#Control Tower originated in 2017 and moved into production in 2018 using #agile methodology to get from announcement to #launch in a matter of months.
Financial Technology
Real-time #payments could save people, especially poor people, billions in late fees, check cashing costs or payday loans. Brookings says the Fed could simply require #banks to permit immediate access to #consumer deposits with a regulatory change.
Financial Technology
#Marcus, the #consumer #lending arm for #Goldman Sachs, wants to become the one-stop shop for many of your financial matters, except for one: #credit #cards — at least for now. “Our fundamental thinking on the credit card space is that there is a lot of innovation that is required. It is true that the industry has a […]
Bank Innovation
“In any one minute, we’ve more people in our mobile app, than in our entire branch network in a week. The only problem – the average user stays for just 17 #seconds,” said one CIO at a leading European retail bank. This is quite the statement. It highlights perfectly the monumental change in #consumer #behavior […]
Bank Innovation
Since the global financial crisis, #consumer #credit #cards have become a relatively stable and profitable asset class within US retail banking. However, with increasing movement across multiple, high-visibility areas of the credit card P&L from rates to rewards and charge-offs, issuers and their stakeholders are asking, “How are we performing?” and in a larger sense, “How should we be evaluating program performance?” An illustrative scan of publicly disclosed key performance indicators—such as interest yields on credit card loans, credit line utilization rates, and return on equity—provides topical insights into the complexities of a credit card portfolio, the risk of “mono-variabilitis” at portfolio levels, and the importance of evaluating performance holistically within the context of the customer portfolio, business strategy, and operational capabilities of different issuers.
At a cardholder level, most large and mid-sized credit card issuers assess higher annual percentage rates (APRs) for cardholders deemed to be more at risk for payment default, a concept generally known as risk-based pricing. As would be anticipated, empirical data from US FDIC call reports for the top 100 US financial institutions (FIs) with at least $ 10 million in credit card loans (Figure 1) depicts a correlation between (a) interest yield, which is the weighted average APRs on revolving balances divided by revolving and transacting balances, and (b) net charge-off rates on credit card loans.
What is interesting is the substantial statistical variance at the portfolio level that cannot be explained by just looking at rates and charge-offs, even when segmented by portfolio type. From our past experience with credit card portfolios, sources of this variance are wide-ranging and interlinked: from customer heterogeneity and different product types (the upper right of the dot plot of Figure 1, for example, that includes several card portfolios focused on the “building credit” consumer segment, such as secured cards) to variance in customer treatment and other portfolio management practices throughout the account lifecycle.
Reflecting the wider range of factors, just because an issuer is over- (under-) indexing the line, with higher (lower) yield at a particular charge-off level, does not necessarily mean the business is over- (under-) performing. Even for common and widely held relationships at the cardholder level, the portfolio picture is more complex and calls for knowledge of both the pieces and the interlinked relationships to ascertain the business meaning of relative industry performance.
Source: Accenture analysis of FDIC call report data for US commercial #banks, savings banks, and savings & loan associations with at least $ 10 million in consumer credit card balances as of year-end 2017. National Banks had $ 10+ billion in credit card receivables for the period; Super Regional Banks had $ 1 to $ 9.9 billion; Regional Banks had $ 100 to $ 999.9 million; and, Community Banks had $ 10 to $ 99.9 million. Specialist portfolios had (i) >$ 25M in credit card receivables per branch and fewer than 100 branches or (ii) yield greater than 30%. n=100.
The nuanced nature of portfolio management becomes even more apparent when credit line utilization is examined. Based on data from Figure 1, Accenture analyzed credit line utilization rates for a subset of 69 of in-scope FIs (excluding those portfolios with net charge-off rates in 2017 in excess of 5 percent and utilization outliers that imply a distinct product type). Credit line utilization was defined as credit card balances owed on transacting and revolving accounts divided by credit line commitments, inclusive of these balances, to extend credit to individuals for household, family and other personal expenditures through credit cards.
Figure 2 shows significant dispersion of line utilizations by FIs with virtually no direct statistically correlative relationship at the portfolio level between credit line utilization and net charge-off rate, even when segmented by portfolio type. At the cardholder level, one would anticipate credit line utilization to increase with net charge-off rates as FIs look to more closely manage credit lines for higher risk cardholders. And indeed, when customers are segmented within portfolio, we have observed portfolios to generally depict an inverse relationship between credit risk and line utilization.
Although operational practices—and the soundness of those practices—may not always be visible without knowledge of the particular internal factors, the variance at a portfolio level may also reflect a wide array of approaches to credit line setting and ongoing account management observed in-market. These range from FIs that have halted proactive credit line increases ever since the global financial crisis, to those that are becoming more progressive in setting and revising credit lines, including through automated means of obtaining ability-to-pay information and cardholder-level multivariate decisioning. Together with the difference in portfolio dynamics and operational treatment, these variations in overarching strategy can have meaningful implications for contextualizing and evaluating performance.
Source: Accenture analysis of FDIC call report data for US commercial banks, savings banks, and savings & loan associations with at least $ 10 million in consumer credit card balances as of year-end 2017, consumer credit line utilization rates ranging from 5% to 30%, and 2017 net charge-off rates on consumer credit card loans of up to 5%. National Banks had $ 10+ billion in credit card receivables for the period; Super Regional Banks had $ 1 to $ 9.9 billion; Regional Banks had $ 100 to $ 999.9 million; and, Community Banks had $ 10 to $ 99.9 million. Specialist portfolios had (i) >$ 25M in credit card receivables per branch and fewer than 100 branches or (ii) yield greater than 30%. n=69.
Reflecting the full suite of drivers, including those above, and how issuers manage them, return on equity (ROE) figures for credit cards are typically both higher and more variable than other bank assets. Credit card banks—defined as FIs with at least 50 percent of total assets in consumer credit cards and which account for roughly half of the consumer card market—have a five-year running average ROE over double that of the banking industry average of 8.64 percent for 2017, per the US FDIC Quarterly Banking Profile for Fourth Quarter 2017.
As alluded to above, return is not without risk. Although banks have been generally disciplined in requiring higher returns for riskier assets; the range of outcomes grows as charge-offs grow, magnified by leverage and real differences in strategies and operational capabilities. However, it is the combinations of these factors that not only make credit cards a challenging business, but also make them all the more rewarding over the long term for those banks that appreciate the variances in portfolio behavior and can manage the full suite of portfolio levers towards an overarching vision.
As a whole, the credit card industry is viewing today’s market as attractive for growth and providers are looking to outperform. With a healthy respect for the complexities of managing a card portfolio and appreciation of holistic interactions, leading FIs are clearly defining their business strategy, taking an integrated approach to portfolio management, and continually optimizing their business assets.
The future always has elements of terra incognita and more so in today’s market. Unified approaches, facilitated by communication among the necessary parties across the cardholder lifecycle, can help individual issuers deliver portfolio performance improvements in the context of their credit card business vision, mission, risk tolerance and market conditions.
For further reading, see how a major Brazilian financial services provider transformed its credit card processing and how a Latin American Bank used customer analytics to increase its credit card revenue.
The post The risk-returns roller coaster for US consumer credit cards appeared first on Accenture Banking Blog.
EXCLUSIVE— #Banks are competing on multiple new platforms, with a rising number of competitors, but traditional banks still have the majority of the #consumer’s #trust: at least according to Carey Kolaja, chief product officer for #Citi #Fintech. While fintechs and other FIs continue to nudge their way into the #financial ecosystem, 87% of consumers “still […]
Bank Innovation
#Citi has brought the #convenience of single sign-on to #corporate #treasury.
Financial Technology
EXCLUSIVE— The march of mobile banking and payments continues across the U.S., but it may be smarter for those startups looking to break into that market to look at other regions, Eric Wiesen, general partner for Bullpen Capital, told Bank Innovation. “In the U.S., my guess is that mobile payments will continue to grow perfectly […]
Bank Innovation
EXCLUSIVE— Alternatives to the traditional #FICO #credit score have become a popular theme for emerging fintechs, but will it actually help consumers #improve their credit? Credit solutions provider #Elevate, however, will #focus on improving its customer’s relationship with their FICO score in 2018 as well as on alternative methods of scoring. “Consumers are more focused […]
Bank Innovation
Payments company, #PayPal will sell its U.S. #consumer loan portfolio to #Synchrony #Financial. Yesterday, the San Jose, Calif-based PayPal said it agreed to sell $ 5.8 billion in consumer credit receivables to Stamford, Conn-based Synchrony Bank, a unit of Synchrony Financial. Synchrony Bank has been PayPal’s banking #partner since 2004. In addition to selling its credit […]
Bank Innovation
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