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Downturn in U.S. Economy Means Profitability Pressures for Credit Card Issuers in 2008

Banks have long relied on strong return on asset (ROA) performance from credit cards. Yet in the midst of the current credit crunch, new research from TowerGroup finds that the combination of higher credit card losses and lower consumer spending will cause credit card ROAs for 2008 to drop at least 15 percent below 2007 levels (already lower than 2006 ROA levels). Yet despite this dreary forecast, TowerGroup finds that by focusing their business strategies on customer retention and expansion rather than acquisition, credit card issuers can still tap profit opportunities in 2008.

The subprime mortgage crisis and the spillover of charge-offs into other consumer loan products have forced consumers to rely more heavily on credit cards as an alternative to secured lending – which has in turn driven a sharp increase in card delinquencies. The current combination of higher losses and lower consumer spending is making new account prospects for credit cards issuers increasingly risky.

Lessons learned from the 1990 recession and past economic downturns suggest that credit card issuers should focus their efforts on current customers. To succeed in today’s economy, issuers must implement more customer-centric business models – approaches which identify ways to reward existing customers and encourage continued loyalty and card use, and will allow card issuers to closely monitor those macro-level portfolio metrics (e.g., outstanding balances, delinquency, bankruptcy, charge-off rates) which can negatively impact profitability.