Egg on Citi’s face

Citigroup’s withdrawal of 161,000 Egg branded credit cards has enraged much of middle England. The anger isn’t so much over the taking away of credit but rather calling the customers ‘risky’. Many of these customers don’t see themselves as a risk and have taken Egg’s pronouncement personally. Egg’s wording makes sense from their commercial viewpoint. Egg are considering the risk and reward balancing act they face not the absolute risk of default. An example:

1. Ms Perfect pays off her credit card bill in full every month. She believes there is no risk of her defaulting and is aware the creditor is making no money from their business together. Ms Perfect is retired on a comfortable but below average income.

2. Mr Lax doesn’t pay off his bill in full. Indeed, he has a patchy payment history but pays back reasonable sums at a high interest rate and his public sector job provides a steady, high, earned income.

It is Ms Perfect who is the riskier customer.

Mr Lax provides a highly profitable and ongoing income stream. Even if Mr Lax did eventually default on the capital it may be far enough in the future that the risk was worth taking and he has been a profitable client. Ms Perfect has far less chance of defaulting but there is no upside for the credit card company. Breaking even when extending a credit line of £1000s is very little reward for a little too much risk in the current climate [1].

Of course, this is an overly simplistic example, Citi will have used numerous parameters to decide the ‘risk’ of a customer. The decision will be dependent on a strict and highly complex risk/reward calculation. This doesn’t mean Citi will get it right 161,000 times but the large majority of those who feel besmirched by the too ‘risky’ tag will indeed be a bad bet on a risk/reward basis. It isn’t a simple matter of whether the customer will pay off their credit card bill or not.

Perusing financial messageboards this weekend it is no exaggeration to say many Ms Perfects consider the allegation of being ‘risky’ as tantamount to libel. The ‘risk’ label has been taken as a personal affront. For this layman of law it brings up a potentially interesting scenario. If some sharpshooter solicitor opens a class action suit what will Citi do?

Citi could simply admit ‘risk’ to them is the “responsible” lending to Ms Perfect rather than the “irresponsible” lending to Mr Lax. On the flip-side Citi could decide it’s better to offer a settlement without publicly stating they’re happier going after Mr Lax than Ms Perfect which could be a public relations nightmare.

Rock and hard place, its not where I’d want my eggs.

[1] The current climate of an economic slowdown and potential recession, of course. Idle musings could suggest a rather convenient coincidental event at Citi last week. On Wednesday Citi published an investment report pointing out the risk to the balance sheets of two UK banks (RBS and Barclays) in the event of a UK recession. Both banks were downgraded by Citi with the presumption in the report being there’d be a fullscale UK recession. The following day Citi’s most visible UK subsidiary is sending out letters to 7% of customers cutting off credit.

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