Balance Transfer Wars: How to Win without Repeating the Past

Kris Carrera
Business Line Executive, Credit
Posted on January 12, 2017


Balance transfers have become the newest way to gain market share and generate instant revenue in an otherwise shifting world of market conditions, evolving consumer trends and regulatory changes to the lending sector. To compete and expand portfolios, lenders need to target and retain the most lucrative customers.

However, while this may be considered a more sustainable, risk-averse way of growing revenue, debt consolidation also helped create the financial crisis of a decade ago. In this rush for balance transfers, it’s imperative that you avoid the pitfalls of the last time around.

It’s All-out War

For most of the last 10 years, financial institutions shunned large-scale debt consolidation programs. Recently, however, an explosion in balance transfer offers has seen credit lines again climb. In fact, many offers this winter surpassed anything seen previously, with many banks offering up to 21 months of interest-free credit, assuming minimum monthly payments are met.

Things certainly are heating up. And you can expect those numbers to grow.

January and February are traditionally the sweet-spot for balance transfer initiatives as consumers’ credit is typically stretched to the limit because of the holidays. With multiple credit cards potentially maxed out, consumers are eager to take up the offer of zero percent interest when they may be paying 12 to 20 percent APR with their current providers. From a consumer’s perspective, it’s almost irresponsible not to consolidate when rates are so favorable.

Consolidate to Accumulate

For financial institutions, debt consolidation is an attractive tool as well. A new customer is immediately brought into the fold, there is instant revenue in the form of a three-to-five percent fee and market share is gained. In addition, since banks are measured and compared according to the number of outstanding cards and the number of assets/loans on the books, an effective balance transfer program can have an immediate effect on the bottom line; It also can quickly change a bank’s underlying numbers and ranking.

However, it’s important to remember that these benefits come at a price. After consolidating a consumer’s debt, there is not a lot of credit available for new purchases. That means there will be precious little in interchange revenue. To compensate, after years of reducing credit lines, many banks are now looking at extending credit as an incentive to gain and retain customers. But balance transfers bring additional liability risk to the bank that needs to be managed carefully even if the necessary credit checks ensured the customer can handle the consolidated debt.

Beware of Consumers

Who can blame a consumer for taking up a debt consolidation offer? Established loyalty programs certainly keep customers using their favorite card, but zero percent interest provides strong incentive to switch providers. Still, what is to stop a consumer from going back to their established credit card – now with a cleared line of credit – after he or she has consolidated the old debt? Remember, credit card kiting is not entirely illegal.

Debt consolidation is of primary interest to the revolver customers, those who do not clear their debt each month, preferring instead to pay off some and carry the remainder forward. But at 40 percent of the market, this is a lucrative demographic that is growing in size as consumers get more confident with carrying debt.

The Need for Balance

By taking on more debt, banks will, of course, diligently conduct a credit check to ensure the debt to income ratios are acceptable on a case by case basis. But those credit checks must be ongoing. Customers may well be servicing their new consolidated debt with at least minimum monthly payments, but it must be confirmed that the same consumer is not building additional debt at other institutions.

Consumers are getting savvy again and see balance transfers as a cash-flow solution, potentially cycling debt around different banks with each improved offer. It is incumbent on all card issuers to continuously check the full credit history to ensure consumers do not overextend themselves.

Debt consolidation is happening hot and heavy, with potentially open-ended lines of credit more akin to the wild west. Credit cards are inherently risky as, unlike conventional loans, there are no assets securing/backing up the loan.  We don’t want banks and consumers to make the same mistakes that were so disastrous a decade ago.

You must develop effective strategies for targeting and retaining the optimal balance transfer candidates – those who deliver returns with minimal risk. Success will enable lenders to promote the right products, help consumers manage their credit effectively, strengthen the relationship and benefit all parties.


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Kris Carrera
Business Line Executive, Credit

With over 25 years of international payments experience, Kris was responsible for the launch of the first successful cobranded card program. A leader in risk-based pricing and target marketing using predictive data analytics, she specializes in merchant services, credit cards and home equity. Kris has received Best Travel Card, Best Cobranded Card and Best Private-Label Program awards.