It has been awhile since I last posted a blog. I am sure everyone is thinkling about potential credit losses as a result of rising unemployment rates. In the U.S. it now over 15%.
During the great mortgage recession in 2007 loan losses peaked at 10%. It took almost 10 years to get the loss rate below 5%. Just prior to the recesssion losses averaged about 5%, or about $25 billion in the U.S.. At the 10% level losses doubled to $50
billion. The individual major card banks were losing about $6 to $10 billion annually.
Today, the U.S. is at 15% unemployment which means loan losses could be 15%. There are projections unemployment will rise to 20%. The portfolios today are larger due to growth in outstandings in the past few years. Growth and high unemployment rates are
a recipe for disaster. At these staggering levels some large banks may even have to exit the card business to remain solvent. One realistically could envision some banks losing over $25 billion on their card programs annually.
It looks a u-shaped recovery for the global economy which means the impact of the pandermic will probably last longer than the mortgage crisis. Banks have been reinventing themselves via innovation and technology in the last five years. Now all strategic
bets are off the table. It is back to lots of cost cutting which hurts everyone.
For companies looking to get into the credit card business the next two years will be best opportunity in over 60 years to do so. The timing is perfect. Consumers will still need access to liquidity via lending. This has going on for thousands of years.
There is also an opportunity to create a new network without the Visa and MasterCard using lower cost schemes such as Faster Payments. Is a new network in the cards? Who do you think will be the new entrants? Amazon? FaceBook? Google?