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News Now

CU System
Study Economic downturn pressuring card issuers
NEEDHAM, Mass. (4/25/08)--The combination of higher credit card losses and lower consumer spending in today's economy will cause credit card return on assets (ROA) for 2008 to drop at least 15% below last year's levels, according to a recent study. The 2007 levels already were lower than 2006 ROA levels, said TowerGroup, a financial services research and consulting firm based in Needham, Mass. Banks have long relied on strong ROA performance from credit cards to boost their profits.
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However, TowerGroup also found that credit card issuers can still tap revenue opportunities by focusing their business strategies on member/customer retention and expansion, rather than acquisition. The subprime mortgage crisis and a spillover of charge-offs into other areas of consumer lending forced consumers to rely more heavily on credit cards as an alternative to secured lending, said TowerGroup's report. That has sharply increased card delinquencies, which means the credit card issuers' prospects for getting new cardholder accounts is "increasingly risky," it said. Card issuers, including credit unions, can take lessons from the past economic downturns such as the 1990 recession and focus efforts on their current member/customers. "To succeed in today's economy, issuers must implement more customer-centric business models--approaches that identify ways to reward existing customers and encourage continued loyalty and card use," TowerGroup said. Such approaches will allow issuers to closely monitor macro-level portfolio metrics--such as outstanding balances, delinquency, bankruptcy and charge-off rates--which can impact earnings negatively. The study's report, "Credit Crisis: What Card Issuers Can Learn from Previous Economic Downturns," by Dennis Moroney, senior analyst of TowerGroup's bank cards research service, explains strategies for card issuers.


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