Stacey West, FICO business consultant for UK card issuers
The UK is currently the biggest card payments market in the European Union, accounting for more than 30% of all EU card spending, and 73% of credit card spending in the EU. The large dependency on card payments in the UK could suggest that the nation's credit card performance is in healthy progression, which, in some part, is true. However, over recent months, there has been constant development or stability in the health of mature UK credit card accounts, but there are more worrying signs for accounts that are less than 12 months old. Card issuers need to be aware of this discrepancy in order to prevent trouble arising, both for banks and their customers.
As part of the FICO Risk Benchmarking Service for clients, we compare the overall performance of the UK cards market with individual card issuers' performance. This year's results have shown that the progress of Classic mature credit card account performance in the UK has been comfortably consistent or improving over recent months. In September this year, the percentage of current (non-delinquent) accounts that have been on the books for 5 years or more remained high at over 96%. and the percentage of current balance remained stable over the year. There was a noticeable annual increase of £97 in the average current balance for Established accounts (on book for 1 to 5 years).
Conversely, the percentage of new accounts that are overlimit is continuously increasing, with no sign of slowing in the near future. This figure reached its highest point in more than two years, nearly double the percentage of Established accounts. The average overlimit amount for new accounts reached its highest point in more than two years over the quarter too. FICO has seen average new credit lines decrease by £201 since March, which may partially explain this and potentially clients are starting to react to the trends by offering lower initial limits. Average delinquent balances have risen for 2+ cycle accounts year on year.
It's not just the size of debt that is alarming, but also the delinquency rate. Overall delinquency has increased by 15.9% and 10.4% for percent of accounts and balances, comparing September 2014 to 2015. This has been influenced by two-cycle results, which rose a staggering 37.7% and 46.1% respectively.
Card issuers need to be aware of this alarming increase in delinquency rate of new credit card accounts, as bad consumer debt comes at the expense of the financial service provider. Providers will soon see these results impacting the Established accounts as they mature.
Source: FICO Risk Benchmarking Service
There are a variety of factors influencing the increase, but a major impact is that the market is seeing a lot of activity to attract new accounts. Previously, card issuers had a strong focus on balance transfer offers, such as charging a low rate or zero percent on any debts you shift from a competitor account. Additionally, we are now starting to see purchase-led offers, such as giving customers a zero percent interest on all new purchases for a an expanding number of months, as issuers compete to feature high on rate tables . These enticing offers can hide the risk to consumers, making card debt seem more affordable on the surface, but masking potentially negative future consequences.
The rise in delinquency corresponds to the increasing rate at which UK consumers have taken on personal debt. People in the UK owed £1.452 trillion in total personal debt at the end of September 2015. This is up from £1.418 trillion at the end of September 2014, which is a significant increase, working out at an extra £662 owed per UK adult2. As many UK customers are taking on personal debt at an alarming rate, they could be making themselves more vulnerable to heftier financial problems. A considerable concern is that the amount of debt taken on by UK consumers is surpassing wage growth, and even exceeding pre-economic-crisis levels. If credit card issuers are not careful to manage the personal debt of their clients, there could be trouble on the horizon.
Credit card debt in September 2015 per household was £2,349. For a credit card bearing the average interest it would take 25 years and 6 months to repay if only the minimum payment is made each month. There was a year-on-year increase of £222.47 in consumer credit per person.
So, card issuers need to ensure that they carry out further analysis on the newly opened accounts to pre-emptively manage future delinquencies. For example, by forecasting potential delinquencies, card issuers have the ability to avoid unnecessary monetary write-off. Here are three steps I suggest issuers can take for new accounts:
- Routinely review application processes and scorecards to make sure they align with more recent company growth objectives, especially if the change in product focus attracts a different account profile. Increased usage of bureau and customer data will improve the targeting.
- Check initial credit limits to make sure that the level of unused exposure does not increase and negatively impact the Basel Capital Requirements, and to avoid higher future losses. Usage and risk metrics should be used in card originations decisions, as well as in ongoing limit reviews, to ensure exposure levels do not increase at a disproportionate rate to spend.
- Review management of new current, overlimit and delinquent accounts to determine whether special treatment is required, and check collections processes to ascertain whether to focus on new accounts at specific times in the payment cycle. There may be warning signs that can be translated into pre-collections activity and provide feedback into the originations strategies.
It is crucial that we don't let the improvement of mature account performance lead us into blindly thinking UK credit card performance is healthy. With rising delinquencies on new credit card accounts, it is clear where card issuer priorities should lie, for the time being at least and monitor the impact on Established accounts as cards age.
If data on UK cards is important to you — and if you would like to benchmark your own portfolios' performance, our new Risk Benchmarking Service can help. We have expanded the list of metrics across the credit lifecycle, providing deeper insight into an issuer's Industry position, and we have added a dashboard within our easy-to-use interactive tool. For more information, contact me at [email protected]
Stacey West is a FICO business consultant who works with UK card issuers. She blogs at www.fico.com/blog.