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Flawed Analysis

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The Consumer Federation of America accused the banking industry of “irresponsible” credit card lending that has strapped an estimated 60 million American households with credit card debt exceeding $7,000 on average. To make its case the CFA cited card issuers with high charge-off rates as the most reckless. The consumer group said the “least responsible” banks include Mellon Bank and Hurley State Bank with a 9% charge-off rate, Wells Fargo with an 8.6% chargeoff rate, First Union with an 8.4% loss rate and Advanta with an 8.2% chargeoff rate. Among the “most responsible” issuers cited: MBNA with a 2.1% chargeoff rate, People’s with 2.4% loss rate, Travelers Bank at 2.7% and First USA at 2.9%. The CFA analysis is grossly flawed since it fails to take into account the growth rate in receivables for each issuer. For example chargeoffs are artificially low at MBNA and First USA since both issuers are the two fastest growing major issuers, while Wells Fargo and Advanta are among industry laggards. MBNA’s card loans grew 31% during the period cited by the CFA. By contrast Wells Fargo’s card loans only increased 8% during the same period. Advanta actually experienced a loss in card loans of 14% between mid-year 1996 and 1997. A simplistic analysis argues that if MBNA is growing four times as fast as Wells Fargo then its losses, on a percentage of outstanding basis, would be four times lower.

             Growth Rates vs. Loss Rates (2Q96-2Q97)
        (change in card outstandings vs charge-off rates)
      Mellon        -26%  9.0%          MBNA       +31%   2.1%

      Wells Fargo   +8%   8.6%          People's   +23%   2.4%
      First Union   +10   8.4%          First USA  +32%   2.9%
      Advanta       -14%  8.2%          Travelers  +41%   2.7%
            Source: Bankcard Update/Bankcard Barometer

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