PROLOGUE: I was recently at the grocery store checkout counter when I heard the bag boy bragging to the cashier, “My girlfriend and I are going to Europe next summer – we’re just going to charge the whole trip on a credit card.” The cashier, with pink hair, tattoos and lots of body piercing, beamed back at him, “I love credit cards!”
Most of the nation’s 10,000 banks and thrifts should aggressively begin efforts to help America’s consumers kick their debt addiction. Like the dentist who may lower future drilling revenues with fluoride treatments, the once honorable banking industry should say “No mas!” to the obscene levels of debt America’s consumers are piling up.
And here’s the upshot. For most banks, the economic loss of not trying to pump more debt into plastic-bloated consumers will not be deadly and may be the best door opener for new investment and insurance services.
Here’s a quick review of the facts:
#1: We’re talking serious FAT with debt!
- The average credit card debt per U.S. household ballooned from $2,985 in 1990 to (holy cow) $8,123 in 2000. This figure is even scarier when one considers that 30% of all credit card holders do not carry a monthly balance – 70% are responsible for all credit card borrowing.
- U.S. households now owe slightly more than $1.00 for each dollar of disposable income. Ten years ago, they owed $.80 for each dollar, and in the early 1950s it was $.35.
- Not surprisingly, approximately 1.3 million U.S. consumers now declare bankruptcy each year, up from 700,000 in 1990 and only 280,000 in 1980.
#2: Credit card debt has overtaken all other types of consumer debt.
Forget the old personal installment loan or even the traditional auto loan. Most consumers today are slaves to the plastic. While installment debt grew at a 4.5% annualized rate over the past five years, revolving credit card debt has grown by more than 10%. The action is in cards, and most banks are really in the credit card business.
3#: Most banks are insignificant players in consumer finance.
Increasingly, the $1.5 trillion consumer credit market has become a game primarily for the large banks and Wall Street. Here’s how the market share breaks out between key players:
- 33% – Wall Street (pools of securities)
- 28% – Banks and thrifts over $10 billion
- 12% – Finance companies
- 12% – Credit unions
- 11% – Banks and thrifts under $10 billion
- 5% – Non-financial entities
Clearly, the 9,700 banks and thrifts under $10 billion play a minimal role with an 11% market share. What’s more, this role continues to decrease. Over the past three years, consumer loans outstanding have actually decreased in both absolute and relative terms for banks under $10 billion. The 100 banks over $10 billion have enjoyed all of the growth.
These Fed statistics do not include home equity loans, but the story there is the same. Today, banks and thrifts hold only 25% of the $600+ billion in home equity loans outstanding, with the smaller banks and thrifts holding only 7% of the market. In addition, there has been 0% growth in home equity loans for banks and thrifts under $10 billion for the past three years.
#4: It’s now about commodities and capital markets.
Overall, the banking industry has seen a fairly dramatic decline of consumer loans on the balance sheet. The Federal Reserve recently reported that consumer loans, as a share of total loans and leases, fell to a new low of about 15%. However, this is primarily because the big banks are securitizing much more of their consumer paper. During the ’90s, the percentage of bank consumer loans that were securitized jumped from under 5% to nearly 40% today!
Banks may lament the loss of market share to tax-advantaged credit unions, but this loss has been small compared to the large bank/Wall Street securities machine. In the past five years, the banking and credit union industries have both grown consumer loans about $50 billion, while securitized consumer assets have grown by a rompin’ stompin’ $300 billion. The trends are very clear. Consumer lending is beginning to resemble the hyper-efficient, thin margin mortgage business. Most banks and thrifts are playing in a consumer portfolio lending game that no longer exists.
STOP THE MADNESS!
The game of corporate strategy is often about turning a disadvantage into an advantage. Very bluntly, I would encourage banks and thrifts with flailing consumer lending businesses to start marketing against the growth in consumer credit.
Maybe stronger parties than the cash-strapped consumer advocacy groups could lead the charge in educating consumers. Primerica (now part of Citigroup) taught its part-time sales force to lead financial planning efforts with debt consolidation loans, not mutual funds or variable life policies.
A bigger push may be needed in banks for amortizing second mortgages used for debt consolidation. From there, banks should follow debt consolidation plans with more investment and insurance sales. It wouldn’t be bad if we saw bankers helping customers cut up some of those credit cards as a symbolic marketing gesture.
Certainly, there will always be a reasonable and profitable base of consumer loans for banks to sell. The upscale market may not be in the same dire situation as the average consumer. Customized products for this market are fine, especially since many smaller banks are primarily targeting the business owner and upscale segments. Yet, for the average retail customer, it’s not time to accept lower grade paper, to lengthen repayment terms so these poor folks can qualify for more debt, or to acquire any “entrepreneurial” finance companies that know how to close deals that are bad for consumers.
It’s time for the banker to say, “Slow down Fred… this stuff’s gonna kill ya!”