Welcome to the 2019 version of our annual market update. I wrote the first such letter thirty years ago, in 1990! My, how times have changed.
While we typically talk about industry happenings and then pivot to updates in our own company, we are going to turn that around this year. I think you’ll agree it adds a bit of perspective to this year’s commentary.
Despite the negative connotation implied by Juliet when she proclaimed, “A rose, by any other name would smell as sweet,” I think it is a fitting quote to describe the state of all things “Auriemma.” Last year, I told you we were changing our name by dropping the word “Consulting.” Well, we did that. But then we did more. Many of you have heard the news by now. But, I know not everyone received, or read, our email communications in August.
While we were wrapping up the process of our name change in late 2018 and early 2019, we were also beginning a process to bring on some outside investment in order to expand and improve our offerings to the market. That effort was consummated on August 1st. As a result, we split into two companies… Auriemma Roundtables, which will operate our US Roundtables practice, and Auriemma Group, which will operate our Partnerships, Research, and Finance lines of business, as well as our UK Roundtables.
Two new presidents have been named. Tom LaMagna for Auriemma Roundtables and Mark Jackson for Auriemma Group. Both have been part of our team for many years and have been gearing up and being groomed for these appointments. I’m excited to pass on the baton(s)!
With that as the backdrop, here are some of the stories and trends we’ve been tracking and expect to continue into 2020.
This was a strong, but mixed, year from a macroeconomic perspective. In the U.S., the Dow hit record highs this year, and the U.S. added 266,000 jobs in November, outpacing predictions. U.S. unemployment is at a record low, and there may still be room for growth, given that labor force participation remains below pre-recession levels. It’s a similar picture across the Atlantic, with UK employment at record highs and a healthy growth in household spending, thanks to stronger wage growth.
Other factors, however, lead to a more uncertain economic picture. The Federal Reserve cut rates three time this year. Trade tensions are impacting business and consumer confidence. Business investment has slumped due to global economic slowdowns and uncertainty about the outcome of the U.S.-China trade war. Consumer credit increased at a seasonally adjusted annual rate of 7.7 percent in October, while revolving credit increased at an annual rate of 10.7 percent, and non-revolving credit increased at a 6.7 percent annual rate, according to ABA Banking Journal. In the UK, the number of job vacancies have started to fall in 2019, and the number of jobs created have decreased, indicating the labor market is potentially cooling. But with many consumers shrugging off the negative indicators the industry pores over, I tend to agree with Michael Corbat that the biggest threat to the economy might be talking ourselves into the next recession.
For their part, industry leaders are thoroughly prepared, with many anticipating a mild recession in the next 12 to 18 months. Clients are interrogating key internal metrics to discern false signals from true indicators, including changes in payment ratios, minimum payment frequency and early delinquency rates. Many are already tightening on credit exposure in some portfolios, and anticipate some future tightening going into 2020. Recession playbooks for pricing, term adjustments and collections/recovery strategies are in place—although triggers have not yet been tripped. Indeed, predicting the future recession appears to be more art than science, with many questioning if the typical indicators – unemployment, for example – are really the ones to be watching in the upcoming cycle.
Delinquencies, a traditional indicator, are slightly on the increase for credit cards. However, the future direction of travel is anyone’s guess. This is clear in the fact that just over half (56%) of issuers in Auriemma Roundtables’ Card Collections group expect an increased delinquency rate going into 2020. The other half expect delinquencies to be flat or down next year. Certainly, nothing in the data reflects systemic alarm or anything fundamentally surprising. In fact, delinquency levels are aligned with industry expectations, based on vintage and composition of portfolios. Additionally, because of the lessons learned from 2008, there’s a more cautionary approach to underwriting in this pre-recession era, and fundamental exposure is more limited than in the past.
Delinquencies for auto lenders have increased steadily across all credit tiers in 2019, although the bulk of delinquencies are unsurprisingly in subprime. The increase is a byproduct of strategic decisions to expand acceptance criteria, rather than an indicator of broader market conditions. To underscore the point, 75% of Auriemma Roundtables’ Auto Collections group members say 2019 net credit losses are below forecast, showcasing the success of collections operations and loss mitigation programs.
What remains to be fully seen is any impact that could be felt amid a downturn if the CFPB’s proposed debt collection rules go into effect, which would cut the number of call attempts per day for most lenders and collectors. In preparation, many first-party collectors are ramping down their call caps and deploying self-service and digitized collections tools. With a potential recession and this proposed regulatory action, the stars are aligning to make investments in more strategic contact management.
This proposed rule represents one of the more significant pieces of proposed legislation from the Bureau, which has been quieter than in years past. (Of course, that posture could change yet again, depending on the outcome of the next election.) While the industry has seen fewer big-ticket enforcement actions from the CFPB this year, there’s concern of growing coalitions among state AGs and legislators who are working to fill the perceived regulatory void. For example, state litigation is attacking banks’ preemption and rate exportation rights, which will need to be solved by federal legislation supporting the concept of “valid when made.” There has also been tremendous scrambling to comply with the data-centric California Consumer Protection Act, which goes into effect January 1 and could very well be adopted by other states going forward.
The U.K.’s regulatory scene has been quite active: Persistent Debt is causing waves, GDPR has claimed its largest big-ticket enforcement actions to date, and the deadline for compliance with PSD2 has passed with several FIs not fully compliant. Of course, there are the results of the UK’s general election – a sweeping win for the Conservative party, signaling an imminent departure from the European Union. The pound surged in trading against the dollar and the euro in response to the vote. Businesses will be working through operational challenges associated with an 2020 exit, and consumers could respond to uncertainty with changes in spending, saving and a potential shift from credit onto debit. A no-deal Brexit could be bad news for jobs, wages or both. Certainty, in any guise, is likely still months away.
Overall, it’s been a strong year for credit card lenders. While falling interest rates may have squeezed fixed-rate lending, credit cards have held strong as an asset class, helping fuel the industry’s solid financial results this year.
Additional positive news: Year-to-date gross and net fraud rates have remained stable, with the average gross fraud rate at 0.27% and the average net fraud rate at 0.13%, according to Auriemma Roundtables’ Card Fraud Control benchmarking. Meanwhile, 85% of Roundtable members reported a flat or decreasing gross fraud rate between FY ‘18 and YTD ’19. As EMV cards have become ubiquitous in the marketplace, the security benefit of the technology has been realized and is reflected in the normalization seen within the distribution of fraud types.
While fraud losses have stabilized, fraud remains a painful reality to consumers, with data breaches and the associated financial ramifications becoming routine. The everyday nature of fraud means consumers are often not proactive in taking preventative measures, with more than one-quarter of cardholders feeling comfortable making online purchases from unfamiliar websites, and more than four-in-ten of cardholders reporting that they haven’t changed the password for their debit or credit card account in over a year, according to Auriemma Research. Other precautions, like fraud alerts, identity theft protection, and two-factor authentication are not overwhelmingly used by consumers, according to the research. (Incidentally, this kind of irrationality is exactly what Auriemma Roundtables is looking to understand in its Behavioral Economics Initiative with Duke University’s Center for Advanced Hindsight – a joint venture focused on identifying opportunities to shift consumer behavior for more positive financial outcomes.)
Of course, the Auriemma Group team has remained active in the co-brand arena. As I shared last year, marquee co-brand deals have slowed in 2019, thanks to the increasing prevalence of long-term program contracts. We expect 2020 will be more active, with many programs preparing to go to market. Certainly, 2019 saw pockets of action – including several de novo airline programs (Air Canada, Emirates, and Norwegian Airlines) and an increase in mid-contract negotiations. The opportunities for card issuers during this period of reduced market activity tend to revolve around focusing more closely on existing programs. For some, this includes testing innovations – such as installment payment plan offerings, omnichannel experiences, and data analytics insights. Brands also have opportunities to keep programs fresh by regularly revisiting key program features, such as value propositions and marketing approaches. Meanwhile, with the challenges in the current retail environment, we’re also seeing a diversification within the private label space, with brands moving toward POS installment lending and issuers offering other lending categories, such as medical financing.
Of course, there were new cards, too – perhaps most notably, the Apple Card, which debuted this year to tremendous buzz. (An introductory video for the Apple card uploaded in tandem with its late-March announcement has racked up more than 25 million views… easily more than ten times the number of views for similar videos for other cards.) Although Apple obviously offers a physical card, the product’s core value proposition has been specifically designed to increase usage and adoption of its mobile payment capabilities. As with many mobile offerings, it’s still unclear how successful Apple’s push will be.
Despite the rumors of its inevitable demise, plastic has continued to thrive during the dawn of mobile payments. Some argue that the increase in contactless card availability may actually migrate some mobile-friendly consumers back to physical payments, according to Auriemma Research. This year, contactless made a meaningful push to mainstream acceptance in the U.S., thanks in part to major transit systems’ acceptance. While it’s not exactly a new technology, the POS experience seems to have improved drastically from previous incarnations.
The simplicity of contactless’ tap is just one example of a customer experience making or breaking a technology. More broadly, a crisp and easy experience has paved the way for an influx of fintechs to sweep both the U.S. and U.K. markets. In the U.S., the unsecured personal loan market continued its dazzling growth, led largely by digital-first fintechs. In e-commerce, snazzy POS financing options like Klarna and Affirm are increasingly popular with consumers who find that borrowing via an installment plan is less intimidating than revolving on a credit card. In the UK, a wave of Challenger Banks, such as Monzo, have developed budgeting tools that are deeply appealing to consumers. Fintechs are eager to garner more market share and have started diversifying into credit cards and other products, such as auto lending. To fuel this growth, fintechs have been bullish on the use of non-traditional data sources, such as utility or cellphone payment information – particularly when scoring consumers in deeper FICO bands or with thin files.
As more data enters the ecosystem however, there are some uncertainties emerging about the integrity of credit reporting. While the vast majority of available information is accurate, reporting complexities and fraudulent consumers are potentially leading to some credit score inflation. In addition, new commercially available scores and alternative data providers will have an unclear impact going forward. To address the reporting complexities, Auriemma Roundtables has spearheaded initiatives with both the CDIA and credit reporting agencies to identify opportunities to improve reporting standards and clarify business processes.
Also distorting the credit reporting environment? An upswing in credit repair agencies enticing consumers to attempt to eliminate or transform negative credit history – often without consumers being fully aware of the process (something the CFPB has taken notice of). It will be crucial for the industry to partner with regulators, such as the FTC and CFPB, to counter predatory players.
While lenders are focused on risk mitigation of all kinds, 2019 has also brought ample opportunities to invest in operational efficiency and automation—areas where both Auriemma Group and Auriemma Roundtables continue to focus energies.
Automation has been more fully deployed in 2019, with speech analytics, AI, machine learning and RPA all focused on eliminating risk and error, increasing efficiency and re-deploying employees toward value-add activities. Banks have rechanneled investment to support these initiatives, with many with new “Transformation” departments popping up. Agile has quickly usurped the traditional waterfall methodology to encourage faster business and technology changes. Automation has made a major breakthrough in credit decisioning across the lending landscape. Speech analytics is being used to tag complaints, identify compliance risk and monitor call quality. Organizations are increasingly using cloud-based technology, including for call recordings and cloud-based dialers. In fraud, machine learning and AI are becoming more prominent, particularly in authentication. And with fraudsters continuing to demonstrate more sophistication and flexibility to overcome authentication hurdles, you can expect more issuers to actively explore solutions like voice biometrics and device fingerprinting in 2020. In collections, alternate collections strategies are actively being expanded, with more than 60% of Roundtable members using one-way texting in pre-chargeoff collections. Debt collections is ripe for further disruption in the UK, with firms looking toward omnichannel engagement tools and testing completely switching off outbound dialing. In customer service, FIs have further nudged customers along the digital migration path, thanks to touch/face ID authentication for mobile logins. IVR systems are being enhanced to drive stronger containment rates, and AI is being explored for real-time call monitoring.
All this investment and change means job transformation is afoot across many functions in all markets – which Auriemma Group will recognize with a new sponsored award at the UK Cards & Payments Awards. The award, Excellence in Operational Innovation, will recognize the card issuer, brand, banking acquirer or payment company that has best demonstrated operational innovation resulting in a best-in class customer experience.
While I expect Auriemma’s two new presidents to push their respective companies well beyond the boundaries I achieved, I don’t expect any significant deviations in the types of business they pursue or the quality of services they provide. The same teams remain in place to deliver value to our clients.
What I do expect however, is that these gentlemen will want to write their own annual updates twelve months from now, thus ending my tenure at 30 years! So, I hope you enjoyed what is likely the last letter from me and look forward, as I do, to reading the words of Mark and Tom next December.
Meanwhile, I thank you again for your patronage and look forward to speaking with you soon.