Everyone pays the price for the “more credit for everyone” philosophy that dominated the last 10 to 12 years. Foreclosures and credit card charge-offs are soaring. It seems that many credit card companies have reduced credit lines across the board, closed inactive accounts, cut off non-paying customers and raised fees. This reaction is a quick fix with negative long-term consequences. One-to-One Customer Risk Management will help minimize losses and maximize returns in the midst of a recession.
As financial institutions large and small grapple with the challenges of the most severe economic crisis since the Great Depression, the approaches these institutions take toward retail credit card customer risk management can have a profound effect on their success in weathering the current storm—and in fostering profitable customer relationships for the future. By employing the best practices and advanced analytical tools of One-to-One Customer Risk Management across the credit life cycle, institutions can minimize defaults on current portfolios and maximize retention of profitable customers for long-term growth.
The credit card debt crisis that BusinessWeek (Oct. 9, 2008) characterized as “the next meltdown” did not self-generate overnight, nor will it disappear quietly or quickly. Rather, it is one symptom of much broader economic problems created in large part by the “more credit for everyone” philosophy that dominated the previous decade. Today, consumers and financial institutions alike are paying the price for these mistakes:
- Mortgage foreclosures, which topped 2 million in 2008, could near 3 million in 2009 (U.S. Census and the National Association of Realtors®)
- Credit card charge-offs are likely headed for historic highs. Moody’s Investors Service has predicted charge-offs as high as 8.5 percent by the end of 2009, compared to recent historical averages of 4 to 5 percent
Each of these disturbing trends also affects, and is affected by, the wide variety of factors that have contributed to the national and global recession, such as increasing unemployment and the bursting of the housing bubble.
In the face of these economic threats, many financial institutions are tempted to turn 180 degrees from “more credit for everyone” to what now seems like “no credit for anyone.” It’s a classic example of overcorrection, driven by a fear of record charge-offs and decreasing interchange revenue and aimed at minimizing short-term losses.
As with most cases of overcorrection, this one is not likely to achieve the desired results. Instead, First Data recommends a more thoughtful, forward-looking approach. We call our approach One-to-One Customer Risk Management, a “back to basics—but better” methodology that combines proven credit-risk policies with advanced analytics and targeted communications, applied at each phase of the credit life cycle: acquisition, maintenance and collection avoidance, and collection. This new approach can make it possible to not only weather the storm of the current crisis, but also be prepared to hit the ground running when the economy turns around.