It's becoming a recurring theme on conference calls across the industry: American Express (NYSE:AXP), Capital One Financial (NYSE:COF), and Discover Financial Services (NYSE:DFS) executives admit that the industry is getting more and more competitive.
And competition, unfortunately, often leads bankers to do very dumb things.
Richard Fairbank, CEO of Capital One, implied as much on a recent conference call: "This is an industry where all of us share a lot of the same customers. So it is a natural part of the cycle that when you have sustained competition typically, we tend to see on a delayed basis that that makes its way into industry credit metrics."
In other words, competition encourages lenders to lower their credit requirements in order to draw customers.
Generally speaking, credit quality is good right now. Charge-offs -- those debts that are so delinquent that they've been written off as uncollectable -- have increased, but not to particularly worrying levels. However, as Fairbank pointed out, charge-offs are a lagging indicator, as loans take time to go bad.
And while Capital One's CEO later said that he hasn't seen loosening credit standards in the industry, data from the Federal Reserve suggests the opposite. According to a recent survey, just 15% of Americans who applied for a credit card said they were declined for a card in June. Although this figure fluctuates, it has been trending downward since late 2013, when 22% of respondents said they were denied a credit card.
Similarly, card companies are more willing to give their customers credit limit increases, which allow customers to carry higher balances.
Recent readings suggest only 16% of requests for credit limit increases are getting rejected, down substantially from readings in 2014, when rejection rates were consistently above 30%.
One worrisome issue is that credit limit increases enable problematic customers to keep borrowing. It's easy to make minimum monthly payments if you can continue to borrow more and more money.
So far, the competition among card companies has brought more attention to the costs of rewards programs, because they hit income statements in the here and now. There have been countless headlines about Costco ditching American Express' store-branded cards in favor of Citi. And the CEOs of Capital One and Discover routinely point to rewards as the focal point of competition.
On the most recent quarterly conference call, Discover CEO David Nelms said that "the low rate environment and the low return environment in banking is part of what I believe is causing greater competition in cards and specifically in rewards."
Card companies from the top of the credit spectrum (American Express and Chase) to the bottom (Discover) are all speaking to the obvious increase in rewards expenses. Charge-offs and loan loss provisions haven't increased as notably or as persistently as increases in rewards costs. However, polls from the Federal Reserve suggest they'll have their day in the spotlight in due time.