As credit rules are rewritten, issuers are tightening the reins on consumer, small business and corporate payment agreements to reduce risk, receivables and especially risky receivables.
For corporate payments market leader American Express, the overall 30-plus day delinquency rate rose to 4.4 percent in 2008, from 2.8 percent in 2007. Its write-off rate increased to 5.5 percent in 2008, from 3.5 percent in 2007. American Express is "incorporating more sophisticated information in ... risk evaluations, focusing on areas of high risk and canceling certain accounts" and "reducing some lines of credit," according to its 2008 annual report. The highest-profile impacts of these efforts are on consumer credit cards, where Amex has increased some interest rates, offered incentives to some cardholders to close accounts and--controversially--reduced lines of credit based on "spending patterns." Amex said that last practice has been discontinued.
"Unlike consumer credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity," the company noted. "It is affected both by general economic conditions and by borrower-specific events." Today's severely reduced volumes fit the former, and borrower-specific events include (but rarely match) what happened to Amex spin-off Lehman Brothers, which was "A-rated and then they disappeared," said an Amex spokeswoman.
[PULL_1]The Amex official and a U.S. Bank executive agreed that evaluating corporate-level creditworthiness has a new urgency, while, at the same time, speed of bill payment is as important as ever. Other card vendors declined to comment.
According to industry consultants, these pressures mean something has to give in card deals, in which corporations often earn a small percentage rebate of the fees that card companies charge to merchants. Normally defined as a fraction of 1 percent of the charge volume, rebate payouts ultimately depend on a number of factors that include losses, credit performance and bill payment rates.
"While things like signing bonuses are still out there, they're not 'buying the business' as much as in the past," noted Management Alternatives president and owner Carol Salcito.
Corporations also may find that existing agreements are not as lucrative as they once were due to reduced travel volumes and the overall credit tightening.
"Along with fewer business trips and less reimbursable travel volume," said consultant John Caldwell of Caldwell Associates, "companies with set-offs for bad debt against their card incentives have to work harder to police all that. The card companies are tightening up on charging for late payment as they do everything they can to improve yield, so it's just a squeeze." He said card program administrators "need to work harder to go over the delinquency list and cut down the number of cards. Everything's been shaken down to the roots."
Still tougher medicine includes newly increased delinquency charges, which some companies don't cover for employees. Amex on April 21 will raise minimum late payment fees to $39, from $29, on certain U.S. Commercial Card accounts, excluding Corporate Purchasing Cards and Corporate Platinum Cards. "A fee of $39 will be assessed at approximately 45 days past due, and each additional late fee assessed-at approximately 60, 90 or 120 days, etc.-will be the greater of $39 or 2.99 percent of the amount that remains unpaid," according to the spokeswoman. "As before, late fees will only be assessed when the amount of past due charges is greater than $35."
Caldwell said he wouldn't be surprised to see "more restrictions on individual" cards and "more emphasis on ghost accounts" that reduce risk for card companies.
"We're seeing companies are tightening their spending policies," said the Amex spokeswoman.
"More and more companies are making payments sooner," said U.S. Bank Corporate Payment Systems senior vice president of program management Jeff Pape. "Some of that might be the issuers' requests; some could be incentives received in managing cash flow. We continue to see customers who are working to pay sooner."
But maximizing card rebates isn't always a corporation's best bet. Salcito said they typically ask their treasury departments to run an analysis on whether it's better to pay quickly and earn the highest possible incentive or to "stretch it out" and earn interest on the money through investments.