A fissure is forming in the U.S. credit card industry: Are consumers about to go bankrupt or bounce back?
On one side, risk-management pioneerCapital One Financial Corp. is reining in credit lines to reduce its exposure. On the other, the nation’s largest card issuer,JPMorgan Chase & Co., is rolling out anew card designed for travelers and diners — the ultimate countercyclical bet.
Those moves are just the tip of a debate unfolding inside the industry as Congress deadlocks over extending $600 weekly checks to millions of unemployed Americans. In some corners, worries are mounting that households will struggle to make ends meet, max out their credit and default. But some banks see an opportunity to attract people who are still doing fine.
“They’re saying, ‘I’d rather be back in a little cautiously, rather than not getting back in at all,’” said Scott Barton, managing partner at 2nd Order Solutions, which advises lenders on credit risk. “It’s not a gold rush — it’s just that things didn’t get that bad.”
The card industry pared credit lines 1.3% in the second quarter, the first drop in eight years, as the coronavirus shut down commerce and left legions of breadwinners without work. Yet fears of widespread defaults went unrealized — at least for a while — as the federal government sent out stimulus payments and augmented unemployment benefits through July.
That’s created an unprecedented situation: Banks know many customers are out of work — but they don’t know who, because so many keep kept paying their bills. The percentage of cardholders behind by 60 days or more actually dropped to 1.37% in July from 1.61% a year earlier,TransUnion data show.
While Democrats and Republicans disagreed throughout August over extending aid, Capital Onesent notices to customers, paring back credit lines so that many wouldn’t be able to spend more than they have in the past. The firm said the move stemmed from a periodic review.
Lenders are usually loathe to lower borrowing limits because it can erode revenue in the future. Instead, some aim to navigate the crisis with a more optimistic posture, enrolling new customers who typically provide two key pieces of information: their current employment and income.
Banks mailed 96 million credit-card offers in July. Though that was down 68% from a year earlier, it was up 69% from June, according to Credit Suisse Group AG analysts.
The bet is that there’s pent-up demand from strong borrowers and that the first banks to act on it will gain market share. In the case of JPMorgan, executives said they want to ensure their product is in the hands of customers once they’re ready to go out again.
“We are seeing a tension,” said Monica O’Reilly, who leads the U.S. financial services industry group for Deloitte.
“There’s this view toward credit risk” that’s typical with high unemployment, she said. But “you’re going to start to see a move toward banks and issuers moving to capture more share.”
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