International Financial Reporting Standard (IFRS) 9 may not mean too much to those outside of the credit card industry and, admittedly, it’s unlikely to be a hot topic of conversation around too many dinner tables.
However, the introduction of IFRS 9, along with persistent debt initiatives in the UK, could herald an increase in the promotion and take-up of Direct Debit in the credit card market.
In simple terms, the roll-out of IFRS 9 means that issuers will increasingly be looking at ways to prevent credit card accounts moving from what is termed as stage 1, where they must provision for a 12-month expected loss (based on the balance and a proportion of the remaining limit), to stage 2, where this moves to a lifetime losses provision.
A move to stage 2 is triggered if an account goes 30 days overdue, or where the level of risk has significantly increased since the account was opened. Issuers will also need to monitor accounts over a 12-36 month period to determine if cardholders are paying more in fees and interest than the principal balance.
This is likely to particularly impact cardholders who consistently pay late due to forgetting to do so manually, as well as those on minimum payments with a high interest rate, and consumers with a large balance transfer fee and an interest-bearing balance.
All of this will potentially result in issuers looking more closely at how they can ensure payments are as easy, convenient and frictionless as possible for customers. And this is where the flexibility offered by Direct Debit could have a significant influence on the levels of promotion and subsequent take-up rates.
For instance, the ability to offer cardholders the option to choose a date which suits them best – perhaps to coincide with payday – or even make multiple Direct Debit payments per month, can only help make things easier for people who may be facing an unpredictable cash flow.
So, as the size of the ‘gig economy’ continues to grow and more and more of us move away from the standard pattern of employment, it could well be that it’s Direct Debit - a payment method which is familiar, trusted and used for over 4.2 billion payments each year - which helps solve a very new challenge.
Watch this space!
Stacey blogs on credit risk management at www.fico.com/blogs where you can find an in-depth look at IFRS 9.
Last year, Bacs launched a free-to-use marketing toolkit to help organisations promote Direct Debit to their customers. Find out more here.