A basis point is a relatively small number. For example, when a number is expressed as 12.34%, the last position, in this case, the “4,” represents 4/100th of a percentage point. It may seem minimal, but when you apply it to a trillion-dollar revolving portfolio, one basis point translates to $100,000, and four basis points are $400,000. For the initiated, you can also call basis points “bips.”
In short, in credit cards, every basis point counts, no matter if you are a top global brand like Chase or Citi or if you are a Main Street financial institution.
Let’s look at basis points in action. Here we will consider inflation and credit card delinquency.
Inflation
According to Trading Economics, the current inflation rate for October 2021 is 6.2%, up from 5.4% in September and 5.3% in August, drawing from the U.S. Bureau of Labor Statistics. In this case, the numbers are in ten basis point units, so 6.2% represents six full percentage points and 20 basis points.
And within those numbers, specific categories have even more significant increases.
The annual inflation rate in the U.S. surged to 6.2% in October of 2021, the highest since November of 1990 and above forecasts of 5.8%. Upward pressure was broad-based, with energy costs recording the biggest gain (30% vs. 24.8% in September), namely gasoline (49.6%). Inflation also increased for shelter (3.5% vs 3.2%); food (5.3% vs 4.6%, the highest since January of 2009), namely food at home (5.4% vs 4.5%); new vehicles (9.8% vs 8.7%); used cars and trucks (26.4% percent vs 24.4%); transportation services (4.5% vs 4.4%); apparel (4.3% vs 3.4%); and medical care services (1.7% vs 0.9%). The monthly rate increased to 0.9% from 0.4% in September, also higher than forecasts of 0.6%, boosted by higher cost of energy, shelter, food, used cars and trucks, and new vehicles.
Now consider that Personal Consumption Expenditures in the U.S. was $15.9 trillion in Q3 2021 and one basis point is a lot of dinero.
Credit Card Delinquency
During the same period between August 2021 and October 2021, where the inflation rate grew from 5.3% to 6.2%, another critical metric grew. According to the Federal Reserve, credit card delinquencies rose from 4.7% in Q2 2021 to 6.3% in Q3 for large banks. Now, stack that 1.6% increase, or 160 basis points, up against 1 trillion dollars in receivables, and you will find that credit card delinquencies are about $16 million worse during that period.
Mercator believes that 2022 offers credit card issuers some real opportunities for growth, but watch out for inflation and rising interest rates. Basis points count when you manage risk.
You can see the 2022 Credit outlook here, where you will also find our views for Commercial and Enterprise payments, Debit and Alternative Products, Emerging Technologies, Merchant Services, and Prepaid.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group