The US Credit Card Industry Is Unraveling - Says TowerGroup
New research titled "Credit Cards 2.0: Smaller Balances and Tighter Margins" from TowerGroup predicts that "the ripple effect of the economic downturn will significantly impair balance growth for the credit card industry through 2010 and that modest growth will resume only in 2011. TowerGroup finds that the payment rate of US credit cardholders declined below 15% through the end of May 2009, a rate last seen in 2002, and attributes the decline mainly to increased unemployment rates."
Well-intended but excessive regulatory intervention coupled with tighter consumer budgets, reduced spending on credit cards, and a shift to debit cards is decreasing bank card profits. TowerGroup believes that card issuers that fail to adapt their business strategies and business models to this changing environment will be in the crosswinds of high risk and low rewards.
"Like a house of cards falling, the credit card industry is unraveling as unemployment rates continue to soar, causing consumers to reduce their spending and decrease or delay their payments to creditors," said Dennis Moroney, Research Director, Bank Cards, at TowerGroup. "It's evident there is no single cause behind US credit card issuers' current business woes, but pressure is mounting for issuers to adjust their business strategies and rebuild."
The pending Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD), effective July 2010, will place the bank card industry in suspended animation. Changes affecting credit card terms and limiting risk-based repricing will cause issuers to curtail lending and tighten available credit. Card issuers will be unwilling to liberalize their credit policies until they can calculate the financial risk and reward trade-offs resulting from the CARD legislation. TowerGroup foresees that this could take at least six months to a year after the enactment of the CARD Act and that growth will be minimal until mid-2011.
The risk to credit card issuers is that consumers having reduced access to credit will adjust their purchasing behavior, becoming comfortable with pay-now (debit) and pay-ahead (prepaid) products, and will no longer rely as much on credit card lending.
"While changes in the credit card industry abound, the transformation of the industry will be slow and steady," said Brian Riley, Research Director, Bank Cards, at TowerGroup. "The United States is clearly seeing a trend away from the days of unharnessed overconsumption. Putting it simply, today's consumers are saving more and spending less because they are unsure of the future."
The TowerGroup Research Note Titled, "Credit Cards 2.0: Smaller Balances and Tighter Margins" may be purchased online at the TowerGroup Store via credit card by using this link: http://store.towergroup.com/index.asp?PageAction=VIEWPROD&ProdID=680
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