U.S. households with solid borrowing historiesmay discover an item making a surprise reappearance in their mailboxes: a credit card offer.
|Sharp decline in credit card offer mailings slows|
After months of declining mailings, recent data show that banks have begun reconsidering card offers. Synovate’s Mail Monitor, which tracks credit card direct mail, reports that U.S. households received 349.1 million card offers in the second quarter. That represents a 67 percent drop from the corresponding period a year earlier, but a decline of just 6 percent from the first three months of this year.
The decline in mail offers is part of an overall effort by credit card issuers to cut risk by pulling back on lending during the recession.
According to Synovate, that could soon change. “We are seeing mailed credit card offers bottoming out and anticipate that there will be an uptick next year,” Anuj Shahani, director of competitive tracking services for Synovate’s financial services group, said in a press release.
Others take a more negative view. “I believe that to glean anything positive from this report as it relates to a rebound in unsecured bank lending is a mistake,” says Keith Davis, research analyst with Farr, Miller and Washington, in an e-mail. “Banks are still being highly selective.”
Synovate confirms that, for now, credit card offer mailings are coming only from select banks and targeting only select hourseholds. Among the leading 25 card mailers, Bank of America sent consumers 77 percent more card offers in the second quarter than it did in the January to March period, while Citi‘s offers climbed 65 percent. “Citi and BofA are up, but from a depressed level,” Shahani says. He adds that Wells Fargo, U.S. Bank, First National Bank of Omaha and lesser-known Elan Financial also ramped up their card mailings quarter over quarter.
“The issuers were completely on pause, and this is when they’re deciding the recession is possibly slowing down,” Shahani says. He notes that rising card offers represent banks’ attempts to be “first to market,” stepping out ahead of the pack to secure those born-again borrowers before the competition does. Lenders hope that the initial cost of acquiring new customers will be offset by long relationships with these borrowers, Shahani explains.
Nevertheless, card offers as a whole are down. “The bigger issuers like American Express and Chase have pulled back,” Shahani says, with Capital One also reducing its mail volume. Meanwhile, Discover — which was the leading mailer in the first quarter — posted a 20 percent decline in card offers from the first three months of 2009.
Shift to ‘prime’
The card offers that continue to be mailed are only arriving at those U.S. households with the best credit scores. “Since the credit crisis has petered out, all the issuers have shifted toward a prime mailbox,” Shahani says. “Prime” is the term used in the lending business for borrowers who regularly pay on time.
That means the number of homes receiving credit card offers remains low. Shahani says that second-quarter penetration (or the number of households receiving offers) remains flat at 40 percent from the first quarter, which is extremely low compared to historical levels of 70 percent to 80 percent penetration in the recent past. In terms of households, there are “very few now that are actually receiving these offers,” Shahani says.
The combination of lower supply of credit and lower demand for credit does not bode well for a strong economic recovery. We continue to look for higher savings rates to be a meaningful drag on economic growth for several years.
|— Keith Davis |
Analysts say that focus on prime borrowers makes sense, since banks are still very reluctant to take on much credit risk amid capital shortages, massive unemployment, customers who are unable to pay their bills and new laws. “I would also be surprised if credit card lending increases dramatically in the face of a very uncertain regulatory environment,” Davis says via e-mail. “New regulations are bound to dampen returns for credit card issuers, and meaningfully so.”
Davis remains cautious about the resulting impact on the economy. “The combination of lower supply of credit and lower demand for credit does not bode well for a strong economic recovery. We continue to look for higher savings rates to be a meaningful drag on economic growth for several years,” he says.
Synovate acknowledges that mailings are unlikely to return to what they once were. Although Synovate expects card offers to recover, “we’re not expecting the penetration numbers getting back to the easy credit days,” Shahani says. He predicts that penetration will reach roughly the 60 percent mark in a year or two, which is closer to levels set in the first half of 2008. “That’s where the new landscape will be defined,” Shahani says.
Still, Davis agrees that Mail Monitor data confirming a shift to variable rate credit card offers from fixed rate products are in line with his views. According to Mail Monitor, every card offer mailed in the second quarter had a variable rate, up from 60 percent of card products that had variable annual percentage rates one year prior.
Analysts have previously said that banks are switching cards to variable rates — which are tied to banks’ prime rates — in an effort to take advantage of an eventual increase in the Federal Reserve’s key lending rate. Since banks always peg their prime rates to the federal funds rate, when the central bank eventually raises interest rates from their current levels near zero, APRs on variable rate cards will also increase.