As UK card spend picks up in a healthier economy, is this balance growth healthy?
To investigate this issue, our team that manages the FICO Benchmark Reporting Service did some digging. The measure we looked at compares growth in delinquent balances vs. growth in current balances. The higher this “bad growth ratio”, the bigger the difference.
Delinquent balances have been growing at a faster rate than current balances, but this ratio has been falling — in other words, improving — over the last year, continuing the previous year’s trend. This improvement has taken place for delinquent balances at 1 cycle, 2 cycles and 3 cycles.
For example, in November 2013 the growth rate of 3-cycle balances was 1.63 times the growth rate of current balances. In November 2014, the ratio was 1.57.
The ratios for 1-cycle and 3-cycles reached their lowest point in more than two years. Year on year 1-cycle balances dropped by 4.72%, which was less of a reduction than the previous year (12.61%). This means that the card accounts rolling into delinquency have lower balances.
The downside? The decrease in the growth ratio was slower last year than in 2013. From November 2012 to 2013 the ratio fell 12.61% and 15.92% for 1-cycle and 3-cycle accounts, respectively, compared to 2.84% to 4.72% from November 2013 to November 2014.
Here’s some additional detail. In November 2014, 31% of the average balances at 1 cycle for contributing issuer’s cards grew at a rate of at least 1.5 times the current balance growth. This percentage rose to 46% at 2 cycles and 77% at 3 cycles. For growth rates of at least double that of current accounts, the figures were 0% for 1-cycle accounts, 8% for 2-cycle accounts and 46% for 3-cycle accounts. This was lower than last year, a positive sign.
When reviewing accounts at the vintage and delinquency levels, new accounts (<12 months on book) experienced the largest positive annual change annually across cycles. This may be positive news, as prior results showed increased spending and decreasing % payments to balance among new accounts. However, new accounts still warrant monitoring, to determine whether there is true improvement or whether these accounts have matured into the Established vintage (1 to 5 years) due to the increase seen in 3 cycle balances compared to current.
We recommend UK card issuers analyse whether differing treatment based on the longevity of the account would improve results, compared to the standard approach of taking specific actions on those <6 months on book.
As the downwards trend in performance seen over the last two years have slowed or stabilised (at some vintage levels), it is becoming more important for card issuers to maximise their understanding and use of the data available to them and potentially look to expand. A data-driven approach will help to identify subpopulations of accounts for differentiated treatment and the right action to take at the right time across the collections life cycle. FICO clients are looking at optimised strategies and models to help in this process. Implementing collections analytics and further bureau data will also help to drive further improved results.
If you’re a UK card issuer not participating in the FICO Benchmark Reporting Service, contact me at firstname.lastname@example.org.