This report focuses on the recovery of the credit card business and the COVID-19 pandemic.
The good thing about recessions is that they will end and move into the next economic cycle, which economists often call “the trough.” The bad news is that no one knows when the COVID-19 downturn will level. If we use the Great Recession as an example, the recession will last a year and a half, almost half the time it took to get through the Great Depression of 1929-1933.
In this latest research report, "Credit Cards in a Post COVID World: Seven Takeaways for the Next Business Cycle", readers will review the learnings that we have now which should go into the business models of credit managers as they start thinking about what credit card businesses will look like when we exit the COVID-19 pandemic.
"COVID-19 made an abrupt appearance, and the credit card industry, which thrives in a healthy economy, must contend with record unemployment, diminished GDP, and a loss in consumer confidence,” comments Brian Riley, Director, Credit Advisory and the author of the research note. Riley adds that "4Q20 and 1Q21 will likely be unprofitable for many credit card issuers as charge-offs peak."
Highlights of the research note include:
- Once payment deferrals end, expect delinquency aging to skyrocket
- Charge-offs beyond 6.54% will eliminate credit card industry profits
- Credit card return on assets (ROA) will fall into negative territory in late 2020
- Regulatory guardrails helped protect the industry; current expected credit loss (CECL) requirements and contingency planning proved their worth
- Top banks, particularly those required to comply with stress testing and DFAST, were well prepared
- Platform service providers played a significant role in providing options for the middle market.
This document contains 15 pages and 7 exhibits.
Seven Strategies for the Next Crisis
- Rapid Impact, Protracted Recovery: Prepare for a Different Environment
- Contingency Planning Protects the Credit Card Business
- Account Level Risk Management Adds a New Layer for Credit Management
- Product Enhancements: Consider Existing Tools for Better Control
- Product Features May Require Modernization
- Credit Risk Management is Still the Name of the Game
- Vendors are an Essential Part of the Payment Ecosystem
List of Figures and Tables
Figure 1: COVID-19 will eliminate 2020 credit card profitability
Figure 2: With the Great Recession as a model, it will take years to recover from COVID-19
Figure 3: The current expected credit loss model will accelerate charge off faster than the incurred loss model
Figure 4: The changing credit card environment offers issuers opportunities for installment loans
Figure 5: Expect tighter credit card underwriting until the economy settles
Table 1: Line items under stress drive ROA down to a negative position
Table 2 Preparing for the economic rebound requires tighter control, more analytics and repositions