I mentioned before that my family’s personal banking account is with a small community bank for no reason other than we like the people there. They learned that my daughter liked green lollipops two decades ago, and always have a supply. They are part of our community, and though they are not by any measure a trillion dollar organization, I can get the local president on the phone any time I want.
On the other hand, my wife and I have a combined 10 active credit cards and tend to carry no cash. Each one of those cards are with top issuers. One of the driving factors is reward points and last year, I’d venture to say that we probably received $3,500 in value from managing our credit card relationships last year, and enjoy adding/deleting credit cards if we can score free airline tickets.
That’s one of the issues in today’s credit card business. Cards are commodity products. A Citi-card does not process quicker than a card issued by Bank-Small-Town-USA. But, the small card issuer does not have the same risk tolerance. Unlike large issuers, small issuers can not afford to make an underwriting error. And, a large bank is more likely to have a merchant processing business, which will often add 40% of card revenue through interchange.
Have large issuers been able to cull out most of the good credit card customers through reward enticements? Are small issuers chasing morsals while large issuers benefit from their risk tolerance?
Today’s read makes you wonder.
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But the subprime segment of credit cards is concentrated at smaller banks because they targeted those customers to maximize their profits, and that subprime segment of customers is running into difficulty not because they lost their jobs, but because they borrowed too much at interest rates that are too high because the banks got too greedy with their most vulnerable customers.
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But for the largest 100 banks – which carry the majority of the credit-card loan balances – the delinquency rate was 2.4% (seasonally adjusted), the Federal Reserve Board of Governors reported Tuesday afternoon. So what is going on here?
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The delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the nearly 5,000 smaller banks in the US – rose to 6.2% in the second quarter.
The disparity in write-offs is worthy of note. The top 100 credit card issuers have delinquency is running at 2.4%. The remaining 5,000 banks run at 6.2%.
The numbers are linear when it comes to write-offs. This article illustrates that small bank credit card write-offs are almost at recession-levels, while large issuers bask at 3.6%.
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These charge-offs among the largest 100 banks in Q2 rose a fraction year over year to 3.6% (seasonally adjusted).
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But among the nearly 5,000 remaining banks, the charge-off rate spiked three full percentage points year over year to 7.8%, the highest since Q1 2010. The rate among smaller banks had peaked during the Financial Crisis in Q1 2010 at 8.4%.
So maybe we are nostalgic when it comes to managing our bank account, but when it comes to our credit cards we go for the best deal. No shame here.
Maybe that’s the power of having 800 point FICO scores!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group