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Hans Hagen - Ferratum

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The Amex Paradox as US Credit Card Issuers Crash Land

11 May 2009  |  3679 views  |  2

In a recent article in the New York Times, the major US credit card issuers have put on their safety belts and crash helmets, as they prepare for a major crash landing with their credit card portfolios. Credit card losses are soaring to unprecedented levels as unemployment rises, and cardholders struggle to make ends meet.

From credit card write offs in the region of 5,5% in 2008, write-offs have shot up to 8,5% in Q1 of this year, well above the previous credit card loss peak of 7,9% experienced after the technology bubble burst in 2001.

Banks are doing their best to limit losses by tightening application approval criteria, cancelling unused card accounts, and reducing available credit limits. At the current rate, credit lines will probably be reduced by a staggering $2,7 trillion by next year, or - to put it in perspective - cut in half compared to the available card credits only two years ago.

Credit card losses have historically correlated quite well with unemployment rates, which indicate that banks are heading for more trouble as the US unemloyment rate threatens to break the 10% barrier. Even more so when Citigroup recently reported that its 10,2% charge-off rate in Q1 for the first time had broken the "historic correlation with unemployment".

American Express is one of the banks trying to limit its exposure, as stress tests of the portfolio indicate that it may face losses of up to 20% of card balances over the next year or two.

So why are they sending out direct mail to recruit new cardholders in France for its Optima credit card? A paradox, to say the least.


Comments: (2)

A Finextra member | 12 May, 2009, 08:15

"So why are they sending out direct mail to recruit new cardholders in France for its Optima credit card? A paradox, to say the least."

Hans, I think I can answer this. One of the benefits of having experienced life in the U.S. and Europe (specifically France) is seeing the differences between the two countries.

France is by far the country in Central Europe that's least affected by the economic crisis. Just go to blvd. haussman in Paris and visit the stores. It's like christmas everyday!

The world's economic crisis was brought about by excessive credit given to undeserving consumers. Not so in France. French people generally don't even know what is a credit card. French banks issue predominantly differed debit cards that are linked to current accounts. French consumers generally acquire loans only for a car and real estate. And even then, the credit worthiness checks are quite rigorous and at the same simplified by the fact that if a french consumer defaults in paying a loan or a bill, then the french consumer is put in a black list called 'interdit bancaire' (means not allowing to do banking).

French consumers are afraid of credit and getting sanctioned with this 'interdit bancaire'. French consumers are attracted to AMEX not because of the 'credit line' but because of the rewards and many other benefits that they get out of using an AMEX.

A few weeks ago, after learning of VISA Europe's lowering of its MIF (multi-lateral interchange fee), I told a friend of mine who works for VISA that AMEX will do extremely well in France and in other european countries.

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A Finextra member | 12 May, 2009, 08:35

Many issuers are lowering card limits to reduce the provisioning they have to make.

This is a cost to the issuer based on the open to buy irrespective of whether or not the card is being used or taken to its limit. So by reducing the card limit the issuer is able to reduce its costs without impacting the cardholder - but it doesn't necessarily mean that the issuer considers the account to be a bad risk.


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Hans is regional Director for Ferratum, an innovative provider of financial services. All opinions are my own.

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