By Ray Birch
PETERBOROUGH, N.H.—Credit unions should brace for potentially growing risk as members place more recurring expenses, such as rent payments, on their credit cards, resulting in balances that will become unmanageable for many.
But on a more positive note, analysts say there are also opportunities to be had in adjusting points programs—and not forgetting the “Little Man Under the Umbrella.”
That words of caution and strategic thinking are coming from experts who spoke with CUToday.info at a time surging unemployment due to the coronavirus pandemic has many people missing paychecks and hoping to find ways to get by until they can work again. It also comes at the same time many of the nation’s largest issuers have begun setting aside billions in reserves for potential losses on card debt and consumer loans.
Experts are advising credit unions to begin more closely monitoring cardholder activity—not only for signs of trouble but to also determine where to place card rewards—and to not lose sight of the need to drive greater spend among members who are not struggling, while offering strong digital support tools for cardholders.
As for how card debt will mount during the pandemic and afterward if the recession continues, Tim Kolk, principal at TRK Advisors, acknowledges it remains a big unknown.
Tim Kolk, TRK Advisors
A Benchmark
“What we can do is look to the last recession to get a benchmark for what happened then. What we know is that industry-wide charge-off rates during the Great Recession more than doubled from pre-recession levels,” noted Kolk. “If that happens again, credit union charge-off rates will reach 7%. There are few credit unions that have priced for 7% loss rates.”
Kolk expects some consumers, hearing reports of debt relief, payment suspension and more, may be slow to pay on their card debt in part because the anticipate asking lenders for relief.
“In addition to these things, we need to recognize yields are also going down by maybe 200 basis points from their high, because Prime is down by 225 basis points from its high when we entered 2019,” said Kolk. “The degree to which purchases will decline is not yet known. Retail purchases in March were down 8.7%, and that is in a partial month of impact. This will flow through to interchange revenue, further reducing total revenues and bottom lines.”
Already Baked In
What can credit unions do?
“The truth is credit card programs enter recessions mostly fully baked,” Kolk said. “Prior pricing and underwriting decisions will determine how a program does over the next couple of years, assuming a standard-length recession.”
But there are steps credit unions can take, such as increased and regular portfolio scoring and monitoring, tightening underwriting and line assignments on new account applications, tracking cardholder behavioral changes to forecast increasing risk, and recalibrating rewards programs to incent the kinds of spending cardholders now favor—such as the switch from travel points to grocery, Kolk said.
“And emphasize cash-back options,” Kolk added. “It is important to remember that keeping performing cardholders happy and engaged is absolutely as important as protecting the credit union from those whose risk is escalating.”
What will also help credit union card programs make it through the pandemic, stated Kolk, are strong digital communication channels.
“Credit unions that have invested in mobile and other remote servicing capabilities for their credit card programs, including rewards, will be in a better position than those which have not,” said Kolk. “Consumers will not be interacting face-to-face, and if the support tools in place for members are weak, that credit card will become disfavored very quickly. And if the favored card is a competing card from a large bank, the risk is the bank will use that to leverage a deeper relationship and perhaps even pull that member away.”
Jill Gonzalez
Growing Debt
Jill Gonzalez, communications director at WalletHub, painted her own picture of what possibly lies ahead.
"We started 2019 owing more than $1 trillion in credit card debt, and had an almost $80-billion net increase by the end of the year. Just before the pandemic started, WalletHub projected an $85-billion net increase in credit card debt during 2020,” Gonzalez said. “This figure will certainly now be a lot higher.”
Gonzalez not only agreed consumers will drive up balances as they place charge more living expenses to plastic, but also with the notion many are doing so with the expectation of future loan forgiveness as part of expanded relief programs.
“Considering many credit unions have stated their willingness to offer assistance to people going through financial hardship, consumers might be able to get at least part of their balances forgiven,” suggested Gonzalez. “There is a lot of confusion in the market right now, and we don't know when the health crisis will be over. Clearly, there will be losses for both credit unions and consumers, especially considering people are technically borrowing from pooled deposits of other members. On the upside, interest rates and fees are typically lower for credit union credit cards, compared to those issued by banks, which should make the debt easier to pay off when the time comes."
A Prediction
Pointing to a WalletHub study, the impact from job loss is substantially bigger now than it was during the entirety of the Great Recession, noted Gonzalez.
“We predict there will be around 40 million jobs lost due to the pandemic nationwide. On top of that, the government and regulators are requesting financial institutions—for valid reasons—lower fees but maintain a high level of service during this time,” Gonzalez said. “So, banks and credit unions are getting a double-whammy with heavy losses but reduced fees and interest. Financial institutions haven't seen this yet in terms of delinquencies, due to the stimulus packages, but they are bound to if the current situation continues for much longer."
Taking Action
Bill Hardekopf
Bill Hardekopf said credit card issuers are taking action now.
“Credit card issuers throughout the industry are tightening their credit standards,” said the CEO of LowCards.com. “Banks and credit unions alike generally feel there is a very high risk on credit card loans right now. So many people are losing their jobs or are already out of work. These financial companies may feel that consumers may apply for a credit card, run up a balance—not necessarily on frivolous items but on necessities—and then possibly not be able to pay back the balance.”
Remembering the Little Man
Card losses will certainly come as a result of the pandemic, but Brian Scott, chief growth officer at PSCU, contends credit unions in the long run will win over other issuers by supporting members during the difficult times.
“I think credit unions have a great opportunity to create loyalty with their members by being the ones to help them through the crisis,” said Scott. “Helping members through the crisis doesn’t mean the credit union makes dumb lending decisions, but it probably means making more loans, some unsecured, to help members in need. There is a big opportunity to create much greater loyalty through all this.”
Scott agreed with other experts that consumers, out of necessity, will need to put some of their living expenses on a credit card.
Brian Scott
“And credit unions will be there to help their members through it,” he said. “Remember the old credit union logo, the one with the little guy and the umbrella? The words raining down on him are ‘hard times, sickness and financial distress.’ That’s what we expect credit unions to be doing right now—helping their members get through the hard times and financial distress. I have a hard time seeing credit unions locking down their cards and loans when members might need them most.”
Get Proactive
Deb Wieczorek, VP of strategic advisory and portfolio growth at CO-OP financial services, sees credit unions as “uniquely positioned” in an uncertain time.
“While this is a time of uncertainty, with transaction volume falling to just over 25% from mid-April 2019, credit unions have always put members first in their financial services,” she said. “Typically, that means greater customer service for deposit accounts and more conservative measures when issuing unsecure lines of credit. This member-focused approach has resulted in less significant losses across their portfolios than larger issuers may see.”
Deb Wieczorek
Wieczorek urged CUs to be “forward-thinking and proactive” with payment relief solutions and incentives, financial education largely around product offerings that can assist their members now, and instructing members on how to use digital and contactless payment offerings.
“Now is a time for credit unions to assert themselves as their members trusted financial partner,” she said.
The Latest Numbers
And while banks have reportedly set aside big dollars for potential losses, Equifax told CUToday.info real trouble has yet to arrive on issuers’ doorsteps.
Equifax reported:
- Outstanding balances last week slightly decreased week over week, as well as compared to Feb 2020
- Outstanding accounts have remained consistent and stable since Feb 2020
- The severe delinquency rate slightly decreased week over week, as well as compared to Feb 2020