Spotlight on Financial Services

Sharp slowdown in new account openings

Last month we reported that response rates on credit card solicitations during 1999 reached a record low. New statistics from Trans Union’s TrenData database indicate that new account openings of all types slowed markedly by the end of 1999 and continued dropping through the first quarter of this year.

During most of the last decade, the volume of new account openings (including mortgage, consumer installment and revolving credit accounts) exhibited a distinct seasonal pattern, peaking in the fourth quarter of each year at a level about 15% higher than the first quarter of each year. However, this typical pattern reversed itself in 1999. The number of new accounts opened in the fourth quarter of 1999 (24.2 per 100 borrowers) was well below the average for the first 6 months of the year. On a year-over-year basis, fourth quarter new account openings were 16.2% lower than in fourth quarter, 1998. Considering that robust consumer spending made the 1999 holiday shopping season one of the strongest in recent years, this result is surprising. Moreover, the downward trend in account openings continued in the first quarter of 2000. The accompanying chart shows that the volume of new account openings declined by 19.3% compared to the activity in the first quarter of 1999.

About 70% of new accounts opened during the fourth quarter of 1999 (16.6 per 100 borrowers) were revolving accounts. The accompanying chart breaks down the source of new accounts by type of institution and compares the volume with fourth quarter, 1998. Leading the overall decline in revolving accounts was a 39% drop in new accounts issued by retailers. New finance company revolving accounts also declined, but the 8.0% dip was far smaller than for retailers. It is possible that rapid growth in Internet shopping in 1999 may also have contributed to the decline in retail account openings over the previous year. Many Internet sellers do not offer proprietary credit. Thus, a shift toward Internet shopping might reduce consumers’ exposure to retail credit solicitations (especially in-store offers) and inhibit growth in new retail account openings.

Bucking the downward trend were new bank revolving accounts, which rose 12.4%. Practically all of these new accounts are bank credit cards. Even though credit card issuers may not have eased credit standards significantly (see recent releases of the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices, available at www.federalreserve.gov )a larger share of the new bank revolving accounts appear to be held by the higher risk segment of the population of bankcard borrowers in the fourth quarter of 1999 than was the case a year earlier. Average credit limits on the new accounts opened in the fourth quarter of 1999 were nearly 16% lower than the limits associated with new accounts opened in the fourth quarter of 1998. If creditors have not tightened standards, then the lower average credit limit suggests a decline in the average credit worthiness of the recipients of new bank cards. To the extent this reflects the accommodation of higher risk borrowers with smaller lines, it suggests that delinquencies may be poised to track upward over the coming year. In next month’s issue of Spotlight we will examine delinquency trends in greater detail.

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