Sector-Specific Trends Impacting Credit Card ARM: Telecom

Fifteen years ago, cell phones were the size of your head and owned by only a few people – generally high-powered execs looking to cut a cutting-edge figure while talking loudly behind you on the subway about a deal, merger, or clandestine affair.

Today, Standard & Poor’s estimates the wireless market’s penetration is a little higher – nearly 80 percent in some areas as of July 2006.  Clearly, the vast majority of people in the United States have a mobile phone.

This is bad news, not only for folks who enjoy peace and quiet in places like airport terminals, movie theaters, and restaurants, but also for cell phone providers.  This particular market is reaching a point of market saturation; those who have made it this far without a cell phone are (a) stronger than the rest of us; and (b) not likely to pull the providers out of their slump.

(Don’t be too sad for cell phone providers.  For one thing, the market value for telecommunications is over $200 billion.  For another, while market saturation may continue to be a growth issue, continual updates to cell phone technologies – e.g., cameras, video recorders, mp3 players, in vitro incubators, and cold fusion generators – ensure that they will forever be able to sell a lot to their pre-existing customers.)

Of the approximately 208 million cell phone users in the United States, the fastest growing segment is the youth market: users 18 to 30.  Cell phones are often the only phone these users own, and the primary way they interact with the outside world.  Whether it’s through person-to-person calls, text messaging, music downloads, or internet access, cell phones are de facto mini-computers that function simultaneously as the life blood of this country’s young people.

With no intention of libel or maligning the under-30 crowd, young people tend to amass lots and lots of unsecured debt in the form of credit card debt, followed by student loans and car payments – or, 30 percent of the national debt burden.  Trends in the broader credit industry show that they’re also not so good at paying it back.

What does this mean, both for the cell phone and credit card industry?  Both a (potential financial) blessing and a (potential financial) curse.

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With cell phone usage comes cell phone bills.  And, as with most bills, there is the opportunity for delinquent payments.  However, for those users 18 to 30, cell phones may actually be one of the first bills paid, to the detriment of utility, school, and medical bills.  Why?  Because it’s how they’re connected to their social networks.  For some cell phone users, life without a cell phone is akin to solitary confinement.  Better to pay the bill and be able to text your friends and complain about your student loan or credit card payment than it is to not pay the bill and figure out some new way of communication.

Most cell phone subscribers choose some form of automatic bill-pay, a system that allows for payments to come out of a checking or savings account.  More popular, however, is the use of credit cards when paying cell phone bills.  In fact, according to a Wall Street Journal story from December, nearly 40 percent of U.S. households have at least one recurring monthly payment that is automatically linked to a credit card.  And a lot of those recurring monthly payments cover cell phone bills.

Utilizing credit cards as the primary means of cell-phone-bill paying creates an interesting new relationship among the participants.  The cell phone provider now has a way of wiping a lot of bad debt off of its books, and a company like Bank of America or Chase is now in the position of being an unwitting partner in Cingular’s accounts receivable management.  Using the broken logic of a young population that is sorely lacking in the credit education department, it’s better to accrue interest on a credit card than it is to suffer the late payment fees – or cancellation policies – enforced on cell phone accounts.

The effect on the ARM industry is almost trickle-down in nature: while fewer delinquent accounts will enter the debt purchasing arena from wireless providers, it is assumed by some industry watchers that significantly more and richer credit card portfolios will make their way into the debt buying marketplace as cell phone bills – which can run up into the hundreds of dollars per month for some users – which are making up an ever-increasingly significant portion of card holders’ debt load.

There is also the potential for impact on the front lines of third-party collections.  As mobile providers increase their service offerings to consumers, many are seeing cell phone bills that come in north of $200.  If consumers are using their cell phones for not only basic communication, but also news and entertainment, they would naturally be more inclined to pay that bill first rather than remit payment to a third-party debt collector.  If there is no longer a credit card available to them to pay the bill, then they will turn to checking account to pay, leaving even less money to pay off old debts.