delinquent borrowers who received a new unsecured personal loan cured at least one of their existing delinquencies within two months of receiving the loan and never missed a payment on the new loan in its first year. For these borrowers, an injection of liquidity via an unsecured personal loan appeared to help them overcome a financial struggle in a sustainable manner. This presents a potential method for lenders, outside of deferment or hardship, to support borrowers when they encounter a sudden, short-term acute financial constraint.  That is not to say lenders should rush to lend to a delinquent borrower just because of a complaint related to a short-term struggle—69% of those borrowers studied who received a loan did not recover on their existing delinquency, and a quarter of those went delinquent on the new personal loan as well.

The key is for lenders to be judicious.  A critical finding of the study was that the targeted 24% of consumers who cured and maintained positive performance on the new loan (“cured and paid”) could be predicted with some success at the time of loan origination using both traditional and trended credit attributes. For example, and controlling for credit score, these borrowers tended to be seasoned credit users with fewer recent inquiries.  Those delinquent borrowers with an open credit line or loan at least ten years old and/or an average of eight or more active accounts at the time of origination tended to achieve the optimal “cured and paid” scenario.  Delinquent borrowers with 12-15% of their wallet held in revolving accounts, most frequently credit cards, also fit this profile. This latter dynamic may be attributed to the fact that credit cards are one of the first products on which consumers go delinquent and also easiest to cure given lower minimum payment requirements.

Beyond an unconventional approach to curing a delinquent borrower, these findings also stress an important lesson from an acquisition perspective: While delinquent borrowers represent a higher risk, it is not safe to assume all delinquent borrowers will default on a new loan.  In the study, TransUnion found less than a quarter of borrowers currently delinquent on one or more accounts were late on a new account payment in the originated loan’s first 12 months on the books.  That includes even the riskiest of borrowers.  When looking at a random sample of borrowers opening new accounts in 2017, only 23% of subprime* consumers who were late by 60 days or more were also late on their new loan or line of credit in its first year.  While this certainly represents higher risk than non-delinquent peers, it is not all currently delinquent borrowers.  Over three quarters of delinquent subprime borrowers studied made all payments on their new loans in the first year—and these are borrowers who might otherwise have been overlooked by existing lender criteria.  Charge-off rates on new loans were also relatively similar between borrowers with existing delinquency and those without, again controlling for traditional credit scores. In fact, near prime* borrowers charged-off on new originations at the same rate regardless of whether they were delinquent or current at the time of loan origination.

In conclusion, lenders may want to review their existing treatment strategies for delinquent borrowers.  Certain distressed borrowers will improve on an existing delinquency with the addition of a new loan, which can lead to a win-win for consumers and lenders.  While this often comes in the form of profits to the lender, either via positive payment performance of the new loan or recouping potential losses on delinquent accounts, it also has the potential to increase customer loyalty.  For anyone going through a sudden, acute situation, a helpful hand at a time of need often garners a deeper respect and appreciation. In a constantly evolving environment, pausing to re-examine criteria and consider innovative, new methods to helping struggling consumers may very well help lenders and borrowers alike.

*Subprime borrowers are defined as individuals with a VantageScore 3.0 credit risk score of 600 or below; Near prime borrowers hold a VantageScore 3.0 credit risk score between 601-660.

**TransUnion Study: The Delinquency Gambit: Help or Hindrance?

About the Authors

Matthew Komos leads financial services research and consulting in the U.S. for TransUnion; Kristen Bataillon is charged with providing insights to TransUnion on recent trends in the lending industry and consumer credit risk management.

The post TransUnion Study Offers Insights on Lending to Delinquent Borrowers appeared first on PaymentsJournal.

It’s time for a breather on credit cards, just for a day.  If you need to fill the void for credit card info, take a look at these recent Mercator Viewpoints on QR Codes, Secured Cards, and the 2020 Credit Outlook. Today, a few moments on student loans, a problem that will impact the U.S. at least through 2060.

On one hand, it would be great to be in college.  Young and foolish, pizza and Budweiser, carefree and bliss.  But, the debt?  Forget about it!

Here’s a read from the Ascent at the Motley Fool on student loans.  It will make you appreciate your credit card debt.

• The U.S. Federal Reserve reports that the average monthly student loan payment is $393 (not including borrowers whose payments are in deferment).
• As of early 2019, there are 5.2 million borrowers in default on their federal student loans, according to The Ascent’s Student Loan Debt Statistics for 2019.
• Federal student loans are in default once a borrower goes 270 days without making a payment. But as soon as you reach default status, you face a host of unsavory repercussions. For one thing, your credit score is pretty much guaranteed to tank.

Digging deeper into the stats are some scary numbers.

• In 2018, 20% of student loan borrowers were behind with their payments.
• Those aged between 35-49 have the highest total student debt, with $548 billion in debt.
• Women hold almost two-thirds of total outstanding U.S. student debt – close to $929 billion as of early 2019.
• The average student loan borrower graduated college with $28,650 in student loan debt in 2017.
• Connecticut was the state with the highest average student loan balance, at $38,510. Utah had the lowest.
• As of the first quarter of 2019, there are an estimated 5.2 million federal student loan borrowers in default.

And loan work out programs? Here are the four big ones, acronyms and all:

What a mess!  A burden for students and parents. A burden for taxpayers who carry the brunt.  And, an economic logjam that will impact household budgets for decades to come.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Student Loan Debt: You Think You Have Problems? appeared first on PaymentsJournal.

The U.S. national debt continues to rise, sparking ongoing debate about its long-term effects on the economy. Some experts argue that the growing debt poses a serious risk to future generations, potentially leading to higher taxes, inflation, and reduced government spending on essential services. Others contend that, as long as the economy continues to grow, the debt is manageable and can be sustained without major negative impacts.

The national debt has surpassed $20 trillion, and as government spending on programs like Social Security, healthcare, and defense increases, so does the debt. This raises an important question: Will the national debt eventually reach a tipping point, or is it simply a byproduct of a complex, modern economy?

Understanding the National Debt

The national debt is the total amount the government owes its creditors, both domestic and foreign. It accumulates over time when the government spends more than it collects in revenue, often through borrowing by issuing bonds. While borrowing is a common practice for governments, the U.S. debt level has reached historic highs, prompting concerns about its sustainability.

Two main components make up the national debt:

• Public debt: This is the portion of the debt held by investors, including foreign governments, individuals, and businesses. They purchase government bonds and securities, effectively lending money to the U.S. government.
• Intragovernmental debt: This refers to money that the government owes to itself, mainly through trust funds such as Social Security and Medicare.

Arguments For and Against the Growing Debt

There are two opposing viewpoints when it comes to the national debt: those who believe it is a critical problem that must be addressed immediately, and those who argue that it is manageable and not an immediate threat to the economy.

• Debt is a serious risk: Critics of the national debt warn that as borrowing increases, so do the interest payments on the debt, which could consume a larger portion of the federal budget. Over time, this could reduce funding for essential government services, leading to cuts in education, healthcare, and social programs. Additionally, critics fear that rising debt could lead to higher taxes and inflation, as the government may need to print more money to cover its obligations.
• Debt is manageable: Supporters of current borrowing levels argue that the national debt is sustainable as long as the U.S. economy continues to grow. They point out that borrowing allows the government to invest in infrastructure, education, and healthcare, which can lead to economic growth and higher future revenues. Furthermore, the U.S. dollar’s status as the world’s reserve currency gives the U.S. more flexibility in managing its debt compared to other nations.

Potential Consequences of the National Debt

If the national debt continues to grow unchecked, it could have several potential consequences for the economy and future generations:

• Higher interest rates: As the debt grows, the government may need to offer higher interest rates to attract buyers for its bonds. This could lead to higher borrowing costs for consumers and businesses as well.
• Reduced government spending: A growing portion of the federal budget could be dedicated to servicing the debt, leaving less money available for essential services like education, healthcare, and defense.
• Inflation: If the government resorts to printing more money to pay off its debt, inflation could rise, eroding the purchasing power of consumers.

The Path Forward

Addressing the national debt will require difficult decisions about government spending and revenue. Many economists suggest that a balanced approach, including reforms to entitlement programs and tax policy, is necessary to prevent the debt from spiraling out of control. However, finding consensus on these issues remains a significant political challenge.

Ultimately, the question of whether the national debt will sink the U.S. depends on how policymakers address the issue in the coming years. While some argue that immediate action is needed to rein in the debt, others believe that as long as the economy continues to grow, the debt can be managed.

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