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Perspective Amit Gupta

Seamus McMahon
Enairo J. Urdaneta

Rebuilding the
Operating Model for
Credit Card Companies

U.S. credit card companies were already facing some fundamental

challenges before the worldwide liquidity crisis began. Now, with the
U.S. economy in a recession, these companies are being forced to
consider changes to their operating models. Reactions that were common
in past downturns—such as cutting overhead or eliminating some
suppliers—will not suffice. Instead, these companies and the banks that
own them must reduce excess capacity across functions, create shared
capabilities with other card issuers, and provide third-party services.
Banks have been hit by a once-in-a- consumer credit dropped precipitously taking steps to protect themselves
century financial storm and have taken in the mid-1990s and have essentially against a surge in consumer defaults—
shelter. The credit card industry, of been flat since 2002.2 Furthermore, in ways that will impact their near-term
course, has gotten caught in the same consumers are less inclined to blithely revenue. For instance, card companies
storm, and credit card executives are pull out credit cards whenever they have been closing inactive or risky
looking at operating model changes make purchases, as indicated by the accounts at a much higher rate than
that might protect their threatened decelerated growth of credit card pur- in the past. They have been cutting
franchises. The decision by American chases since 2001.3 Add to these fac- credit limits in ways that would have
Express to turn itself into a bank hold- tors a new level of regulatory scrutiny been unthinkable a few years ago. In a
ing company (following the example over fees and pricing tactics that have recent review of a portion of American
of two investment banks, Goldman been deemed unfair and deceptive, Express cardholders—the sort of review
Sachs and Morgan Stanley) is an and the industry has all the ingredients the company does on an ongoing
example of the extreme adjustments for slower revenue growth. basis—American Express adjusted the
that credit card issuers are willing to credit available to half of the cardhold-
make. This decision also brought an All these issues have been exacerbated ers it examined.5 In similar reviews in
end to the era of monoline credit card by the recession, which is reducing the the past, the company typically cut the
players in the United States. demand for credit. Americans wor- credit lines of 20 percent of the card-
ried about job security have started holders it reviewed; this time, half of
Although the liquidity crisis is new, to save more, with personal savings the accounts in review had their credit
other problems have been develop- as a percentage of disposable income slashed. More recently, a prominent
ing for some time. Since 2006, for increasing from less than 1 percent banking analyst from Oppenheimer
instance, there has been a sharp rise in 2005 to nearly 3 percent as of the & Co. said that the U.S. credit card
in credit card payments overdue by second quarter of 2008, and are cau- industry may cut more than $2 trillion
more than 180 days. The percent- tious about accumulating credit card in credit lines over the next 18 months
age of credit card balances that the debt.4 With many issuers eliminating to address risk concerns and regulatory
industry will write off as uncollectible “teaser” or promotional interest rates, changes. The industry has also tight-
will likely exceed 9 percent by the end consumers also have fewer incentives ened credit score requirements for those
of next year, compared to 4 percent in to make use of new cards. seeking new cards and has reduced
2006.1 Consumer caution about credit direct mail solicitations in the third
levels has been growing for more Likewise, the supply of credit is quarter of 2008 by 25 to 30 percent
than a decade: Growth rates in U.S. decreasing. Indeed, many issuers are compared to the same period in 2007.

Booz & Company

Federal Reserve
Three Ways and infrastructure) in all key activi-
ties. As issuers curtail their acquisi-

The Nilson Report
Bureau of Economic Analysis
to Rebuild tion efforts, for instance, they will 5
AnnaMaria Andriotis, “Banks Lowering

the Credit want to adjust capacity related to

the origination of new accounts,
Consumers’ Credit-Card Limits,”, November 14, 2008.
Card including campaign execution, sales,
Operating application processing, and credit
decisioning. Reducing capacity may
Model naturally lead to a reevaluation of
current sourcing strategies and a
new push to make some existing
processes more efficient.

The declines in both the supply of 2. C

 reate shared capabilities with
and demand for credit have left other card issuers. The era of credit
issuers with excess capacity. Excess card issuers doing everything on
capacity is not a new phenomenon in their own has ended. By join-
the credit card industry, of course—
it happens every time there’s an
ing forces, credit card companies
will be able to create industry
economic downturn. What’s differ- utilities to handle the processing
ent this time, however, is that rather of nonstrategic activities across the
than excess capacity existing just in value chain. For instance, groups
back-end functions such as process- of issuers should think about
Banks should embark on a series of
ing, fulfillment, and servicing, it forming a joint utility for collec-
initiatives aimed at transforming the
will also exist in core areas such as tions of overdue accounts. Only
operating models of their credit card
strategy development and marketing such collaboration will help bring
units. In addition to finding new ways
execution. Credit card companies maximum efficiency to collections
to collaborate with each other and
cannot cut some overhead, end their and eliminate the zero-sum game in
with co-brand partners, issuers should
relationships with certain suppliers, which one issuer’s gain is another’s
make changes to their current opera-
and assume their efforts will suffice. loss. Customers may favor a col-
tions and delivery models to reduce
The necessary response is both deeper lections utility as it would likely
the excess capacity that has become
and more creative, and it will center receive the enthusiastic support of
glaringly apparent. Standing still is
around three efforts. regulatory authorities.
not an option. With the foundation
shifting, it’s time to act.
1. Reduce excess capacity across func- 3. P
 rovide third-party services. A
tions. So far, most cost-reduction third way for credit card issuers to
efforts within credit card companies achieve cost efficiencies is through
have focused on overhead and non- scale, including the commercial-
core functions. This isn’t enough. ization of non-core services. By
The industry’s structural changes providing key services (e.g., state-
warrant reductions along the entire ment issuance, customer service,
credit card value chain. To ensure collections, and recoveries) to
that internal costs are justified, issu- smaller regional banks or issuers,
ers will want to assess their current credit card companies can achieve
operations from end to end to iden- economies of scale and thus reduce
tify excess capacity (both people their overall operating costs.

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Contact Information

New York
Amit Gupta Seamus McMahon Enairo J. Urdaneta
Partner Partner Associate
212-551-6823 212-551-6400 212-551-6802

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©2008 Booz & Company Inc.