Downturn Forces Issuers to Change Card Risk Models: TowerGroup

Increasing collection capacity should be just one part of the approach that issuer take as they “brace for deterioration in credit quality” as the economic downturn sweeps the country, according to a new report from TowerGroup senior analyst Brian Riley.

Issuers prepared for the credit losses that will be incurred this year will be “well-positioned to take advantage of the failures in the market and poised to recover quickly when the economy normalizes,” Riley writes.

Riley lays out 10 strategies that issuers can use to best manage risk to their credit card portfolios and prepare for an economic rebound in his report “Process and Data Risks in a Changing Economy: How Credit Card Issuers Can protect Their Portfolios.”

Some of the suggestions extend current procedures while others may raise discussion points for executives.

For example, issuers should rethink their current loyalty programs that reward cardholders for transactions. Instead, loyalty points might be aligned to credit quality of the cardholder.

In addition, issuers must “increase customer reconnaissance,” watching carefully the cardholder’s purchase trends. Specifically, issuers should track cardholders that are using credit cards for consumables, or monthly living expenses.

Additionally, a number of cardholders that previously were “transactors,” and paid off their credit card bill every month, will move to becoming revolvers, who pay off only a portion of the bill each month.

Revolvers “must be scored aggressively to assess the risk,” according to Riley, and issuers should supplement internal data with external data from credit bureaus and regional demographics to ascertain that risk.