2011 Financial Services Regional Seminar A Deeper Discussion … · 2011 Financial Services...

2011 Financial Services Regional Seminar

A Deeper Discussion of Deleveraging

Ezra BeckerVice President, Research and ConsultinggFinancial ServicesTransUnion

© 2011 TransUnion LLC All Rights Reserved

Session overviewSession overview

• Consumer behavior can be profoundly dynamic. We begin with a brief review of changes in payment preferences.

• We then explore changes in product preferences through an analysis of credit card deleveraging. Simple explanations for change may not always be entirely accurate.

• We offer three practical responses to these dynamics that can lead to material benefit in terms both of profitability and the customer relationship across your institution.

• More generally, the insight you can gain from this type of exercise can lead to improved strategies that are better aligned to the needs of your customers and prospects, regardless of product.

© 2011 TransUnion LLC All Rights Reserved2


A brief review of the payment hierarchy reversal


Trends in delinquency rates led us to believe that a shift in payment prioritization had occurredpayment prioritization had occurred

Serious Delinquency Comparison

National Credit Card 90+ DPD Rate

6.0%

7.0%

8.0%National Mortgage 60+ DPD Rate

y

3.0%

4.0%

5.0%

Del

inqu

ency

0.0%

1.0%

2.0%

Quarter

4

Sources: TransUnion Trend Data database and proprietary forecasting models


These trends were not isolated to specific geographic markets but were occurring across the U S

Serious Delinquency Comparison

NV Credit Card 90+ DPD Rate

markets, but were occurring across the U.S.

14.0%

16.0%

18.0%NV Mortgage 60+ DPD Rate

y

6 0%

8.0%

10.0%

12.0%

Del

inqu

ency

0.0%

2.0%

4.0%

6.0%

Quarter

5

Source: TransUnion Trend Data database


This behavioral change was clearly illustrated by payment hierarchy trends—consumers paying cards before mortgageshierarchy trends consumers paying cards before mortgages

% of Consumers 30+ DPD on Mortgages / Current on Bankcards% f C C /

rs

% of Consumers Current on Mortgages / 30+ DPD on Bankcards% of Consumers 30+ DPD on Mortgages and 30+ DPD on Bankcards

7.00%

8.00%

% o

f Con

sum

er

3 00%

4.00%

5.00%

6.00%

%

0.00%

1.00%

2.00%

3.00%

Quarter

6

Source: TransUnion Credit Reporting Database


Unemployment and home value depreciation were primary drivers of this dynamicof this dynamic

% Current on Cardbut

30+ DPD on Mortgagea Unemployment RatebHome Value

Depreciationb30 DPD on Mortgage Unemployment Rate Depreciation

State Q4 2009 Q4 2009 Q1 2006 - Q4 2009

Nevada 15.23% 12.5% 57.0%

Florida 13.34% 11.3% 45.5%

Arizona 11.57% 9.3% 48.3%Arizona 11.57% 9.3% 48.3%

California 10.83% 12.5% 46.8%

Georgia 8.12% 10.2% 25.9%

Vermont 3.56% 6.6% 9.4%Vermont 3.56% 6.6% 9.4%

Nebraska 3.44% 5.0% 1.7%

Alaska 3.39% 8.9% 18.1%

South Dakota 2.85% 5.2% 4.0%

North Dakota 2.36% 4.5% -8.9%North Dakota 2.36% 4.5% 8.9%

ρ = 0.80 (statistically significant, strong correlation)

ρ = 0.57 (statistically significantmoderate correlation)

7

Sources: (a) TransUnion Credit Reporting Database, (b) Economy.com


We have asserted that this is a key contributor to the fact that card delinquencies were well controlled throughout a tough recessiondelinquencies were well controlled throughout a tough recession

Total Quarter OriginationsE d f Q t 90 C I id t D li R t

1.2%

1.4%

1.6%

20,000,000

25,000,000End of Quarter 90+ Consumer Incident Delinquency Rate

quen

cy R

ate

Total Qua

Response to mortgage delinquency

0.6%

0.8%

1.0%

10,000,000

15,000,000

ncid

ent D

elin

q arter Acquisiti

0.0%

0.2%

0.4%

05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11

0

5,000,000

90+

DPD

Inion Volum

e

CARD Act concerns

Q1

200

Q2

200

Q3

200

Q4

200

Q1

200

Q2

200

Q3

200

Q4

200

Q1

200

Q2

200

Q3

200

Q4

200

Q1

200

Q2

200

Q3

200

Q4

200

Q1

200

Q2

200

Q3

200

Q4

200

Q1

20Q

2 20

Q3

20

Q4

20Q

1 20

Q2

20

We suggested that consumers wanted to protect their available d dit th i i f li idit i t i ti

8 © 2011 TransUnion LLC All Rights Reserved

card credit—their primary source of liquidity in uncertain timesSources: TransUnion Trend Data and Credit Reporting Databases

Further analysis of how payment preferences varied by age group yielded insight that was not intuitive on the surfaceyielded insight that was not intuitive on the surface

Survey Question: If you only have enough money to pay one of these loan obligationsthis month, would you pay your credit card bill or your mortgage?

8.0%

Payment Preference by Age Group

4.0%

6.0%

2.0%

4.0%

0.0%18-29 30-49 50-64 65+

Other / Not Sure Credit Card Payment First

9

Source: A survey of 2,914 consumers performed the week of 10/12/09 for TransUnion by Zogby International

Other / Not Sure Credit Card Payment First



Product preferences and deleveraging


More recently, we have published statistics showing how card borrowers built up balances at the onset of the recessionborrowers built up balances at the onset of the recession

A B l A

Card Statistics

$6,000

$6,200

$3,000

$3,050

$3,100

Average Balance per AccountAverage Balance per Borrower

rrow

erAverag

$5,400

$5,600

$5,800

$2,800

$2,850

$2,900

$2,950

alan

ce p

er B

oge B

alance per

$4,800

$5,000

$5,200

$2,600

$2,650

$2,700

$2,750

Aver

age

Ba r A

ccount

Jul-

07A

ug

-07

Sep

-07

Oct

-07

No

v-07

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08A

ug

-08

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-09

May

-09

Jun

-09

Jul-

09A

ug

-09

Sep

-09

Oct

-09

No

v-09

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-10

May

-10

Jun

-10

Jul-

10A

ug

-10

Sep

-10

Oct

-10

No

v-10

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-11

May

-11

Jun

-11

Since then, they have worked hardt d th b l

11

Source: TransUnion Credit Reporting Database


to reduce those balances

Federal Reserve data also indicate that revolving balances had been dropping in aggregatebeen dropping in aggregate

U.S. Revolving Balances ($Billions)

$1,200

$1,400

$600

$800

$1,000

$200

$400

$600

$0Q1

2007Q2

2007Q3

2007Q4

2007Q1

2008Q2

2008Q3

2008Q4

2008Q1

2009Q2

2009Q3

2009Q4

2009Q1

2010Q2

2010Q3

2010Q4

2010Q1

2011Q2

2011

12

Source: Federal Reserve G.19 Report


Yet some in the industry argue that the drop is entirely due to charge-off–one industry observer explains it this way:to charge off one industry observer explains it this way:

• In 2010, outstanding credit card debt decreased relative to its level in 2009: $66,934,000,0002009: $66,934,000,000

• In 2010, the credit card charge-off rate in dollars was: $75,045,428,150

• Consumer pay down: -$8,111,428,150 Card debt actually grew!

• Conclusion–One might look at the $66.9 billion decline in credit card debt and

come to the conclusion that consumers paid down their balances income to the conclusion that consumers paid down their balances in a big way

–The reality is, however, that entire decrease is the direct result of Americans defaulting on their debtg

–In fact, the true picture is that Americans accumulated $8.1 billion additional credit card debt in 2010 relative to 2009

13

Source intentionally not cited


That argument misses the greater dynamic; the correct answer is somewhat more complexanswer is somewhat more complex

What is the correct equation for balance change dynamics?

BalanceEND OF PERIOD

BalanceSTART OF PERIOD

Purchases Interest Fees Payments C/O+ ++ – –=BalanceEND OF PERIOD

BalanceSTART OF PERIOD

Purchases Interest Fees Payments C/O+ ++ – –=

Accounting Mostly a Current

ΔBalance = [Purchases – Payments] + [Interest + Fees] – [C/O]

treatment forold decisions

function of existing balances

behavioral decisions

To date we have conducted two research projects on this theme


To date, we have conducted two research projects on this theme

First: Let’s work through a “back of the envelope” calculation–consider changes from Q1 2009 to Q1 2010calculation consider changes from Q1 2009 to Q1 2010

ΔBalancePer Federal Reserve G 19 report:Per Federal Reserve G.19 report:

Total revolving balances at Q1 2009 = $923.3BTotal revolving balances at Q1 2010 = $829.0B

It is generally agreed that CC balances = 98% of total revolving balances

ThereforeTherefore,

ΔBalance = ($829.0B - $923.3B) x 98% = - $92.4B

ΔBalance = [Purchases – Payments] + [Interest + Fees] – [C/O]


Source: http://www.federalreserve.gov/RELEASES/g19/Current/ as of 03/22/2011

First: Let’s work through a “back of the envelope” calculation–consider changes from Q1 2009 to Q1 2010calculation consider changes from Q1 2009 to Q1 2010

ΔBalancePer Federal Reserve G 19 report:Per Federal Reserve G.19 report:

Total revolving balances at Q1 2009 = $923.3BTotal revolving balances at Q1 2010 = $829.0B

It is generally agreed that CC balances = 98% of total revolving balances

ThereforeTherefore,

ΔBalance = ($829.0B - $923.3B) x 98% = - $92.4B

−$92.4B = [Purchases – Payments] + [Interest + Fees] – [C/O]


Source: http://www.federalreserve.gov/RELEASES/g19/Current/ as of 03/22/2011

As with balances charge-off data are available from the FedAs with balances, charge off data are available from the Fed

C/O

Quarter Revolving Balancesa ($B) Card Balancesb ($B) C/O Ratec Quarterly C/O ($B)

Q1 2010 $829.0 $812.4 10.16% $20.6

Q4 2009 $894 0 $876 1 10 12% $22 2Q4 2009 $894.0 $876.1 10.12% $22.2

Q3 2009 $893.5 $875.6 10.10% $22.1

Q2 2009 $905.2 $887.1 9.77% $21.7

Therefore,

C/O $21 7B $22 1B $22 2B $20 6B $86 6BC/O = $21.7B + $22.1B + $22.2B + $20.6B = $86.6B

Sources: (a) http://www federalreserve gov/RELEASES/g19/Current/ as of 03/22/2011

−$92.4B = [Purchases – Payments] + [Interest + Fees] – [C/O]


Sources: (a) http://www.federalreserve.gov/RELEASES/g19/Current/ as of 03/22/2011

(b) It is generally agreed that 98% of revolving balances are credit card balances

(c) http://www.federalreserve.gov/releases/chargeoff/chgallnsa.htm as of 03/22/2011

As with balances charge-off data are available from the FedAs with balances, charge off data are available from the Fed

C/O

Quarter Revolving Balancesa ($B) Card Balancesb ($B) C/O Ratec Quarterly C/O ($B)

Q1 2010 $829.0 $812.4 10.16% $20.6

Q4 2009 $894 0 $876 1 10 12% $22 2Q4 2009 $894.0 $876.1 10.12% $22.2

Q3 2009 $893.5 $875.6 10.10% $22.1

Q2 2009 $905.2 $887.1 9.77% $21.7

Therefore,

C/O $21 7B $22 1B $22 2B $20 6B $86 6BC/O = $21.7B + $22.1B + $22.2B + $20.6B = $86.6B


−$92.4B = [Purchases – Payments] + [Interest + Fees] – $86.6B





We have to estimate interest incomeWe have to estimate interest income

InterestPer Bankrate com APR for variable-rate cards is 14 43%Per Bankrate.com, APR for variable-rate cards is 14.43%

Be conservative and assume EIR = only 50% of APR

Be even more conservative and calculate earned interest off of lowest balance in the year (Q1 2010)

ThereforeTherefore,

Interest = $829.0B x 14.43% x 50% = $59.8B

−$92.4B = [Purchases – Payments] + [Interest + Fees] – $86.6B


Source: http://www.bankrate.com/credit-cards.aspx as of 03/22/2011

We have to estimate interest incomeWe have to estimate interest income

InterestPer Bankrate com APR for variable-rate cards is 14 43%Per Bankrate.com, APR for variable-rate cards is 14.43%

Be conservative and assume EIR = only 50% of APR

Be even more conservative and calculate earned interest off of lowest balance in the year (Q1 2010)

ThereforeTherefore,

Interest = $829.0B x 14.43% x 50% = $59.8B

−$92.4B = [Purchases – Payments] + [$59.8B + Fees] – $86.6B


Source: http://www.bankrate.com/credit-cards.aspx as of 03/22/2011

Similarly we have to estimate fee incomeSimilarly, we have to estimate fee income

FeesFor many lenders interest is about 85% of revenue fees are aboutFor many lenders, interest is about 85% of revenue, fees are about 15% of revenue

Be conservative and assume fees are only 10% of revenue

So, Fees = Revenue x 10%Interest = Revenue x 90%

Therefore,

Fees = [Interest x 10%] ÷ 90%$59 8B 0 10 0 90= $59.8B x 0.10 ÷ 0.90

= $ 6.6B

−$92.4B = [Purchases – Payments] + [$59.8B + Fees] – $86.6B


$92.4B [Purchases Payments] [$59.8B Fees] $86.6B

Similarly we have to estimate fee incomeSimilarly, we have to estimate fee income

FeesFor many lenders interest is about 85% of revenue fees are aboutFor many lenders, interest is about 85% of revenue, fees are about 15% of revenue

Be conservative and assume fees are only 10% of revenue

So, Fees = Revenue x 10%Interest = Revenue x 90%

Therefore,

Fees = [Interest x 10%] ÷ 90%$59 8B 0 10 0 90

−$92.4B = [Purchases – Payments] + [$59.8B + $6.6B] – $86.6B

= $59.8B x 0.10 ÷ 0.90= $ 6.6B

$92.4B [Purchases Payments] [$59.8B $6.6B] $86.6B


In the end, we find an interesting relationship between payments and purchasespayments and purchases

−$92.4B = [Purchases – Payments] + [$59.8B + $6.6B] – $86.6B

Payments = Purchases + $92.4B + $59.8B + $6.6B – $86.6B

Payments = Purchases + $72.2B

Point #1: Between Q1 2009 and Q1 2010, consumers made over $72B more in payments on their cards than purchases

Payments Purchases $72.2B

Had we been less conservative, our estimate would have been almost $110B more in payments than in purchases*

$72B more in payments on their cards than purchases

Note that this dynamic contributes to the change in balances on the sameorder of magnitude as does charge-off


*See appendix for calculations

This result is quite different than what was occurring in 2004*This result is quite different than what was occurring in 2004

2009: Payments = Purchases + $72.2B2004: Payments = Purchases – $ 2.1B2004: Payments Purchases $ 2.1B

2nd Mortgage Originations

Consider also that alternative options for revolving credit were widely available in 2004

300,000

350,000

400,000

450,000 Lots of alternativerevolving credit availability

Orig

inat

ions

100,000

150,000

200,000

250,000

Very little alternativerevolving credit availability

2nd

Mor

tgag

e O

0

50,000

Jan-

04M

ar-0

4M

ay-0

4Ju

l-04

Sep-

04N

ov-0

4Ja

n-05

Mar

-05

May

-05

Jul-0

5Se

p-05

Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep-

06N

ov-0

6Ja

n-07

Mar

-07

May

-07

Jul-0

7Se

p-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Nov

-09

2


*See appendix for calculationsMonth

At the consumer level, we find more clear evidence of deleveraging by pay-downdeleveraging by pay down

Table 1:Distribution of Accounts Q1 2009

Table 2:Distribution of Accounts after 1 Year

Score Range

Delinquency Status as of Q1 2010

0 - 59 DPD 60 - 119 DPD 120+ DPD

851 - 900 24.07% 0.02% 0.07%

Score Range

Distribution as of Q1 2009

851 - 900 24.16%801 - 850 11.83%

nage

men

t3.

009

851 900801 - 850 11.72% 0.02% 0.09%751 - 800 9.92% 0.03% 0.11%701 - 750 9.22% 0.04% 0.15%651 - 700 7.73% 0.06% 0.20%601 - 650 7.61% 0.08% 0.31%

Man

agem

ent

3.0

009

%751 - 800 10.06%701 - 750 9.41%651 - 700 7.99%601 – 650 8.00%551 600 7 48%

nion

Acc

ount

Man

as o

f Q1

200

551 - 600 6.95% 0.11% 0.41%501 - 550 5.37% 0.12% 0.49%451 - 500 4.21% 0.12% 0.57%401 - 450 3.20% 0.10% 0.55%351 - 400 2.21% 0.10% 0.69%U

nion

Acc

ount

Mas

of Q

1 20 551 - 600 7.48%

501 - 550 5.98%451 - 500 4.90%401 - 450 3.85%351 - 400 3.00%301 3 0 1 32%

Tran

sUn

301 - 350 0.88% 0.07% 0.37%251 - 300 0.54% 0.05% 0.36%201 - 250 0.31% 0.04% 0.31%150 - 200 0.14% 0.02% 0.25%

Tran

sU 301 - 350 1.32%251 - 300 0.95%201 - 250 0.66%150 - 200 0.42%

25

Sources: Analysis of more than 1.65 million credit card accounts in the TransUnion Credit Reporting Database


Point #2: Across the risk spectrum, consumers are deleveraging both through C/O and through pay-downdeleveraging both through C/O and through pay down

Table 3:% of Cell with Decreasing Balances

Table 2:Distribution of Accounts after 1 Year

Score Range


0 - 59 DPD 60 - 119 DPD 120+ DPD

851 900 53 14% 53 11% 57 96%Score Range


0 - 59 DPD 60 - 119 DPD 120+ DPD

851 - 900 24.07% 0.02% 0.07%

nage

men

t3.

09

851 - 900 53.14% 53.11% 57.96%801 - 850 58.30% 53.56% 63.78%751 - 800 59.81% 57.73% 66.28%701 - 750 58.97% 60.30% 68.91%651 - 700 56.71% 56.13% 69.75%601 - 650 54 98% 63 31% 67 91%na

gem

ent

3.0

9

851 900 24.07% 0.02% 0.07%801 - 850 11.72% 0.02% 0.09%751 - 800 9.92% 0.03% 0.11%701 - 750 9.22% 0.04% 0.15%651 - 700 7.73% 0.06% 0.20%601 - 650 7 61% 0 08% 0 31%

ion

Acc

ount

Man

as o

f Q1

2009 601 - 650 54.98% 63.31% 67.91%

551 - 600 54.84% 66.04% 74.79%501 - 550 53.44% 64.28% 74.88%451 - 500 52.61% 64.37% 72.33%401 - 450 48.89% 66.55% 70.46%351 - 400 51 73% 63 66% 69 22%io

n A

ccou

nt M

anas

of Q

1 20

09 601 650 7.61% 0.08% 0.31%551 - 600 6.95% 0.11% 0.41%501 - 550 5.37% 0.12% 0.49%451 - 500 4.21% 0.12% 0.57%401 - 450 3.20% 0.10% 0.55%351 - 400 2.21% 0.10% 0.69%

Tran

sUni 351 400 51.73% 63.66% 69.22%

301 - 350 64.07% 71.65% 78.64%251 - 300 66.43% 71.51% 78.79%201 - 250 69.37% 75.96% 80.41%150 - 200 73.06% 78.26% 82.03%

Tran

sUni 351 400 2.21% 0.10% 0.69%

301 - 350 0.88% 0.07% 0.37%251 - 300 0.54% 0.05% 0.36%201 - 250 0.31% 0.04% 0.31%150 - 200 0.14% 0.02% 0.25%

26

Sources: Analysis of more than 1.65 million credit card accounts in the TransUnion Credit Reporting Database


Misdirected effort? Consider the following example: suppose you spend $1 000 000 on acquisitions each yearsuppose you spend $1,000,000 on acquisitions each year

If you want to keep your loss rate under 1%...

Score Range

% of Populationat Start

Cumulative120+ Rate

% Deleveraging Relative Deleveraging

Cumulative RelativeRange at Start 120+ Rate Deleveraging

RateRelative

Deleveraging Rate

851 - 900 24.16% 0.30% 12.79% 52.94% 52.94%801 - 850 11.83% 0.44% 6.83% 57.76% 54.52%751 - 800 10.06% 0.60% 5.93% 58.95% 55.49%nt

3.0

701 - 750 9.41% 0.77% 5.44% 57.76% 55.88%651 - 700 7.99% 0.99% 4.38% 54.85% 55.75%601 - 650 8.00% 1.32% 4.18% 52.30% 55.36%551 - 600 7.48% 1.71% 3.81% 50.99% 54.95%501 - 550 5.98% 2.17% 2.87% 48.03% 54.46%451 500 4 90% 2 68% 2 22% 45 21% 53 96%

unt M

anag

emen

f Q1

2009

451 - 500 4.90% 2.68% 2.22% 45.21% 53.96%401 - 450 3.85% 3.15% 1.56% 40.64% 53.41%351 - 400 3.00% 3.77% 1.14% 38.04% 52.93%301 - 350 1.32% 4.10% 0.56% 42.80% 52.79%251 - 300 0.95% 4.43% 0.36% 37.52% 52.65%201 - 250 0 66% 4 71% 0 22% 33 04% 52 52%an

sUni

on A

cco

as o

f

201 250 0.66% 4.71% 0.22% 33.04% 52.52%150 - 200 0.42% 4.94% 0.10% 24.95% 52.40%Tr

a

• $9,900 of your marketing dollars are lost on Bad accounts (can’t be helped)

• At worst, $557,500 is spent marketing to people who don’t seem to want more


credit! (More than half your entire acquisitions budget)

Account closures and balance chasing: some consumers were “forced” to deleverage more so than others

An example of balance chasing

were forced to deleverage more so than others

Source: Source names go here (Arial 8pt)

$10 000

$12,000Balance versus Limit

$6 000

$8,000

$10,000

$2 000

$4,000

$6,000

$0

$2,000

Q1 2009 Q2 2009 Q3 2009 Q4 2009


The 2nd phase of our deleveraging analysis shows that balance reductions in the low-risk ranges are due primarily to pay-down

$15 000 000 000 T l CC B l N CC B l P h I F P CCC/O b l

Credit Card Balance Change Decomposition—Prime TierSource: TransUnion Credit Reporting database

reductions in the low risk ranges are due primarily to pay down

Δ Δ Δ

$10,000,000,000

$15,000,000,000 Total CC Bal New CC Bal Purchases, Interest, Fees, Payments CC C/O balΔ Δ Δ

$0

$5,000,000,000

‐$10,000,000,000

‐$5,000,000,000

‐$20,000,000,000

‐$15,000,000,000


In the subprime tier, balance reductions are due to charge-off AND pay-down—and the contribution is shifting toward the latter

$10 000 000 000

Credit Card Balance Change Decomposition—Subprime TierSource: TransUnion Credit Reporting database

pay down and the contribution is shifting toward the latter

$5,000,000,000

$10,000,000,000Total CC Bal New CC Bal Purchases, Interest, Fees, Payments CC C/O balΔ Δ Δ

‐$5,000,000,000

$0

‐$15,000,000,000

‐$10,000,000,000

‐$25,000,000,000

‐$20,000,000,000


So what are these consumers using to make purchases?So what are these consumers using to make purchases?

Debit versus credit transactions—emerging demographic trends• Since 2006, the debit card has eclipsed the check as the most used , p

noncash instrumenta

• Only 47% of Americans over 65 said they had used a debit card in the month before the September 2008 Javelin Strategy and Research

bsurveyb

• 71% of Americans aged 18 to 24 said that they had used a debit card in the month preceding the September 2008 survey; just 51% of that same age group indicated they had used a credit card in the samesame age group indicated they had used a credit card in the same periodb

• 74% of monthly college spending is with cash and debit cards; only 7% is with credit cardsc

Sources: (a) The 2010 Federal Reserve Payments Study as referenced byhttp://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf as of 08/22/2011

(b) Javelin Strategy and Research 2009 study entitled, "Credit Card Spending Declines“ as referenced byhttp://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics1276.php/ as of 04/21/2011


(c) Student Monitor 2008 annual financial services study as referenced byhttp://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics1276.php/ as of 04/21/2011

At the same time, legislative/regulatory changes make this trend increasingly impactful and lenders are responding more activelyincreasingly impactful, and lenders are responding more actively

• CARD Act—marketing to younger consumers

• Durbin Amendment—debit transactions become less attractive to card issuers

• Overdraft fee opt-in

CreditCard Users

Lender Consumer

Debit Card Users

Lender

Product

P h

Consumer

Usage

T d


Push Trend


Practical strategic responses


Strategy #1: Acquisitions—incorporate deleveraging characteristics into your selection criteriacharacteristics into your selection criteria

Start

“Well behaved”?

NoYesYes

No

Deleveraging?

Yes

Aggregate limits dropping?


YesNo

Strategy #2: Portfolio management—distinguish between deleveraging and loss of loyaltydeleveraging and loss of loyalty

Your Institution Other LendersYour Institution

Attrition

Deleveraging


Strategy #3: Apply analytical risk management rigor in the DDA spacespace

Percent of Realized Loss Identified

Lowest % of Scores 5% 10% 15% 20% 25% 30% 35% 40% KS SCORE

PERCENT OF CUSTOMERS IDENTIFIEDPERCENT OF CUSTOMERS IDENTIFIEDFICO Classic 04 12.7% 23.9% 36.6% 48.2% 57.8% 68.4% 77.4% 85.7% 54

FICO Classic Bankcard 04 12.5% 25.3% 37.8% 48.5% 59.3% 69.1% 78.2% 86.1% 55FICO Classic 98 12.8% 25.2% 36.1% 46.3% 56.3% 66.7% 75.4% 83.9% 53

VantageScore 18.9% 25.0% 36.2% 47.2% 56.4% 67.3% 76.1% 83.6% 52TransUnion New Account 12.8% 24.4% 36.3% 47.9% 57.7% 68.4% 77.5% 85.8% 54

TransUnion Account Management 11.0% 22.4% 33.1% 42.8% 52.7% 60.7% 68.3% 78.3% 50% % % % % % % %TransUnion Auto 13.3% 26.1% 38.9% 49.2% 59.9% 69.8% 77.3% 84.6% 53

TransUnion Bankruptcy Model 7.1% 15.1% 26.2% 35.3% 46.1% 56.2% 65.8% 74.1% 44

Percent of Files Scored

FICO Classic 04 83.12%FICO Classic Bankcard 04 83.12%

FICO Classic 98 83.12%VantageScore 88.56%g

TransUnion New Account 89.37%TransUnion Account Management 89.37%

TransUnion Auto 89.52%TransUnion Bankruptcy Model 89.41%


SummarySummary

• Consumer preferences and performance will always be dynamic–be willing to change your perspective as the environment changes

• Consumer behavior can be complex. A sophisticated analytical approach is often needed to understand it correctly—not just to answer the business question, but to ask the right one!answer the business question, but to ask the right one!

• Increasingly, an accurate picture of customer behavior can only be drawn by looking across products

• Any strategies designed to drive consumer behavior should take into account the existing preferences of those consumers to maximize the probability of success



Appendix


Less conservative calculations between Q1 2009 and Q1 2010Less conservative calculations between Q1 2009 and Q1 2010

ΔBalance: Per Federal Reserve G.19 reporta, total revolving balances at Q1 2009 = $923.3B and total revolving balances at Q1 2010 = $829.0B. Therefore, ΔBalance = ($829.0B - $923.3B)

Changes to assumptions in main presentation noted in RED

x 98% = - $92.4B

C/O: C/O = $20.6B + $22.2B + $22.1B + $21.7B = $86.6B

Quarter Revolving Balancesa ($B) Card Balancesb ($B) C/O Ratec Quarterly C/O ($B)Quarter Revolving Balancesa ($B) Card Balancesb ($B) C/O Ratec Quarterly C/O ($B)

Q1 2010 $829.0 $812.4 10.16% $20.6

Q4 2009 $894.0 $876.1 10.12% $22.2

Q3 2009 $893.5 $875.6 10.10% $22.1

Interest: Interest = [$923.3B + $829.0B)/2] x 14.43% x 70% = $88.5B

Fees: Fees = [Interest x 15%] ÷ 85% = $88 5B x 0 15 ÷ 0 85 = $15 6B

Q2 2009 $905.2 $887.1 9.77% $21.7


Fees: Fees = [Interest x 15%] ÷ 85% = $88.5B x 0.15 ÷ 0.85 = $15.6B

- $92.4B = [Purchases - Payments] + [$88.5B + $15.6B] – [86.6B]

∴ Payments = Purchases + $109.9B





Calculations between Q1 2004 and Q1 2005Calculations between Q1 2004 and Q1 2005

ΔBalance: Per Federal Reserve G.19 reporta, total revolving balances at Q1 2004 = $760.6B and total revolving balances at Q1 2005 = $789.0B. Therefore, ΔBalance = ($789.0B - $760.6B) x 98% = $27.8B

C/O: C/O = $10.1B + $8.9B + $9.5B + $9.0B = $37.5B

Quarter Revolving Balancesa ($B) Card Balances ($B) b Card C/O Ratec Quarterly C/O ($B)Quarter Revolving Balancesa ($B) Card Balances ($B) b Card C/O Ratec Quarterly C/O ($B)

Q1 2005 $789.0 $773.2 4.63% $9.0

Q4 2004 $819.1 $813.6 4.71% $9.5

Q3 2004 $779.8 $764.2 4.67% $8.9

Q2 2004 $764.2 $748.9 5.39% $10.1

Interest: Interest = $789.0B x 14.43% x 50% = $56.9B

Fees: Fees = [Interest x 10%] ÷ 90% = $56 9B x 0 10 ÷ 0 90 = $6 3B

Sources: (a) http://www federalreserve gov/releases/g19/20050708/ as of 04/20/2011

Fees: Fees = [Interest x 10%] ÷ 90% = $56.9B x 0.10 ÷ 0.90 = $6.3B

$27.8B = [Purchases - Payments] + [$56.9B + $6.3B] – [37.5B]

∴ Payments = Purchases - $2.1B


Sources: (a) http://www.federalreserve.gov/releases/g19/20050708/ as of 04/20/2011



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