Credit card businesses will benefit from better, smarter use of data
A slowing economy and an anticipated increase in credit card defaults will lead underwriters to make more use of alternative data to better evaluate borrowers this year. In the first half of 2021, consumers were not spending as much due to lockdowns, and they were flush with cash. So, default rates, which usually hover around 4%, plummeted to 1.8%. And happy banks focused on growth for their unsecured lending products.
This year, credit card default rates will likely head back toward a more normalized 2–3%. Along with that normalization, banks will make fewer promotional offers, such as big bonus points, longer introductory periods, and temporary zero-interest periods, to encourage new customers to sign up for their credit card products. Instead, bank executives will focus on lowering the average cost of acquisition by up to 20%, which means getting the right credit card product to the right person at the right time. To do that, they'll need to analyze a full range of metrics – some traditional ones based on their own internal data, such as credit card transactions, and some new ones from alternative data sources, such as a customer's social media commentary or product reviews. And they'll need to make use of advanced digital technologies, such as artificial intelligence.