Card Issuers to Hire Collectors, Focus on Risk, as Economy Falls

The fading economy could force credit card issuers to hire more collectors and rethink their model for treating cardholders on the edge of going delinquent or charging off their debt, according to a new report from finance and payments consultant TowerGroup.

The evidence is in, as major issuers like JPMorgan Chase predict charge off rates will grow from 3.89 percent in the fourth quarter of 2007 to 5.50 percent in the first half of this year, according to Brian Riley, senior analyst, bank cards at Tower and author of the report.

The economic downturn could lead major card issuers to nearly double the number of accounts they close from 7 percent of accounts to 12 percent. This “involuntary attrition” could add up to as many as half a million closed accounts at the largest issuers, according to Riley.

A rise of 200 basis points from 3.5 percent to 5.5 percent in five-month old delinquent accounts could force a large issuer to hire as many as 100 new collectors. The issuer would also have to bulk up its collection management staff and buy the physical equipment necessary to serve these accounts, Riley writes in “Process and Data Risks in a Changing Economy: How Credit card issuers can protect Their Portfolios.”

Issuers monitoring cardholder behavior for danger signs will have to look at such indicators as a switch from debit card to credit card to pay for groceries and other day-today expenses. This becomes more troublesome if the consumer allows this debt to revolve, instead of paying it off every month.

Issuers should also keep an eye out for the use of long-dormant accounts or cardholders hitting the credit limit on an account that had previously seen lower spending totals.

Indeed, revolving cardholders, long the “industry darlings for their contribution to interest revenue,” will have to be “scored aggressively to assess the risk” they pose for becoming a charge off statistic, writes Riley. In this downturn, the best customer might well be a “transactor,” the cardholder that uses his card regularly and pays off his bill each month.