There are new risks that might evade detection by the current risk management machine learning models used in financial institutions. I wanted to share some interesting observations that could impact risk in credit card portfolios.
Florida is a state dominated by small business services. All small businesses rely to some degree on credit cards for their payments and working capital. I want to highlight recent changes that could increase credit risk and should be explored by risk management departments of financial institutions.
1) Florida is the only state in the US that changed the law in March 2018 for payday lenders to offset the CFPB rule on interest rates. “The state currently allows loans of up to $500 paid off in a lump sum within 31 days, with annual interest rates often exceeding 300%… To get around the CFPB rule, Florida will permit loans of up to $1,000, to be paid back in installments in 60 days or 90 days. The federal regulation doesn’t generally cover loans lasting 45 days or longer” (Hayashi). The high-interest rate for a longer period could accelerate delinquencies with small businesses and consumers in Florida that are accustomed to payday loans but unaware of the additional interest due.
2) To maintain a home, consumers use a network of small businesses that provide services ranging from lawn care to home repair. My experience is that many of the small business owners are now accepting payment in cryptocurrencies that they say increase their margins (similar to cash payments). In January 2018, Citibank, Chase, Bank of America, and Capital One stopped customers from purchasing cryptocurrencies on their credit cards (Andriotis). Risk management should reassess the debt to payment pattern for the segment of cryptocurrency buyers given the 50% decline in value of their cryptocurrency assets. This risk segment is small for most financial institutions, but preemptive line reductions for heavily indebted customers could help them better manage their finances and avoid default.
3) Given that most financial institutions in 2018 have prohibited cryptocurrency purchases with their credit cards, the risk of a fraudulent merchant activity is reduced for those institutions. However, credit risk remains as numerous posts on the internet explain how to buy cryptocurrencies with PayPal or other payment processors that could enable customers to continue to create credit risk for their financial institution (Martindale).
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Hayashi, Yuka. “Florida Gives Payday Lenders a Boost.” The Wall Street Journal, 19 Mar. 2018. Web. 21 Mar. 2018.
Andriotis, AnnaMaria. “Bitcoin Investors Had a Tough Week. Credit Card Companies are about to make it Tougher. ” The Wall Street Journal, 3 Feb. 2018. Web. 21 Mar. 2018. .
Martindale, John. “How to Buy Bitcoin with Paypal.” DigitalTrends.com. 20 Feb. 2018.
Web. 22 Mar. 2018.