Original Story: USAToday.com
Breaking news such as the massive data breach at Experian or Target now seems common. Leaving aside the victims of actual fraud, I hear constantly from people who've had to swap out every debit and credit card, or whose cards were unilaterally replaced by their bank. This causes all sorts of problems.
Sometimes it makes you long for the days of cash. While cash is not practical for everything, there are very compelling reasons to consider it or other alternatives instead of those debit cards.
Of course, you also have to watch where you get your cash, too. Criminals are good at installing near-invisible skimmers on ATMs. These steal your card information and then a miniature camera over the keypad steals your PIN. It's everything a thief needs to drain your account.
Avoid out of the way ATMs in isolated areas. When you can, use ATMs in a restricted-access foyer. You should also hold your hand over the keypad when you enter your PIN. This blocks a camera from seeing what you're doing.
CREDIT OR DEBIT: What's best for consumers?
Now that you know how to safely get cash, here's where you should use it.
1. GAS STATIONS
ATMs aren't the only places criminals can install card skimmers. Gas stations are a favorite target for thieves. Last year, four men were arrested for allegedly stealing $2.1 million using skimmers at gas stations in the south. The skimmers were installed in the pumps and were even equipped with Bluetooth — which allowed the thieves to come by and extract the collected numbers and PINs wirelessly!
To keep the odds in your favor, use cash. If nothing else, use a credit card at a gas pump. It's not widely appreciated that consumer responsibility for debit-card charges are different than they are for credit cards. Credit-card charges are easier to contest, and you're only liable for up to $50 of fraudulent purchases.
With a debit card, you have to report a fraudulent purchase within a few business days for the $50 liability limit to kick in.
2. RESTAURANTS
Restaurants, too, can be a source of trouble. Some unscrupulous servers bring handheld card skimmers to work to swipe your card info. Even low-tech thieves can just write down the card numbers.
To make matters worse, many restaurants use older computer systems for processing cards. These are easy for hackers to install card-swipe software, as in the Target hack. The price paid can be quite high; Subway got hit in 2011 by Romanian hackers, who got away with $10 million from 150 restaurants.
One of the lesser noted aspects about the coming end to Microsoft's XP operating system is that many restaurants and ATMs still use the XP infrastructure.
3. STORES
Restaurants and gas stations make juicy targets: a steady steam of customers, some not from the area. The same goes for stores.
For small purchases cash is the way to go. Use cash at the grocery store or while buying clothes. For larger purchases, use a credit card instead of a debit card. Again, you have less liability than you do with a debit card.
Bonus tip: Some people use cash at stores to avoid the store tracking what they buy. However, stores can still track your purchase history if you still swipe a loyalty card.
4. ONLINE
OK, you can't use cash online. But please, use a credit card, not a debit card. The fraud protections are better and a hacker can't overdraft your bank account with a credit card. You don't need to be fighting overdraft fees on top of everything else.
You can also check with your bank to see if it offers one-time credit card numbers for online buying. Since each number only works once, it won't do a hacker any good to steal it.
Of course, one drawback to using a credit card is the interest payments if you don't pay on time. This site can show you the real cost of using a credit card.
Finally, I know this is a lot of work, particularly when it seems that everyone is busy and overworked; but remember as well to check your bank statements, and credit reports, regularly for suspicious activity.
Showing posts with label credit cards. Show all posts
Showing posts with label credit cards. Show all posts
Wednesday, April 16, 2014
Friday, December 28, 2012
Consumers Warned on Deferred-Interest Cards
originally appeared in The Wall Street Journal:
The cards that many Americans swiped to bring Christmas cheer this year known as deferred-interest credit cards, could deliver a lump of coal in 2013.
Personal-finance experts are warning consumers that a failure to pay off just a few dollars of their purchases on some credit cards from Apple Inc., Wal-Mart Stores Inc. and other big-name retailers can leave them with major finance charges later on.
The deferred-interest credit cards offered by those stores allow customers to pay for purchases interest-free for a set period. But borrowers who fail to pay off their initial purchases in full by the end of the promotional period must pay interest on the original amount that they charged—even the parts they have already paid off.
The backdated interest is often at rates as high as 25%.
Deferred-interest credit cards are one of the worst abuses by credit-card lenders, according to a staff attorney for the National Consumer Law Center, which in the past has pushed for a ban on deferred-interest cards.
Under the programs, a borrower who bought a $1,000 computer with one of these cards who has even just a few dollars remaining at the end of their deferred-interest period could conceivably wind up having to pay hundreds of dollars in interest charges.
Such cards, which have been around for years, are pitched by retailers including Amazon.com Inc., Office Depot Inc. and Home Depot Inc. The programs give merchants a way to entice consumers to spend, and give consumers the ability to make a big-ticket purchase without having to pay anything up front.
The National Consumer Law Center, which has long called for a ban on deferred-interest cards, plans to urge the U.S. Consumer Financial Protection Bureau, the agency launched in 2011 to monitor credit cards, mortgages and other financial products for abusive practices, to propose rules that would restrict lenders from offering the programs. The group argues that legislation passed in 2009 known as the CARD Act intended to curb deferred-interest programs but regulators failed to do so when issuing the specific rules for carrying out the law's provisions.
A spokeswoman for CFPB declined to comment on whether such cards are on its agenda but said the agency has received consumer complaints about deferred-interest programs. She declined to say how many complaints it has received.
Lenders who offer the programs on behalf of retailers say they can benefit consumers by giving them a window of time to pay off purchases without finance charges.
General Electric Co., whose finance arm is one of the biggest issuers of store credit cards, says it takes steps to ensure transparency on the terms and conditions of its programs, which include cards marketed to customers of Amazon, Wal-Mart and others.
All billing statements for deferred-interest programs include details about the promotion, including the minimum principal payments borrowers are required to make each month, the expiration date and amount of interest that has accrued, a GE spokeswoman said. She added that two months prior to the expiration of the promotional period, consumers are alerted that the clock is ticking.
GE said the vast majority of borrowers pay off their balances before the promotional periods end.
The Amazon card, which offers six, 12 or 24 months of deferred-interest financing depending on the dollar amount spent or items a customer purchases when opening the card. Customers who don't pay off their balances in full incur a 25.99% standard APR on the full amount charged from the purchase date, according to the fine print included on the Web page advertising the card.
CardHub.com, a credit-card comparison website, cited the Amazon card along with several others for lacking transparent policies on how interest is charged in a study released earlier this year.
Amazon didn't respond to requests for comment.
"Deferred interest in my opinion should be outlawed," according to the chief executive officer of Evolution Finance, which owns CardHub.com. He says deferred-interest cards hide the true cost of financing.
CardHub.com's study found that more than 80% of major retailers offer customers financing options, and of those more than 60% offer a deferred-interest plan.
Apple, another retailer on CardHub.com.'s list of worst offenders, offers a deferred-financing card through Barclaycard, the credit-card division of Barclays PLC. The bank currently offers no-interest financing for six, 12 or 18 months depending on the size of a customer's purchase. The standard rate that applies after the promotional period ends is 22.99% on the amount they charged when they first opened the account as well as new purchases made going forward, according to online terms and conditions for the card.
Spokeswomen for Apple and Barclaycard declined to discuss the programs.
A research scientist in Cedar Rapids, Iowa, said he has a deferred-interest credit card through Apple, Best Buy Co. and Lowe's Cos. I've never had any issues, I only get these if I can pay it off, according to the scientist.
He uses his Lowe's card to buy supplies for home-improvement projects and the Best Buy card, which he is currently paying off, to buy a new TV.
Overall, I think it's a great deal for an astute consumer who knows what they're doing and can pay them off, he said. However, he said the contracts aren't well written and can be confusing.
A leading consumer-credit expert agrees deferred-interest plans can benefit consumers who know they have the money to pay off their balances before the promotional period ends. However, she recommends consumers consider opening a general-purpose credit card direct through a bank.
Many credit-card issuers today offer promotional 0% financing for as long as 18 months when first opening an account. The difference is such cards don't retroactively charge interest to past balances a consumer has paid off. Rather, the interest rate is applied only to any balance left at that time and new purchases made going forward.
It's a little more of a safety net just in case you can't pay the entire thing off, according to the consumer-credit expert. It still requires planning and forethought. But if there's a purchase you need to make and it's going to take a year to pay it off that could be a good strategy.
The cards that many Americans swiped to bring Christmas cheer this year known as deferred-interest credit cards, could deliver a lump of coal in 2013.
Personal-finance experts are warning consumers that a failure to pay off just a few dollars of their purchases on some credit cards from Apple Inc., Wal-Mart Stores Inc. and other big-name retailers can leave them with major finance charges later on.
The deferred-interest credit cards offered by those stores allow customers to pay for purchases interest-free for a set period. But borrowers who fail to pay off their initial purchases in full by the end of the promotional period must pay interest on the original amount that they charged—even the parts they have already paid off.
The backdated interest is often at rates as high as 25%.
Deferred-interest credit cards are one of the worst abuses by credit-card lenders, according to a staff attorney for the National Consumer Law Center, which in the past has pushed for a ban on deferred-interest cards.
Under the programs, a borrower who bought a $1,000 computer with one of these cards who has even just a few dollars remaining at the end of their deferred-interest period could conceivably wind up having to pay hundreds of dollars in interest charges.
Such cards, which have been around for years, are pitched by retailers including Amazon.com Inc., Office Depot Inc. and Home Depot Inc. The programs give merchants a way to entice consumers to spend, and give consumers the ability to make a big-ticket purchase without having to pay anything up front.
The National Consumer Law Center, which has long called for a ban on deferred-interest cards, plans to urge the U.S. Consumer Financial Protection Bureau, the agency launched in 2011 to monitor credit cards, mortgages and other financial products for abusive practices, to propose rules that would restrict lenders from offering the programs. The group argues that legislation passed in 2009 known as the CARD Act intended to curb deferred-interest programs but regulators failed to do so when issuing the specific rules for carrying out the law's provisions.
A spokeswoman for CFPB declined to comment on whether such cards are on its agenda but said the agency has received consumer complaints about deferred-interest programs. She declined to say how many complaints it has received.
Lenders who offer the programs on behalf of retailers say they can benefit consumers by giving them a window of time to pay off purchases without finance charges.
General Electric Co., whose finance arm is one of the biggest issuers of store credit cards, says it takes steps to ensure transparency on the terms and conditions of its programs, which include cards marketed to customers of Amazon, Wal-Mart and others.
All billing statements for deferred-interest programs include details about the promotion, including the minimum principal payments borrowers are required to make each month, the expiration date and amount of interest that has accrued, a GE spokeswoman said. She added that two months prior to the expiration of the promotional period, consumers are alerted that the clock is ticking.
GE said the vast majority of borrowers pay off their balances before the promotional periods end.
The Amazon card, which offers six, 12 or 24 months of deferred-interest financing depending on the dollar amount spent or items a customer purchases when opening the card. Customers who don't pay off their balances in full incur a 25.99% standard APR on the full amount charged from the purchase date, according to the fine print included on the Web page advertising the card.
CardHub.com, a credit-card comparison website, cited the Amazon card along with several others for lacking transparent policies on how interest is charged in a study released earlier this year.
Amazon didn't respond to requests for comment.
"Deferred interest in my opinion should be outlawed," according to the chief executive officer of Evolution Finance, which owns CardHub.com. He says deferred-interest cards hide the true cost of financing.
CardHub.com's study found that more than 80% of major retailers offer customers financing options, and of those more than 60% offer a deferred-interest plan.
Apple, another retailer on CardHub.com.'s list of worst offenders, offers a deferred-financing card through Barclaycard, the credit-card division of Barclays PLC. The bank currently offers no-interest financing for six, 12 or 18 months depending on the size of a customer's purchase. The standard rate that applies after the promotional period ends is 22.99% on the amount they charged when they first opened the account as well as new purchases made going forward, according to online terms and conditions for the card.
Spokeswomen for Apple and Barclaycard declined to discuss the programs.
A research scientist in Cedar Rapids, Iowa, said he has a deferred-interest credit card through Apple, Best Buy Co. and Lowe's Cos. I've never had any issues, I only get these if I can pay it off, according to the scientist.
He uses his Lowe's card to buy supplies for home-improvement projects and the Best Buy card, which he is currently paying off, to buy a new TV.
Overall, I think it's a great deal for an astute consumer who knows what they're doing and can pay them off, he said. However, he said the contracts aren't well written and can be confusing.
A leading consumer-credit expert agrees deferred-interest plans can benefit consumers who know they have the money to pay off their balances before the promotional period ends. However, she recommends consumers consider opening a general-purpose credit card direct through a bank.
Many credit-card issuers today offer promotional 0% financing for as long as 18 months when first opening an account. The difference is such cards don't retroactively charge interest to past balances a consumer has paid off. Rather, the interest rate is applied only to any balance left at that time and new purchases made going forward.
It's a little more of a safety net just in case you can't pay the entire thing off, according to the consumer-credit expert. It still requires planning and forethought. But if there's a purchase you need to make and it's going to take a year to pay it off that could be a good strategy.
Tuesday, August 7, 2012
Google Googles for Yield, Finds Auto Bonds
Story first reported from WSJ.com
Feeling lucky, Google Inc. has found a new place to park some of its $40 billion cash hoard: bonds backed by car loans.
The Mountain View, Calif., company has plowed hundreds of millions of dollars in recent months into asset-backed securities, tied largely to automobile loans and consumer credit-card payments. Among Google's recent purchases: triple-A-rated debt from car makers Honda Motor Co. and Hyundai Corp. Google had previously restricted itself to U.S. Treasurys, high-quality corporate bonds and other low-risk securities.
Google's foray into auto lending is the latest sign that ultralow rates on the longtime standby of corporate treasurers, highly liquid Treasury securities, are pushing cash-rich U.S. companies to find new places to put their money. That shift has been a boon for bond issuers, even if buyers are only trying to squeeze a bit more juice out of their portfolios.
"We are not trying to hit a home run here," said Google's treasurer, Brent Callinicos.
The shift has benefited issuers of bonds backed by credit cards and auto loans. Through Aug. 2, $60.68 billion of bonds tied to car loans had been sold in the U.S., according to Thomson Reuters. That is up 50% from a year earlier and the highest figure at this point of the year since 2005.
Market participants say the ABS offerings have grown to meet demand, enabling companies to borrow in larger chunks—in some cases at rates unseen since before the crisis. Late last month, a unit of Nissan Motor Co. priced $1.4 billion of bonds—increased from a planned $1 billion—at an average rate of 0.48%, a record low.
Google, the fourth-most cash-rich company in the S&P 100 after General Electric Co., Goldman Sachs Group Inc. and Microsoft Corp., according to FactSet, isn't alone in piling into these offerings. The search firm joins diversified manufacturer 3M Co. and payroll-services company Automatic Data Processing Inc., which also have purchased asset-backed securities this year, the companies said.
About 80 firms, including asset managers and a handful of corporations, look into buying bonds in the typical auto ABS deal, said Brian Wiele, head of the Americas securitization syndicate at Barclays. That is double the typical figure of a year ago, he said, and deals are being sold in about a day and a half—roughly half of the average time last year.
"We have seen very good participation from corporates," said Amanda Magliaro, head of the asset-backed syndicate at Citigroup, which led the Nissan offering. "Investors have confirmed their own belief that the asset-backed market is safe and very liquid."
The auto portion of an ABS index compiled by Barclays has returned 2.34% this year on deals with an average maturity of just over two years. That compares with 0.30% for comparable Treasurys this year.
Some recent asset-backed securities have been priced to yield as little as 0.5%, but even that is enough of a premium to two-year Treasurys yielding 0.2% for company treasurers as they weigh acquisitions and other longer-term options for deploying cash.
"Auto and credit-card ABS performed well during the crisis," said Scott Krohn, vice president and treasurer in the financing arm of 3M, based in St. Paul, Minn.
So far, asset-backed securities represent less than 1% of Google's cash.
The company says it buys short-term, high-quality debt and participates in deals that are usually overcollateralized. That means for every $100 of loans in the pool there may be only $85 of bonds, for example—lowering the risk that purchasers of the debt will have their payments squeezed by defaults.
An ADP spokesman said the company's ABS holdings account for a number in the low-single-digit percentage of its investment portfolio.
John Bella, managing director in ABS at Fitch Ratings, said net losses on auto asset-backed securities have fallen steadily since the crisis four years ago, and the deals are now backed by stronger collateral, or loans made to so-called prime borrowers.
Their high credit scores and the strength of the loans' performance during the most recent downturn may have helped investors gain more confidence in the debt as an alternative haven.
Only about 1% of the loans originated in 2011 and packaged into auto asset-backed securities are expected by Fitch to default, compared with 2.6% of the loans in auto deals originated in 2007, Mr. Bella said.
Still, there are risks to the bonds in an economic slowdown, should consumers fall behind on their loan repayments.
Feeling lucky, Google Inc. has found a new place to park some of its $40 billion cash hoard: bonds backed by car loans.
The Mountain View, Calif., company has plowed hundreds of millions of dollars in recent months into asset-backed securities, tied largely to automobile loans and consumer credit-card payments. Among Google's recent purchases: triple-A-rated debt from car makers Honda Motor Co. and Hyundai Corp. Google had previously restricted itself to U.S. Treasurys, high-quality corporate bonds and other low-risk securities.
Google's foray into auto lending is the latest sign that ultralow rates on the longtime standby of corporate treasurers, highly liquid Treasury securities, are pushing cash-rich U.S. companies to find new places to put their money. That shift has been a boon for bond issuers, even if buyers are only trying to squeeze a bit more juice out of their portfolios.
"We are not trying to hit a home run here," said Google's treasurer, Brent Callinicos.
The shift has benefited issuers of bonds backed by credit cards and auto loans. Through Aug. 2, $60.68 billion of bonds tied to car loans had been sold in the U.S., according to Thomson Reuters. That is up 50% from a year earlier and the highest figure at this point of the year since 2005.
Market participants say the ABS offerings have grown to meet demand, enabling companies to borrow in larger chunks—in some cases at rates unseen since before the crisis. Late last month, a unit of Nissan Motor Co. priced $1.4 billion of bonds—increased from a planned $1 billion—at an average rate of 0.48%, a record low.
Google, the fourth-most cash-rich company in the S&P 100 after General Electric Co., Goldman Sachs Group Inc. and Microsoft Corp., according to FactSet, isn't alone in piling into these offerings. The search firm joins diversified manufacturer 3M Co. and payroll-services company Automatic Data Processing Inc., which also have purchased asset-backed securities this year, the companies said.
About 80 firms, including asset managers and a handful of corporations, look into buying bonds in the typical auto ABS deal, said Brian Wiele, head of the Americas securitization syndicate at Barclays. That is double the typical figure of a year ago, he said, and deals are being sold in about a day and a half—roughly half of the average time last year.
"We have seen very good participation from corporates," said Amanda Magliaro, head of the asset-backed syndicate at Citigroup, which led the Nissan offering. "Investors have confirmed their own belief that the asset-backed market is safe and very liquid."
The auto portion of an ABS index compiled by Barclays has returned 2.34% this year on deals with an average maturity of just over two years. That compares with 0.30% for comparable Treasurys this year.
Some recent asset-backed securities have been priced to yield as little as 0.5%, but even that is enough of a premium to two-year Treasurys yielding 0.2% for company treasurers as they weigh acquisitions and other longer-term options for deploying cash.
"Auto and credit-card ABS performed well during the crisis," said Scott Krohn, vice president and treasurer in the financing arm of 3M, based in St. Paul, Minn.
So far, asset-backed securities represent less than 1% of Google's cash.
The company says it buys short-term, high-quality debt and participates in deals that are usually overcollateralized. That means for every $100 of loans in the pool there may be only $85 of bonds, for example—lowering the risk that purchasers of the debt will have their payments squeezed by defaults.
An ADP spokesman said the company's ABS holdings account for a number in the low-single-digit percentage of its investment portfolio.
John Bella, managing director in ABS at Fitch Ratings, said net losses on auto asset-backed securities have fallen steadily since the crisis four years ago, and the deals are now backed by stronger collateral, or loans made to so-called prime borrowers.
Their high credit scores and the strength of the loans' performance during the most recent downturn may have helped investors gain more confidence in the debt as an alternative haven.
Only about 1% of the loans originated in 2011 and packaged into auto asset-backed securities are expected by Fitch to default, compared with 2.6% of the loans in auto deals originated in 2007, Mr. Bella said.
Still, there are risks to the bonds in an economic slowdown, should consumers fall behind on their loan repayments.
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Monday, August 8, 2011
BORROWING BY CONSUMERS SKYROCKETS
Story first appeared in the Associated Press.
Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.
The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That's the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.
The category that measures credit card use increased by $5.2 billion, which is the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.
Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.
Borrowing is usually a sign of confidence in the economy. Consumers tend to take on more debt when they feel wealthier. But an increase in credit card debt could also signal that people are falling on harder times.
Americans have been struggling this year with high unemployment, scant raises and steep gas prices. For the first six months of the year, the economy grew at an annual rate of only 0.8 percent. That's the weakest stretch since the recession officially ended.
While many consumers leaned on their credit cards in June, a separate report this week showed they cut spending that month for the first time in 20 months.
Hiring has picked since then. Employers added 117,000 jobs in July, and the unemployment rate ticked down to 9.1 percent, the Labor Department said Friday. The figure was the best in three months. And the job totals for May and June were revised up.
Still, twice as many jobs are needed to lower the unemployment rate. The July figures are barely enough to keep up with the population growth.
Households began borrowing less and saving more when unemployment spiked during the Great Recession. Many have resisted pulling out their credit cards in the two years since the downturn ended.
Economists do not expect consumers will load up on debt the way they did during the housing boom in the middle of the last decade. During that period, Americans felt wealthier and more willing to take on increased debt because of the soaring value of their homes.
The Federal Reserve's borrowing report includes auto loans, student loans and credit cards. But it excludes mortgages and loans tied to real estate.
Tuesday, October 5, 2010
Visa, MasterCard Changes will benefit Merchants, and maybe Consumers
LA Times
The credit card issuers, in an accord with the Justice Department, will let shopkeepers disclose processing fees to customers and offer discounts to those using cards that carry lower fees.
Consumers may be in for a major break on credit card purchases under an new agreement reached Monday between the U.S. Department of Justice and the nation's two biggest card companies.
At issue are the merchant fees that businesses pay credit card companies such as Visa and MasterCard to process the charges. Until now, shopkeepers had been forbidden to tell consumers about the fees — or offer discounts to customers using cards with lower merchant fees.
But on Monday, Visa and MasterCard agreed to let merchants charge less to customers who use different kinds of credit cards that charge smaller fees to shopkeepers.
"We want to put more money in consumers' pockets, and by eliminating credit card companies' anticompetitive rules, we will accomplish exactly that," Atty. Gen. Eric Holder said at an afternoon news conference. "The companies put merchants and their customers in a no-win situation."
The agreement came as part of a lawsuit filed Monday against the major credit card companies by the federal government and several state attorneys general for anti-competitive practices. MasterCard and Visa settled, but the third card company, American Express, refused to sign on to the agreement.
Retailers have complained for years that credit card companies gouge them by charging as much as 5% of the value of each purchase every time a card is used.
Now, businesses will be allowed to charge less if customers use cards that have lower fees — a move that the Justice Department's lawyers say will lead to more competition between card companies and millions of dollars in savings.
Many merchants, long frustrated by the fees, were pleased. Mitchell Goldstone, who owns Irvine photography shop and online business Scanmyphoto.com, welcomed the settlement, saying it would free up merchants to nudge consumers toward using less expensive cards.
"I was very excited today and encouraged by the Department of Justice moving forward," said Goldstone, who is also a plaintiff in a private lawsuit against the credit card companies. After employees and rent, Goldstone said, the fees are his biggest expense.
Merchants pay about $35 billion a year in fees to credit card companies, according to the Justice Department. It's money that restaurant owners, retailers and others say they can ill afford in the difficult economy.
Consumers know well that credit card companies charge interest, but many are not aware of the merchant fees.
The cost of a swipe varies widely, depending on whether the customer is using a card that offers rewards. It might cost a merchant 2% of the purchase price if a customer uses a no-frills card. But if the purchase is made with a card that offers airline miles, for example, the merchant might pay as much as 5%.
MasterCard and Visa praised the settlement in news releases. Both companies said that they already allow some of the measures called for in the agreement.
Josh Floum, general counsel for Visa Inc., said that allowing merchants to offer discounts based on the cost of fees is "a reasonable accommodation."
The company already allows businesses to offer discounts to customers who pay cash or use debit cards in the type of transaction in which they use their PIN numbers to take cash right out of their accounts.
The agreement is expected to take effect as soon as it gains court approval, perhaps in a few months. The lawsuit and settlement were filed in federal court in New York.
But American Express said the agreement was unfair and vowed to fight it in court.
"Our attitude is that this is bad law, bad economic policy," American Express spokesman Michael O'Neill said. "We don't think there is anything in it for consumers."
Far from offering discounts to consumers, O'Neill said, merchants are just as likely to keep the savings on cheaper credit card fees for themselves.
"You never hear the retail associations say, 'If we save money on this, we're going to pass it on to consumers,' " he said. "They're not willing to make that commitment."
Moreover, he said, American Express is considerably smaller than Visa and MasterCard, and should not be included as an example of a company large enough to impede competition.
Because American Express did not settle, the lawsuit will continue against the credit card company. The Justice Department says American Express accounts for 24% of all credit card spending in the U.S. MasterCard accounts for 27% and Visa, 43%.
Scott Hauge, president of advocacy group Small Business California, said credit card fees are a huge issue for small-business owners, many of whom must accept credit cards in order to stay in business. He urged American Express to drop its resistance to the agreement.
"I've always thought it was outrageous that the credit cards could dictate to the merchants with those higher costs," Hauge said. "American Express should be ashamed of themselves."
Consumers may be in for a major break on credit card purchases under an new agreement reached Monday between the U.S. Department of Justice and the nation's two biggest card companies.
At issue are the merchant fees that businesses pay credit card companies such as Visa and MasterCard to process the charges. Until now, shopkeepers had been forbidden to tell consumers about the fees — or offer discounts to customers using cards with lower merchant fees.
But on Monday, Visa and MasterCard agreed to let merchants charge less to customers who use different kinds of credit cards that charge smaller fees to shopkeepers.
"We want to put more money in consumers' pockets, and by eliminating credit card companies' anticompetitive rules, we will accomplish exactly that," Atty. Gen. Eric Holder said at an afternoon news conference. "The companies put merchants and their customers in a no-win situation."
The agreement came as part of a lawsuit filed Monday against the major credit card companies by the federal government and several state attorneys general for anti-competitive practices. MasterCard and Visa settled, but the third card company, American Express, refused to sign on to the agreement.
Retailers have complained for years that credit card companies gouge them by charging as much as 5% of the value of each purchase every time a card is used.
Now, businesses will be allowed to charge less if customers use cards that have lower fees — a move that the Justice Department's lawyers say will lead to more competition between card companies and millions of dollars in savings.
Many merchants, long frustrated by the fees, were pleased. Mitchell Goldstone, who owns Irvine photography shop and online business Scanmyphoto.com, welcomed the settlement, saying it would free up merchants to nudge consumers toward using less expensive cards.
"I was very excited today and encouraged by the Department of Justice moving forward," said Goldstone, who is also a plaintiff in a private lawsuit against the credit card companies. After employees and rent, Goldstone said, the fees are his biggest expense.
Merchants pay about $35 billion a year in fees to credit card companies, according to the Justice Department. It's money that restaurant owners, retailers and others say they can ill afford in the difficult economy.
Consumers know well that credit card companies charge interest, but many are not aware of the merchant fees.
The cost of a swipe varies widely, depending on whether the customer is using a card that offers rewards. It might cost a merchant 2% of the purchase price if a customer uses a no-frills card. But if the purchase is made with a card that offers airline miles, for example, the merchant might pay as much as 5%.
MasterCard and Visa praised the settlement in news releases. Both companies said that they already allow some of the measures called for in the agreement.
Josh Floum, general counsel for Visa Inc., said that allowing merchants to offer discounts based on the cost of fees is "a reasonable accommodation."
The company already allows businesses to offer discounts to customers who pay cash or use debit cards in the type of transaction in which they use their PIN numbers to take cash right out of their accounts.
The agreement is expected to take effect as soon as it gains court approval, perhaps in a few months. The lawsuit and settlement were filed in federal court in New York.
But American Express said the agreement was unfair and vowed to fight it in court.
"Our attitude is that this is bad law, bad economic policy," American Express spokesman Michael O'Neill said. "We don't think there is anything in it for consumers."
Far from offering discounts to consumers, O'Neill said, merchants are just as likely to keep the savings on cheaper credit card fees for themselves.
"You never hear the retail associations say, 'If we save money on this, we're going to pass it on to consumers,' " he said. "They're not willing to make that commitment."
Moreover, he said, American Express is considerably smaller than Visa and MasterCard, and should not be included as an example of a company large enough to impede competition.
Because American Express did not settle, the lawsuit will continue against the credit card company. The Justice Department says American Express accounts for 24% of all credit card spending in the U.S. MasterCard accounts for 27% and Visa, 43%.
Scott Hauge, president of advocacy group Small Business California, said credit card fees are a huge issue for small-business owners, many of whom must accept credit cards in order to stay in business. He urged American Express to drop its resistance to the agreement.
"I've always thought it was outrageous that the credit cards could dictate to the merchants with those higher costs," Hauge said. "American Express should be ashamed of themselves."
Friday, September 10, 2010
Credit Card Use Continues to Fall amid Economic Uncertainty
USA Today
Americans have sharply reduced their use of credit cards, and some analysts believe the trend will continue even after the economy has fully recovered.
The Federal Reserve Board reported this week that credit card borrowing fell at a 6.3% annual rate in July. The last time borrowing with credit cards increased was in August 2008.
Separately, a survey by Javelin Strategy & Research found that 56% of consumers used credit cards in 2009, down from 87% in 2007. Credit card usage could fall as low as 45% this year, the report said.
Reasons for the decline:
•Economic uncertainty. "People are being extraordinarily cautious because of concerns about a double-dip recession, and jobs not being returned," says Javelin President James Van Dyke. Consumers are opting for debit cards, because they're "one of those mechanisms that allows you to spend what you have," says Martha Doran, an accounting professor at San Diego State University.
•Less available credit. To reduce their risks, lenders have slashed consumers' credit limits, in some cases by as much as 90%, says Robert Livingstone, president of IdealCost.com, a consulting firm based in West Palm Beach, Fla. Under a provision in the credit card reform bill, most college students can't get a credit card without a co-signer.
•Incentives to use debit over credit. Some cash-strapped businesses, unwilling to pay transaction fees associated with credit cards, are giving consumers incentives to pay with a debit card or cash. Livingstone says he received a 7% discount on his wife's engagement ring by paying with a check rather than a credit card.
•A generational shift. Young consumers who are accustomed to having up-to-date information at their fingertips don't want to wait 30 days to see how a credit card purchase will affect their bank account, Van Dyke says. "Younger people have an inherent preference for real-time payment methods like debit," he says. They are also more inclined to be aware of credit risk management practices, having come of age during this economic downturn.
In 2009, payment volume for debit cards exceeded credit cards for the first time, a trend that's expected to continue in 2010, Javelin says.
Many banks are responding to the trend by adding rewards programs and other features to their debit cards, says Ken Lin, chief executive of Credit Karma, a website that provides free credit scores. Banks "realize the new cash cow is going to be on the debit side of the business," he says.
The American Bankers Association says it's too soon to determine whether the trend will continue after the economy has recovered. "Consumers are clearly reacting to an uncertain economy right now, so it is unclear what they will do in the future when it comes to choosing between debit and credit card use," says Kenneth Clayton, ABA senior vice president and general counsel.
The Federal Reserve Board reported this week that credit card borrowing fell at a 6.3% annual rate in July. The last time borrowing with credit cards increased was in August 2008.
Separately, a survey by Javelin Strategy & Research found that 56% of consumers used credit cards in 2009, down from 87% in 2007. Credit card usage could fall as low as 45% this year, the report said.
Reasons for the decline:
•Economic uncertainty. "People are being extraordinarily cautious because of concerns about a double-dip recession, and jobs not being returned," says Javelin President James Van Dyke. Consumers are opting for debit cards, because they're "one of those mechanisms that allows you to spend what you have," says Martha Doran, an accounting professor at San Diego State University.
•Less available credit. To reduce their risks, lenders have slashed consumers' credit limits, in some cases by as much as 90%, says Robert Livingstone, president of IdealCost.com, a consulting firm based in West Palm Beach, Fla. Under a provision in the credit card reform bill, most college students can't get a credit card without a co-signer.
•Incentives to use debit over credit. Some cash-strapped businesses, unwilling to pay transaction fees associated with credit cards, are giving consumers incentives to pay with a debit card or cash. Livingstone says he received a 7% discount on his wife's engagement ring by paying with a check rather than a credit card.
•A generational shift. Young consumers who are accustomed to having up-to-date information at their fingertips don't want to wait 30 days to see how a credit card purchase will affect their bank account, Van Dyke says. "Younger people have an inherent preference for real-time payment methods like debit," he says. They are also more inclined to be aware of credit risk management practices, having come of age during this economic downturn.
In 2009, payment volume for debit cards exceeded credit cards for the first time, a trend that's expected to continue in 2010, Javelin says.
Many banks are responding to the trend by adding rewards programs and other features to their debit cards, says Ken Lin, chief executive of Credit Karma, a website that provides free credit scores. Banks "realize the new cash cow is going to be on the debit side of the business," he says.
The American Bankers Association says it's too soon to determine whether the trend will continue after the economy has recovered. "Consumers are clearly reacting to an uncertain economy right now, so it is unclear what they will do in the future when it comes to choosing between debit and credit card use," says Kenneth Clayton, ABA senior vice president and general counsel.
Wednesday, August 25, 2010
Credit Card Debt Drops to Lowest Level in 8 Years
Associated Press
The amount consumers owed on their credit cards in this year's second quarter dropped to the lowest level in more than eight years as cardholders continued to pay off balances in the uncertain economy.
The average combined debt for bank-issued credit cards - like those with a MasterCard or Visa logo - fell to $4,951 in the three months ended June 30, down more than 13 percent from $5,719 in the same period a year ago, according to TransUnion.
The credit reporting agency said it was the first three-month period during which card debt fell below $5,000 since the first quarter of 2002.
Credit card debt remained the highest in Alaska, but slid 7 percent there to $7,148. A total of 22 states recorded debt higher than the national average.
Residents of Alabama paid off the most debt, dropping their average balance by 27 percent to $4,753.
More borrowers also made payments on time. The rate of cardholders past due by 90 days or more fell to 0.92 percent in the second quarter, from 1.17 percent last year.
That's the first time the delinquency rate has been below 1 percent since the second quarter of 2007, before the recession, said Ezra Becker, director of consulting and strategy in TransUnion's financial services unit. The rate fluctuates during the year, he said, but the improvement is more evidence that consumers are working to make sure their credit cards remain in good standing.
That concern reflects several economic factors, from the fear of unemployment to the fact that the collapsed housing market means it's harder to cash in on home equity when money gets tight. "You can't buy groceries with your house anymore," Becker said.
Reflecting the weak economies in the states hardest hit by the housing crisis, the delinquency rate was highest in Nevada, at 1.5 percent of cardholders, followed by Florida, 1.24 percent, Arizona, 1.11 percent and California, 1.08 percent. In all, 16 states fared worse than the national average for delinquencies.
The lowest delinquency rates remained in North Dakota, at 0.54 percent, and South Dakota, at 0.55 percent.
In a twist, Becker said the foreclosure crisis could be helping to improve the timeliness of credit card payments and lower balances. When people don't make mortgage payments, he suggested, they have a short-term cash boost.
"That can provide extra money to pay down credit cards," he said.
Besides paying down debt, consumers are getting fewer new cards. Nationwide, the number of new accounts opened dropped almost 6.5 percent from last year.
TransUnion predicts that the national delinquency rate will remain below 1 percent for the rest of the year. However, on the high end, the Nevada rate is forecast to edge up to 1.6 percent.
The average combined debt for bank-issued credit cards - like those with a MasterCard or Visa logo - fell to $4,951 in the three months ended June 30, down more than 13 percent from $5,719 in the same period a year ago, according to TransUnion.
The credit reporting agency said it was the first three-month period during which card debt fell below $5,000 since the first quarter of 2002.
Credit card debt remained the highest in Alaska, but slid 7 percent there to $7,148. A total of 22 states recorded debt higher than the national average.
Residents of Alabama paid off the most debt, dropping their average balance by 27 percent to $4,753.
More borrowers also made payments on time. The rate of cardholders past due by 90 days or more fell to 0.92 percent in the second quarter, from 1.17 percent last year.
That's the first time the delinquency rate has been below 1 percent since the second quarter of 2007, before the recession, said Ezra Becker, director of consulting and strategy in TransUnion's financial services unit. The rate fluctuates during the year, he said, but the improvement is more evidence that consumers are working to make sure their credit cards remain in good standing.
That concern reflects several economic factors, from the fear of unemployment to the fact that the collapsed housing market means it's harder to cash in on home equity when money gets tight. "You can't buy groceries with your house anymore," Becker said.
Reflecting the weak economies in the states hardest hit by the housing crisis, the delinquency rate was highest in Nevada, at 1.5 percent of cardholders, followed by Florida, 1.24 percent, Arizona, 1.11 percent and California, 1.08 percent. In all, 16 states fared worse than the national average for delinquencies.
The lowest delinquency rates remained in North Dakota, at 0.54 percent, and South Dakota, at 0.55 percent.
In a twist, Becker said the foreclosure crisis could be helping to improve the timeliness of credit card payments and lower balances. When people don't make mortgage payments, he suggested, they have a short-term cash boost.
"That can provide extra money to pay down credit cards," he said.
Besides paying down debt, consumers are getting fewer new cards. Nationwide, the number of new accounts opened dropped almost 6.5 percent from last year.
TransUnion predicts that the national delinquency rate will remain below 1 percent for the rest of the year. However, on the high end, the Nevada rate is forecast to edge up to 1.6 percent.
Tuesday, August 24, 2010
New Credit Card Rules can Help, But don't get Complacent
USA Today
In the past, making a late credit card payment was like forgetting your mother's birthday. Repairing the damage could take months. Sometimes, years.
Now, though, the repercussions of a tardy credit card payment may not be as long-lasting or severe. Federal rules that took effect Aug. 22 limit the amount of late fees banks can charge. The rules also make it more difficult for banks to permanently raise your interest rate if you make a late payment.
The rules, adopted by the Federal Reserve Board in June, implement provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act that was signed into law last year. What's new:
•Ceiling on late fees. Most late-payment fees are now capped at $25. Lenders are also barred from charging a fee that exceeds the amount of the violation. For example, if you're late making a $20 payment, the penalty can't exceed $20.
Previously, banks charged a median penalty fee of $39 for late payments or transactions that exceeded the card's limit, according to the Pew Health Group's Safe Credit Cards Project. The median penalty fee for credit unions was $25.
The law gives issuers the right to charge a higher penalty fee if they can justify the need for a higher amount. However, most issuers will probably play it safe and stick with the $25 limit, says Nick Bourke, manager of the Safe Credit Cards Project.
•Cooling off period for penalty interest rates. Banks can still hike your interest rate if you make a late payment, but they must wait at least 45 days before raising your rate, says Curtis Arnold, founder of CardRatings.com.
This gives customers time to resolve any billing issues that could have caused the missed payment, he says. Even if you were at fault, the 45-day window gives you time to pay off the balance or transfer it to a lower-rate card before the new rate kicks in.
•Time limits on penalty rates. Once a lender imposes a penalty rate, it's required to review the rate after six months. If you haven't missed any payments during that period, the bank will have to roll back the rate, unless it can give the Federal Reserve a good reason for keeping it.
•No penalties for inactivity. Do you keep an extra credit card in the back of your wallet for emergencies? Now, it won't cost you anything to do that. Lenders are prohibited from charging you a fee if you don't use your credit card to make new purchases. Your issuer could, however, close your account.
•No piling on. Card issuers are prohibited from charging you multiple fees based on a single late payment or other single transaction.
Now, the bad news
Don't let these changes lull you into thinking it's OK to get sloppy about your bills. The ceiling on penalty fees is limited to one misstep. If you make more than one late payment in a six-month period, your issuer can charge you up to $35.
Even worse is what could happen to your interest rate. Since February, card issuers have been prohibited from raising rates on your existing balance unless your account is 60 days past due. However, once you're 60 days late on a payment, your interest rate could skyrocket.
While the law says penalty fees must be "reasonable and proportional," it places no limit on penalty interest rates, Bourke says. "If you're experiencing some financial difficulty and become 60 days past due on your credit card account, the credit card issuer still has the right to impose any size of (interest rate) penalty on you it wants," he says.
And escaping that high rate won't be easy. Issuers must lower your rate to the pre-penalty level if you make on-time payments for the first six months the penalty rate is in effect. But a big increase in your interest rate could make it harder for you make minimum payments, Bourke says. And if you make a late payment during the six-month period, he says, "The penalty rate can last forever."
At least 94% of bank cards and 46% of credit union cards include the right to impose an interest rate penalty in their card holder agreements, according to Pew's analysis. Among those that disclosed their rates, the median rate in March was 29.99%, up from 28.99% in July 2009.
To avoid costly oversights, take advantage of free e-mail reminders provided by many credit card issuers, says Bill Hardekopf, chief executive officer of LowCards.com.
"My advice is, do everything you can to make your monthly payment on time."
Now, though, the repercussions of a tardy credit card payment may not be as long-lasting or severe. Federal rules that took effect Aug. 22 limit the amount of late fees banks can charge. The rules also make it more difficult for banks to permanently raise your interest rate if you make a late payment.
The rules, adopted by the Federal Reserve Board in June, implement provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act that was signed into law last year. What's new:
•Ceiling on late fees. Most late-payment fees are now capped at $25. Lenders are also barred from charging a fee that exceeds the amount of the violation. For example, if you're late making a $20 payment, the penalty can't exceed $20.
Previously, banks charged a median penalty fee of $39 for late payments or transactions that exceeded the card's limit, according to the Pew Health Group's Safe Credit Cards Project. The median penalty fee for credit unions was $25.
The law gives issuers the right to charge a higher penalty fee if they can justify the need for a higher amount. However, most issuers will probably play it safe and stick with the $25 limit, says Nick Bourke, manager of the Safe Credit Cards Project.
•Cooling off period for penalty interest rates. Banks can still hike your interest rate if you make a late payment, but they must wait at least 45 days before raising your rate, says Curtis Arnold, founder of CardRatings.com.
This gives customers time to resolve any billing issues that could have caused the missed payment, he says. Even if you were at fault, the 45-day window gives you time to pay off the balance or transfer it to a lower-rate card before the new rate kicks in.
•Time limits on penalty rates. Once a lender imposes a penalty rate, it's required to review the rate after six months. If you haven't missed any payments during that period, the bank will have to roll back the rate, unless it can give the Federal Reserve a good reason for keeping it.
•No penalties for inactivity. Do you keep an extra credit card in the back of your wallet for emergencies? Now, it won't cost you anything to do that. Lenders are prohibited from charging you a fee if you don't use your credit card to make new purchases. Your issuer could, however, close your account.
•No piling on. Card issuers are prohibited from charging you multiple fees based on a single late payment or other single transaction.
Now, the bad news
Don't let these changes lull you into thinking it's OK to get sloppy about your bills. The ceiling on penalty fees is limited to one misstep. If you make more than one late payment in a six-month period, your issuer can charge you up to $35.
Even worse is what could happen to your interest rate. Since February, card issuers have been prohibited from raising rates on your existing balance unless your account is 60 days past due. However, once you're 60 days late on a payment, your interest rate could skyrocket.
While the law says penalty fees must be "reasonable and proportional," it places no limit on penalty interest rates, Bourke says. "If you're experiencing some financial difficulty and become 60 days past due on your credit card account, the credit card issuer still has the right to impose any size of (interest rate) penalty on you it wants," he says.
And escaping that high rate won't be easy. Issuers must lower your rate to the pre-penalty level if you make on-time payments for the first six months the penalty rate is in effect. But a big increase in your interest rate could make it harder for you make minimum payments, Bourke says. And if you make a late payment during the six-month period, he says, "The penalty rate can last forever."
At least 94% of bank cards and 46% of credit union cards include the right to impose an interest rate penalty in their card holder agreements, according to Pew's analysis. Among those that disclosed their rates, the median rate in March was 29.99%, up from 28.99% in July 2009.
To avoid costly oversights, take advantage of free e-mail reminders provided by many credit card issuers, says Bill Hardekopf, chief executive officer of LowCards.com.
"My advice is, do everything you can to make your monthly payment on time."
Wednesday, August 4, 2010
AT&T, Verizon to Target Visa, MasterCard With Smartphones
Bloomberg
AT&T Inc. and Verizon Wireless, the biggest U.S. mobile carriers, are planning a venture to displace credit and debit cards with smartphones, posing a new threat to Visa Inc. and MasterCard Inc., three people with direct knowledge of the plan said.
The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone, the people said. The carriers have been searching for a chief executive officer.
The trial would be the carriers’ biggest effort to spur mobile payments in the U.S. and supplant more than 1 billion plastic cards in American wallets. Smartphones have encroached on tasks ranging from Web browsing to street navigation and now may help the phone companies compete with San Francisco-based Visa and MasterCard, the world’s biggest payments networks.
“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, California-based Crone Consulting LLC. The firm advises card networks, issuers and phone companies. The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.
Market Dominance
Visa and Purchase, New York-based MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general- purpose cards last year, according to the Nilson Report, an industry newsletter. That dominance has helped fuel profit growth for both companies. Visa’s annual operating income has grown sixfold since fiscal 2005 to $3.54 billion last year. MasterCard’s has surged more than fivefold to $2.27 billion.
Visa fell 1.5 percent to $72.23 at 4:15 p.m. in New York Stock Exchange composite trading and MasterCard declined 3.6 percent to $202.52, the worst performance in the Standard & Poor’s 500 Index.
The service, similar to those already available in Japan, Turkey and the U.K., would use contactless technology to complete purchases in stores. They’d be processed through Discover’s payments network, currently the fourth-biggest behind Visa, MasterCard and American Express Co. Barclays would be the bank helping to manage the accounts, said the people, who requested anonymity because of confidentiality agreements.
‘Logical Next Step’
AT&T and Verizon Wireless are equal partners in the venture and T-Mobile has a smaller stake, one person said.
Representatives for the carriers, London-based Barclays and Riverwoods, Illinois-based Discover declined to comment on the venture.
“Mobile payments are the logical next step for consumers,” said Mark Siegel, a spokesman for Dallas-based AT&T. Siegel, Marquett Smith of Basking Ridge, New Jersey-based Verizon Wireless, and Peter Dobrow of the Bellevue, Washington- based T-Mobile unit, all said their companies “have nothing to announce.”
At Discover, spokeswoman Leslie Sutton said the company “is always evaluating technology solutions that make things faster, safer and more convenient.” Barclays spokesman Kevin Sullivan said, “facilitating mobile payments is a big part of Barclaycard’s strategy globally.”
The phone companies probably wouldn’t replace the biggest U.S. credit- and debit-card issuers, including JPMorgan Chase & Co. and Wells Fargo & Co., said Gary Townsend, CEO of Hill- Townsend Capital LLC, a Chevy Chase, Maryland-based hedge fund that specializes in financial firms.
Swipe Fees
“What is a cell phone, except a mechanism for consumers to address their lives in whatever way they choose?” Townsend said today in a telephone interview. “There’s certainly no reason if an AT&T account can effectively be carried on a phone that a JPMorgan or a Wells Fargo card can’t be there, too. In fact, the antitrust issues would demand that that be allowed.”
Retailers may be eager to help another network after years of fighting over transaction fees set by Visa and MasterCard. The merchants persuaded Congress last month to approve caps on interchange, or “swipe” fees, for debit transactions and filed a 2005 federal antitrust lawsuit that is still pending. The U.S. Department of Justice is weighing whether to bring a civil lawsuit against Visa for barring merchants from surcharging customers who use credit cards, according to the company.
‘Material, Adverse Effect’
“If we change our rules in these areas, this could cause a material, adverse effect on our business,” Visa said today in a regulatory filing.
Interchange fees on credit and debit cards exceed $40 billion a year and average about 1 percent to 2 percent of every transaction.
The people with knowledge of the carriers’ venture didn’t say how much merchants may be charged per transaction or when the trial will start.
“We have long argued that real competition is missing from today’s payments market,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association, which represents merchants such as Wal-Mart Stores Inc., Home Depot Inc. and Target Corp. “The emergence of a secure and reliable competing network that serves the demand from consumers for mobility payment options and reduces retailers’ costs would be welcomed news.”
‘Tipping Point’
Visa and MasterCard are benefiting as people abandon cash and paper checks for cards and electronic payments, which account for more than half of U.S. consumer purchases, compared with 36 percent in 2003, according to the Nilson Report.
Mobile technology for banking and payments is reaching “a tipping point,” with younger consumers leading the way, Mercatus LLC, a Boston-based consulting firm, said in a June 7 study. More than half of U.S. consumers, and almost 80 percent of those between the ages of 18 and 34, will use mobile financial services within five years, according to Mercatus.
“Rapid and broad-based consumer adoption of mobile financial services is imminent,” as people rely on their phones to manage every aspect of their lives, said Mercatus Managing Partner Bob Hedges, former head of retail banking and payments at Fleet Bank. “Consumers want it to happen.”
MasterCard and Visa have been investing in their own mobile projects. Visa and Richardson, Texas-based DeviceFidelity, have developed technology that can transform phones consumers carry today, including Apple Inc.’s iPhone, into a payment device that can store multiple card accounts, said Bill Gajda, head of mobile for Visa.
Zong, Bling, Boku
“Visa is in discussions with a number of mobile operators around the world,” Gajda said in a July 28 interview. “We continue to believe that the best opportunity to create a secure, scalable, mobile-payment service is by working together, converging mobile and financial networks, and extending the value of electronic payments to the mobile channel.”
In June, New York-based Citigroup Inc. introduced MasterCard PayPass stickers that can be affixed to the back of mobile phones to make contactless payments at about 230,000 U.S. merchants, MasterCard spokeswoman Joanne Trout said in an e- mail.
Startups based near Silicon Valley, California, such as Zong, Bling Nation and Boku Inc., offer alternative payment solutions. Zong users enter their mobile phone numbers to make purchases on the Internet. Bling Nation works with community banks and local businesses, allowing customers to “tap-and- pay” with their devices. Boku lets online gamers buy “digital goods and social experiences,” the company says on its website.
‘Card Is Dumb’
Any new payment system may face barriers that prevent the technology from taking hold in the U.S., the Federal Reserve Bank of Boston said in a May policy paper.
Consumers won’t demand mobile payments “until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so,” the report said.
Merchants would have to spend an estimated $200 per reader, and updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 per handset, according to the Boston Fed. That may be worthwhile if accepting mobile payments allows retailers to send rewards and information about promotions to their customers’ phones at checkout.
Contactless, or near-field communication, technology “is no less secure” than today’s plastic cards, according to the Fed. Consumers may also be able to sync their phones to a computer, allowing them to make purchases even if there’s no mobile signal or the battery dies.
“These are important issues if people are to be convinced to rely on this technology as an alternative to carrying a wallet,” the policy paper said.
The wireless carriers have an advantage over Visa and MasterCard in the race to control the U.S. payments market because the phone companies have access to their customers’ mobile numbers and bank account information, said Crone, the industry consultant.
“A mobile device is online, real-time interactivity that changes the customer relationship,” he said. “A card is dumb.”
The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone, the people said. The carriers have been searching for a chief executive officer.
The trial would be the carriers’ biggest effort to spur mobile payments in the U.S. and supplant more than 1 billion plastic cards in American wallets. Smartphones have encroached on tasks ranging from Web browsing to street navigation and now may help the phone companies compete with San Francisco-based Visa and MasterCard, the world’s biggest payments networks.
“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, California-based Crone Consulting LLC. The firm advises card networks, issuers and phone companies. The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.
Market Dominance
Visa and Purchase, New York-based MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general- purpose cards last year, according to the Nilson Report, an industry newsletter. That dominance has helped fuel profit growth for both companies. Visa’s annual operating income has grown sixfold since fiscal 2005 to $3.54 billion last year. MasterCard’s has surged more than fivefold to $2.27 billion.
Visa fell 1.5 percent to $72.23 at 4:15 p.m. in New York Stock Exchange composite trading and MasterCard declined 3.6 percent to $202.52, the worst performance in the Standard & Poor’s 500 Index.
The service, similar to those already available in Japan, Turkey and the U.K., would use contactless technology to complete purchases in stores. They’d be processed through Discover’s payments network, currently the fourth-biggest behind Visa, MasterCard and American Express Co. Barclays would be the bank helping to manage the accounts, said the people, who requested anonymity because of confidentiality agreements.
‘Logical Next Step’
AT&T and Verizon Wireless are equal partners in the venture and T-Mobile has a smaller stake, one person said.
Representatives for the carriers, London-based Barclays and Riverwoods, Illinois-based Discover declined to comment on the venture.
“Mobile payments are the logical next step for consumers,” said Mark Siegel, a spokesman for Dallas-based AT&T. Siegel, Marquett Smith of Basking Ridge, New Jersey-based Verizon Wireless, and Peter Dobrow of the Bellevue, Washington- based T-Mobile unit, all said their companies “have nothing to announce.”
At Discover, spokeswoman Leslie Sutton said the company “is always evaluating technology solutions that make things faster, safer and more convenient.” Barclays spokesman Kevin Sullivan said, “facilitating mobile payments is a big part of Barclaycard’s strategy globally.”
The phone companies probably wouldn’t replace the biggest U.S. credit- and debit-card issuers, including JPMorgan Chase & Co. and Wells Fargo & Co., said Gary Townsend, CEO of Hill- Townsend Capital LLC, a Chevy Chase, Maryland-based hedge fund that specializes in financial firms.
Swipe Fees
“What is a cell phone, except a mechanism for consumers to address their lives in whatever way they choose?” Townsend said today in a telephone interview. “There’s certainly no reason if an AT&T account can effectively be carried on a phone that a JPMorgan or a Wells Fargo card can’t be there, too. In fact, the antitrust issues would demand that that be allowed.”
Retailers may be eager to help another network after years of fighting over transaction fees set by Visa and MasterCard. The merchants persuaded Congress last month to approve caps on interchange, or “swipe” fees, for debit transactions and filed a 2005 federal antitrust lawsuit that is still pending. The U.S. Department of Justice is weighing whether to bring a civil lawsuit against Visa for barring merchants from surcharging customers who use credit cards, according to the company.
‘Material, Adverse Effect’
“If we change our rules in these areas, this could cause a material, adverse effect on our business,” Visa said today in a regulatory filing.
Interchange fees on credit and debit cards exceed $40 billion a year and average about 1 percent to 2 percent of every transaction.
The people with knowledge of the carriers’ venture didn’t say how much merchants may be charged per transaction or when the trial will start.
“We have long argued that real competition is missing from today’s payments market,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association, which represents merchants such as Wal-Mart Stores Inc., Home Depot Inc. and Target Corp. “The emergence of a secure and reliable competing network that serves the demand from consumers for mobility payment options and reduces retailers’ costs would be welcomed news.”
‘Tipping Point’
Visa and MasterCard are benefiting as people abandon cash and paper checks for cards and electronic payments, which account for more than half of U.S. consumer purchases, compared with 36 percent in 2003, according to the Nilson Report.
Mobile technology for banking and payments is reaching “a tipping point,” with younger consumers leading the way, Mercatus LLC, a Boston-based consulting firm, said in a June 7 study. More than half of U.S. consumers, and almost 80 percent of those between the ages of 18 and 34, will use mobile financial services within five years, according to Mercatus.
“Rapid and broad-based consumer adoption of mobile financial services is imminent,” as people rely on their phones to manage every aspect of their lives, said Mercatus Managing Partner Bob Hedges, former head of retail banking and payments at Fleet Bank. “Consumers want it to happen.”
MasterCard and Visa have been investing in their own mobile projects. Visa and Richardson, Texas-based DeviceFidelity, have developed technology that can transform phones consumers carry today, including Apple Inc.’s iPhone, into a payment device that can store multiple card accounts, said Bill Gajda, head of mobile for Visa.
Zong, Bling, Boku
“Visa is in discussions with a number of mobile operators around the world,” Gajda said in a July 28 interview. “We continue to believe that the best opportunity to create a secure, scalable, mobile-payment service is by working together, converging mobile and financial networks, and extending the value of electronic payments to the mobile channel.”
In June, New York-based Citigroup Inc. introduced MasterCard PayPass stickers that can be affixed to the back of mobile phones to make contactless payments at about 230,000 U.S. merchants, MasterCard spokeswoman Joanne Trout said in an e- mail.
Startups based near Silicon Valley, California, such as Zong, Bling Nation and Boku Inc., offer alternative payment solutions. Zong users enter their mobile phone numbers to make purchases on the Internet. Bling Nation works with community banks and local businesses, allowing customers to “tap-and- pay” with their devices. Boku lets online gamers buy “digital goods and social experiences,” the company says on its website.
‘Card Is Dumb’
Any new payment system may face barriers that prevent the technology from taking hold in the U.S., the Federal Reserve Bank of Boston said in a May policy paper.
Consumers won’t demand mobile payments “until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so,” the report said.
Merchants would have to spend an estimated $200 per reader, and updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 per handset, according to the Boston Fed. That may be worthwhile if accepting mobile payments allows retailers to send rewards and information about promotions to their customers’ phones at checkout.
Contactless, or near-field communication, technology “is no less secure” than today’s plastic cards, according to the Fed. Consumers may also be able to sync their phones to a computer, allowing them to make purchases even if there’s no mobile signal or the battery dies.
“These are important issues if people are to be convinced to rely on this technology as an alternative to carrying a wallet,” the policy paper said.
The wireless carriers have an advantage over Visa and MasterCard in the race to control the U.S. payments market because the phone companies have access to their customers’ mobile numbers and bank account information, said Crone, the industry consultant.
“A mobile device is online, real-time interactivity that changes the customer relationship,” he said. “A card is dumb.”
Friday, May 7, 2010
Banks Hemorrhage Cash With Cards Wanting To Be American Express
Bloomberg
William “Wild Bill” Janklow’s law office in Sioux Falls, South Dakota, is crowded with mementos from his 16 years as a Republican governor. On a low, wooden bookcase, near bottles of hot sauce custom labeled for his annual Buffalo Roundup, he keeps a 4-foot length of red ribbon festooned with Citibank credit cards.
Janklow is the politician who, in 1981, brought Citibank to South Dakota. When he cut that ribbon to welcome the New York- based bank, he blew the lid off the U.S. credit card business, Bloomberg Markets reports in its June Issue.
The law inviting Citibank to South Dakota threw out limits on how much interest the state’s banks could charge borrowers -- rules known as usury caps.
“Citi wanted the invitation, and they knew what we were doing with rates,” Janklow says. In a secret meeting at the governor’s residence with Walter Wriston, chief executive officer of Citicorp, the bank’s parent, Janklow agreed to drive through the legislation in a swap for 400 jobs.
“That was the deal,” Janklow says. “You have no idea, in a state of 750,000, how many 400 jobs is, all in one place.”
The business Janklow and Wriston set in motion with a handshake that evening transformed U.S. consumer lending. Once interest rates were allowed to rise as high as banks could push them, credit cards became a ticket to enormous profit. In the decade ended on Dec. 31, 2007, credit card issuers together earned more than $50 billion, mostly on the difference between their own cost of money and consumer rates of as much as 30 percent. So-called subprime lenders pitched rates as high as 80 percent. At JPMorgan Chase & Co., cards accounted for 20 percent of both revenue and profits in 2007.
Profit Driver
“The credit card business has been a critical driver for these companies; it was the single most profitable product in the lending arena next to mortgages,” says Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
Then the harshest economic decline since the 1930s crushed the job market, and a record number of card holders stopped paying their bills. The three biggest card-issuing banks lost at least $7.3 billion on cards in 2009. Bank of America Corp., after earning $4.3 billion on cards in 2007 -- a third of its total profit -- swung to a $5.5 billion loss in 2009. JPMorgan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter.
“We have a business that is hemorrhaging money,” says Paul Galant, CEO of Citigroup Inc.’s card unit, where Citi-branded cards lost $75 million last year. The bank won’t disclose how much it lost on cards it issued under the names of retail stores.
At the same time, the card issuers’ bottom line is being hurt by a new federal law forcing them to be more transparent about fees and interest charges. U.S. credit card issuers wrote off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008, according to R.K. Hammer Investment Bankers, a Thousand Oaks, California-based adviser to card issuers.
U.S. credit card delinquencies and write-offs tend to track the national jobless rate. When unemployment jumped to 10.1 percent in October, card industry loan write-offs hit 10.4 percent, according to estimates from Moody’s Investors Service.
American Express Co., Capital One Financial Corp. and Discover Financial Services, which only in recent years became banks, fared better than Bank of America, Chase and Citigroup. They made money in 2009 after more-cautious lending during the boom years, which limited the rise in defaults. The sea of red ink began to recede in the first quarter for Charlotte, North Carolina-based Bank of America. It reported $952 million in profit from cards in the quarter after releasing reserves set aside in 2009 to cover future defaults.
Turning around their card units may be more important than ever to the banks in the wake of the U.S. Securities and Exchange Commission’s lawsuit accusing Goldman Sachs Group Inc. of fraud, says Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. The case is focusing Washington’s lens on regulating the derivatives market, which could weigh on the big banks’ trading operations, he says.
“I look at cards as able to do well when other parts of the business aren’t,” says Holland, who owns shares of JPMorgan. Still, he thinks the days of immense profits in cards may be over. “The future may not be as good as the past,” Holland says.
As the economy revives, defaults will ease. Washington’s assault on the industry may not. In February, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act wiped out many of the banks’ most lucrative billing practices, including their ability to raise rates on existing debt at any time.
Washington Rules
Now, the banks have to give cardholders 45 days’ warning on any rate rise and can’t apply a new rate on existing debt. JPMorgan Chairman and CEO Jamie Dimon said during an earnings conference call in April that the changes will cost his bank up to $750 million in 2010. Banks overall may lose $50 billion in revenue during the next five years, including $11 billion in 2011, because of the legislation, says Robert Hammer, CEO of R.K. Hammer Investment Bankers.
Congress isn’t finished. A proposal for a U.S. consumer finance protection agency, which would police how banks deliver and service financial products, has passed in the House and was being discussed in the Senate as of mid-April.
Credit card customers, meanwhile, are still furious after years of rising rates, snowballing fees and less time in which to pay their bills. Citigroup’s Galant, who took over in April 2009, gets hundreds of e-mails a month.
‘Angry at Us’
“They are angry at us; they are angry at the system; they are angry at the government,” he says. “All they want to do is get back to a peaceful existence.”
The lenders are busy reinventing themselves and the risk models they used to justify passing out plastic to almost anyone who would take it. They had come to rely on computer-generated data to assess borrowers.
“We have shifted to more judgmental lending,” says Susan Faulkner, who took over Bank of America’s card operation in early March.
That means they’re putting human eyes on applications and judging borrowers on, for instance, the type of mortgage they hold. “Instead of starting with the product, we are starting with the customer,” Faulkner says.
The borrowers that card issuers want are richer and more- stable payers than the hordes they marketed to during the boom years. The least-creditworthy customers are being dumped.
Shrinking Credit Lines
The big six issuers have trimmed total credit available to their customers by about 25 percent partly by shrinking credit lines and not renewing expired cards, says Moshe Orenbuch, a bank analyst at Credit Suisse Group AG in New York.
The number of cards in circulation has declined to 576 million from 708 million in 2007, according to the Nilson Report, a Carpinteria, California-based industry newsletter. Customers bear some responsibility for the mess, Faulkner says.
“The business has to be right-sized,” she says. “There was too much credit extended; customers overextended themselves in the use of that credit.”
To hang on to their richest and most reliable payers -- and increase their fee revenue -- the banks are inventing new premium cards and adding to rewards programs. Those willing to pay $85 a year for a Chase Sapphire card, for instance, are guaranteed a live person will answer if they call. They also receive a yearly “dividend” of 7 percent of the reward points they have accumulated.
Airline Offer
In November, Chase also offered a co-branded card with British Airways Plc that gave 100,000 miles to any customer who signed up and spent $2,000 in the first three months of membership. That’s more than enough points for a round-trip plane ticket from the U.S. to Europe. Chase has since scaled back the reward to 30,000 points.
They’re all chasing American Express, which has long catered to a wealthier group. The firm made $2.1 billion in 2009, helped by expense cuts and a default rate that was among the lowest in the big six. The company’s stock was the top performer in the Dow Jones Industrial Average in 2009, returning 118 percent.
Total spending per American Express card averaged $8,665 in 2009, compared with an average of $3,073 for cards issued by banks that partner with San Francisco-based Visa Inc. and Purchase, New York-based MasterCard Inc., according to the Nilson Report.
“Everyone is trying to be American Express,” Orenbuch says. Down the line, he says, the competition may mean better pricing for the most-creditworthy customers.
Razzle Dazzle
The razzle-dazzle isn’t working yet. U.S. cardholders, still stung by recession, have spent less on plastic. Revolving debt fell by $9.4 billion in February, according to the U.S. Federal Reserve, compared with the same month a year earlier. Overall, consumer credit fell in February for the 12th time in 13 months.
“The banks are feeling the squeeze,” says Elizabeth Warren, who chairs the Congressional Oversight Panel of the government’s Troubled Asset Relief Program and has written four books about debt and the American middle class. Warren, who turns 61 in June, was first to map out the idea for the consumer agency, which President Barack Obama supports.
“Everyone has more credit cards than they want,” Warren says, sitting in the cafeteria of the Russell Senate Office Building on Capitol Hill before heading to a meeting at the White House. “There is no more growth.”
Shifting demographics, abetted by the financial crisis, will limit demand for consumer credit for years to come, says David Robertson, publisher of the Nilson Report. The business gathered steam as the post-World War II baby boom generation hit their peak spending years, he says. The next generation is smaller and, coming off the market crash, more cautious.
“There was a fantastic opportunity for the industry to grow with the baby boomers,” Robertson says. “Now you simply don’t have as many people entering their prime years.”
Gordon Smith, who joined JPMorgan’s Chase Bank as CEO of card services in 2007, has a different view. As the U.S. population grows, so will the card business, he says. Long-term behavioral changes, such as Internet shopping and the decline of checks and cash, are spurring the credit- and debit-card business.
“My guess is that the piece of plastic will be in place for a very long time,” Smith says.
JPMorgan Chase, the biggest U.S. card issuer with 145 million accounts and $163 billion in outstanding loans, more than doubled its direct mail offers in the last three months of 2009 from the previous quarter, according to Mintel Comperemedia, a Chicago-based firm that tracks such offers.
“We intend to go after all the best customers of all of our competitors,” Smith says.
The challenge is to sort out the good risks from the bad.
“There is a segment of people who will have a lot less credit available,” Smith says.
Chase has revved up models that compare customers’ total debt level with their income. The bank will likely end up offering credit to about 15 percent fewer customers, Smith says.
To Warren, who is also a Harvard Law School professor, pulling credit from the riskiest borrowers may be necessary. Many low-income cardholders, she says, were drawn in by “tricks and traps,” such as time-limited low rates.
“Millions of American families can’t pay off their credit card bills right now,” says Warren, who estimates that they’re spending $100 billion a year on fees and interest-rate payments. “Are their economic lives better off because they are spending the hundred billion? I don’t think so.”
Transparent Marketing
Warren says most people, regardless of income, should still have some access to consumer credit. She is pushing for lower rates and fees and simpler, more transparent marketing of terms.
“If the business model is to offer credit to every man, woman, child and dog in America in unlimited amounts, it just doesn’t work,” she says. “If it’s to offer a cheaper credit product to people who become more likely to pay, then that is sustainable.”
Bank of America’s Faulkner, who oversees $677 billion in deposits as well as a $150 billion card portfolio, says she has paid attention to surveys showing that customers want more clarity. In September, the bank slapped the decades-old brand name BankAmericard on a basic card, which has one rate (prime plus 14 percent) and one flat fee for late payments ($39). On its Web site, the bank cites its single-page disclosure form as a “key feature.”
“This was answering an unmet need,” Faulkner says.
20 Million Cards
Given the size of her franchise, Faulkner has a long climb ahead before she returns to a time when credit cards were Bank of America’s most reliable profit center. In 2006, CEO Ken Lewis paid $35 billion for MBNA Corp. and its 20 million card customers.
Until the first quarter, Bank of America’s card business had posted six straight quarterly losses, with many of its delinquent borrowers in parts of the country such as California, Florida and Nevada that were hardest hit by the collapse in housing prices.
At Citigroup, Galant is rethinking how revolving, unsecured lending relates to its customers’ other banking products. Among Citigroup’s ideas: the Forward card, which allows customers to earn a 0.25 percentage-point drop in their annual percentage rate, or APR, for three months of paying on time.
“Everybody now is saying, ‘We are going to pick the clients that we think are really safe bets,’” Galant says. “But what about the other 90 percent of people?”
Sioux Falls
Citibank passed out $80 billion in new credit to borrowers in 2009, including $21 billion in the fourth quarter, spokesman Samuel Wang says. The company is 27 percent owned by the U.S. government.
In Sioux Falls, Citigroup has grown to more than 3,000 employees in 28 departments from those 400 employees promised to Janklow in the 1980s. They occupy a 76-acre (31-hectare) campus near the airport, in three broad, low buildings, which include a day-care center and kindergarten. About 1,200 people work in the 24-hour customer service unit, where most sit in grayfabric cubicles wearing headsets and taking calls from people who are having trouble with their credit cards.
Citi has enhanced efforts that let borrowers delay payments or reduce their interest rates, Wang says. The bank offers incentives and a consolidation program to help reduce card balances. About 490,000 people signed up for such help in the fourth quarter of 2009, compared with about 357,000 a year earlier, Wang says.
‘Hell of a Problem’
Three decades ago, Wriston had urgent business to conduct when he flew to South Dakota. Wriston, who ran Citicorp from 1970 to 1984, was struggling in the aftermath of the high inflation and interest rates of the time. In February 1980, the fed funds rate was 13.35 percent; New York law, meantime, had a statutory cap on consumer lending of 10.5 percent. Citi was losing money on every credit card loan it handed out -- even before factoring in accounting expenses and credit losses.
“Citibank had a hell of a problem,” Janklow says, reminiscing during a three-hour dinner on a March evening at Foleys Steakhouse in Sioux Falls.
Wriston had learned that South Dakota’s bankers were already pushing to jettison the state’s usury caps and that the legislature was in session and might be able to move fast, he says. When the law that some still call the “Citibank bill” passed, “I became a celebrity in credit card circles in America,” Janklow says, with a laugh.
A year after South Dakota lifted its rate caps, Delaware also relaxed its usury rules. JPMorgan and Bank of America’s card businesses are both based in the Middle Atlantic state. Federal law allows banks to lend according to the rules of the state in which they are based.
Once South Dakota and Delaware knocked the lid off interest charges, the U.S. credit card business exploded. A big player in the 1990s was Capital One, which began as the credit card arm of Richmond, Virginia-based Signet Bank.
Capital One developed computer programs designed to assess customers’ shifting risk profiles. The statistical modeling allowed for a much broader range of rate offerings in which stable customers would get lower rates and riskier borrowers could be charged more.
With data suggesting that handing out more credit was a safe bet, card issuers bumped up limits, passed out second and third cards to existing customers and marketed to a broader group.
‘Smoking Gun’
As the years passed, banks were lulled into thinking they could manage any economic downturn, Nilson Report’s Robertson says. They didn’t bargain for a sudden, severe economic plunge.
“The industry believed that they had enough experience to manage unsecured credit to higher risk consumers,” Robertson says. “But no one anticipated the depth of the recession and the impact it would have on jobs. The unemployment rate is the smoking gun.”
Still, bank adviser Hammer says, the card business isn’t going anywhere.
“The customer got lost in the days of easy money,” he says. “Now they just have to be much smarter about how they do all of this.”
Janklow, the man who brought those jobs to Sioux Falls, was re-elected governor of South Dakota in 1982 with 72 percent of the vote. He served again from 1995 to 2003 and was elected to the U.S. House of Representatives. Then, his career was marred by tragedy.
Fatal Accident
In August 2003, while driving a Cadillac near his home, he struck and killed a motorcyclist. He was found to have been speeding and to have gone through a stop sign; he was sentenced to 100 days in jail. He left public life and is now practicing law.
Janklow is sympathetic to the woes of the industry that helped make his career, he says. Yet he understands the public anger at the high rates and fees. He still uses an AT&T-branded credit card he got in the 1980s because he was guaranteed no annual fee for life.
“There is an old saying in capitalism: ‘What you abuse, you lose,’” Janklow says.
The question now is whether the executives running the credit card industry have gotten the message.
The law inviting Citibank to South Dakota threw out limits on how much interest the state’s banks could charge borrowers -- rules known as usury caps.
“Citi wanted the invitation, and they knew what we were doing with rates,” Janklow says. In a secret meeting at the governor’s residence with Walter Wriston, chief executive officer of Citicorp, the bank’s parent, Janklow agreed to drive through the legislation in a swap for 400 jobs.
“That was the deal,” Janklow says. “You have no idea, in a state of 750,000, how many 400 jobs is, all in one place.”
The business Janklow and Wriston set in motion with a handshake that evening transformed U.S. consumer lending. Once interest rates were allowed to rise as high as banks could push them, credit cards became a ticket to enormous profit. In the decade ended on Dec. 31, 2007, credit card issuers together earned more than $50 billion, mostly on the difference between their own cost of money and consumer rates of as much as 30 percent. So-called subprime lenders pitched rates as high as 80 percent. At JPMorgan Chase & Co., cards accounted for 20 percent of both revenue and profits in 2007.
Profit Driver
“The credit card business has been a critical driver for these companies; it was the single most profitable product in the lending arena next to mortgages,” says Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
Then the harshest economic decline since the 1930s crushed the job market, and a record number of card holders stopped paying their bills. The three biggest card-issuing banks lost at least $7.3 billion on cards in 2009. Bank of America Corp., after earning $4.3 billion on cards in 2007 -- a third of its total profit -- swung to a $5.5 billion loss in 2009. JPMorgan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter.
“We have a business that is hemorrhaging money,” says Paul Galant, CEO of Citigroup Inc.’s card unit, where Citi-branded cards lost $75 million last year. The bank won’t disclose how much it lost on cards it issued under the names of retail stores.
$89 Billion
At the same time, the card issuers’ bottom line is being hurt by a new federal law forcing them to be more transparent about fees and interest charges. U.S. credit card issuers wrote off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008, according to R.K. Hammer Investment Bankers, a Thousand Oaks, California-based adviser to card issuers.
U.S. credit card delinquencies and write-offs tend to track the national jobless rate. When unemployment jumped to 10.1 percent in October, card industry loan write-offs hit 10.4 percent, according to estimates from Moody’s Investors Service.
American Express Co., Capital One Financial Corp. and Discover Financial Services, which only in recent years became banks, fared better than Bank of America, Chase and Citigroup. They made money in 2009 after more-cautious lending during the boom years, which limited the rise in defaults. The sea of red ink began to recede in the first quarter for Charlotte, North Carolina-based Bank of America. It reported $952 million in profit from cards in the quarter after releasing reserves set aside in 2009 to cover future defaults.
Goldman Suit
Turning around their card units may be more important than ever to the banks in the wake of the U.S. Securities and Exchange Commission’s lawsuit accusing Goldman Sachs Group Inc. of fraud, says Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. The case is focusing Washington’s lens on regulating the derivatives market, which could weigh on the big banks’ trading operations, he says.
“I look at cards as able to do well when other parts of the business aren’t,” says Holland, who owns shares of JPMorgan. Still, he thinks the days of immense profits in cards may be over. “The future may not be as good as the past,” Holland says.
As the economy revives, defaults will ease. Washington’s assault on the industry may not. In February, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act wiped out many of the banks’ most lucrative billing practices, including their ability to raise rates on existing debt at any time.
Washington Rules
Now, the banks have to give cardholders 45 days’ warning on any rate rise and can’t apply a new rate on existing debt. JPMorgan Chairman and CEO Jamie Dimon said during an earnings conference call in April that the changes will cost his bank up to $750 million in 2010. Banks overall may lose $50 billion in revenue during the next five years, including $11 billion in 2011, because of the legislation, says Robert Hammer, CEO of R.K. Hammer Investment Bankers.
Congress isn’t finished. A proposal for a U.S. consumer finance protection agency, which would police how banks deliver and service financial products, has passed in the House and was being discussed in the Senate as of mid-April.
Credit card customers, meanwhile, are still furious after years of rising rates, snowballing fees and less time in which to pay their bills. Citigroup’s Galant, who took over in April 2009, gets hundreds of e-mails a month.
‘Angry at Us’
“They are angry at us; they are angry at the system; they are angry at the government,” he says. “All they want to do is get back to a peaceful existence.”
The lenders are busy reinventing themselves and the risk models they used to justify passing out plastic to almost anyone who would take it. They had come to rely on computer-generated data to assess borrowers.
“We have shifted to more judgmental lending,” says Susan Faulkner, who took over Bank of America’s card operation in early March.
That means they’re putting human eyes on applications and judging borrowers on, for instance, the type of mortgage they hold. “Instead of starting with the product, we are starting with the customer,” Faulkner says.
The borrowers that card issuers want are richer and more- stable payers than the hordes they marketed to during the boom years. The least-creditworthy customers are being dumped.
Shrinking Credit Lines
The big six issuers have trimmed total credit available to their customers by about 25 percent partly by shrinking credit lines and not renewing expired cards, says Moshe Orenbuch, a bank analyst at Credit Suisse Group AG in New York.
The number of cards in circulation has declined to 576 million from 708 million in 2007, according to the Nilson Report, a Carpinteria, California-based industry newsletter. Customers bear some responsibility for the mess, Faulkner says.
“The business has to be right-sized,” she says. “There was too much credit extended; customers overextended themselves in the use of that credit.”
To hang on to their richest and most reliable payers -- and increase their fee revenue -- the banks are inventing new premium cards and adding to rewards programs. Those willing to pay $85 a year for a Chase Sapphire card, for instance, are guaranteed a live person will answer if they call. They also receive a yearly “dividend” of 7 percent of the reward points they have accumulated.
Airline Offer
In November, Chase also offered a co-branded card with British Airways Plc that gave 100,000 miles to any customer who signed up and spent $2,000 in the first three months of membership. That’s more than enough points for a round-trip plane ticket from the U.S. to Europe. Chase has since scaled back the reward to 30,000 points.
They’re all chasing American Express, which has long catered to a wealthier group. The firm made $2.1 billion in 2009, helped by expense cuts and a default rate that was among the lowest in the big six. The company’s stock was the top performer in the Dow Jones Industrial Average in 2009, returning 118 percent.
Total spending per American Express card averaged $8,665 in 2009, compared with an average of $3,073 for cards issued by banks that partner with San Francisco-based Visa Inc. and Purchase, New York-based MasterCard Inc., according to the Nilson Report.
“Everyone is trying to be American Express,” Orenbuch says. Down the line, he says, the competition may mean better pricing for the most-creditworthy customers.
Razzle Dazzle
The razzle-dazzle isn’t working yet. U.S. cardholders, still stung by recession, have spent less on plastic. Revolving debt fell by $9.4 billion in February, according to the U.S. Federal Reserve, compared with the same month a year earlier. Overall, consumer credit fell in February for the 12th time in 13 months.
“The banks are feeling the squeeze,” says Elizabeth Warren, who chairs the Congressional Oversight Panel of the government’s Troubled Asset Relief Program and has written four books about debt and the American middle class. Warren, who turns 61 in June, was first to map out the idea for the consumer agency, which President Barack Obama supports.
“Everyone has more credit cards than they want,” Warren says, sitting in the cafeteria of the Russell Senate Office Building on Capitol Hill before heading to a meeting at the White House. “There is no more growth.”
Baby Boomers
Shifting demographics, abetted by the financial crisis, will limit demand for consumer credit for years to come, says David Robertson, publisher of the Nilson Report. The business gathered steam as the post-World War II baby boom generation hit their peak spending years, he says. The next generation is smaller and, coming off the market crash, more cautious.
“There was a fantastic opportunity for the industry to grow with the baby boomers,” Robertson says. “Now you simply don’t have as many people entering their prime years.”
Gordon Smith, who joined JPMorgan’s Chase Bank as CEO of card services in 2007, has a different view. As the U.S. population grows, so will the card business, he says. Long-term behavioral changes, such as Internet shopping and the decline of checks and cash, are spurring the credit- and debit-card business.
“My guess is that the piece of plastic will be in place for a very long time,” Smith says.
JPMorgan Chase, the biggest U.S. card issuer with 145 million accounts and $163 billion in outstanding loans, more than doubled its direct mail offers in the last three months of 2009 from the previous quarter, according to Mintel Comperemedia, a Chicago-based firm that tracks such offers.
Competition
“We intend to go after all the best customers of all of our competitors,” Smith says.
The challenge is to sort out the good risks from the bad.
“There is a segment of people who will have a lot less credit available,” Smith says.
Chase has revved up models that compare customers’ total debt level with their income. The bank will likely end up offering credit to about 15 percent fewer customers, Smith says.
To Warren, who is also a Harvard Law School professor, pulling credit from the riskiest borrowers may be necessary. Many low-income cardholders, she says, were drawn in by “tricks and traps,” such as time-limited low rates.
“Millions of American families can’t pay off their credit card bills right now,” says Warren, who estimates that they’re spending $100 billion a year on fees and interest-rate payments. “Are their economic lives better off because they are spending the hundred billion? I don’t think so.”
Transparent Marketing
Warren says most people, regardless of income, should still have some access to consumer credit. She is pushing for lower rates and fees and simpler, more transparent marketing of terms.
“If the business model is to offer credit to every man, woman, child and dog in America in unlimited amounts, it just doesn’t work,” she says. “If it’s to offer a cheaper credit product to people who become more likely to pay, then that is sustainable.”
Bank of America’s Faulkner, who oversees $677 billion in deposits as well as a $150 billion card portfolio, says she has paid attention to surveys showing that customers want more clarity. In September, the bank slapped the decades-old brand name BankAmericard on a basic card, which has one rate (prime plus 14 percent) and one flat fee for late payments ($39). On its Web site, the bank cites its single-page disclosure form as a “key feature.”
“This was answering an unmet need,” Faulkner says.
20 Million Cards
Given the size of her franchise, Faulkner has a long climb ahead before she returns to a time when credit cards were Bank of America’s most reliable profit center. In 2006, CEO Ken Lewis paid $35 billion for MBNA Corp. and its 20 million card customers.
Until the first quarter, Bank of America’s card business had posted six straight quarterly losses, with many of its delinquent borrowers in parts of the country such as California, Florida and Nevada that were hardest hit by the collapse in housing prices.
At Citigroup, Galant is rethinking how revolving, unsecured lending relates to its customers’ other banking products. Among Citigroup’s ideas: the Forward card, which allows customers to earn a 0.25 percentage-point drop in their annual percentage rate, or APR, for three months of paying on time.
“Everybody now is saying, ‘We are going to pick the clients that we think are really safe bets,’” Galant says. “But what about the other 90 percent of people?”
Sioux Falls
Citibank passed out $80 billion in new credit to borrowers in 2009, including $21 billion in the fourth quarter, spokesman Samuel Wang says. The company is 27 percent owned by the U.S. government.
In Sioux Falls, Citigroup has grown to more than 3,000 employees in 28 departments from those 400 employees promised to Janklow in the 1980s. They occupy a 76-acre (31-hectare) campus near the airport, in three broad, low buildings, which include a day-care center and kindergarten. About 1,200 people work in the 24-hour customer service unit, where most sit in grayfabric cubicles wearing headsets and taking calls from people who are having trouble with their credit cards.
Citi has enhanced efforts that let borrowers delay payments or reduce their interest rates, Wang says. The bank offers incentives and a consolidation program to help reduce card balances. About 490,000 people signed up for such help in the fourth quarter of 2009, compared with about 357,000 a year earlier, Wang says.
‘Hell of a Problem’
Three decades ago, Wriston had urgent business to conduct when he flew to South Dakota. Wriston, who ran Citicorp from 1970 to 1984, was struggling in the aftermath of the high inflation and interest rates of the time. In February 1980, the fed funds rate was 13.35 percent; New York law, meantime, had a statutory cap on consumer lending of 10.5 percent. Citi was losing money on every credit card loan it handed out -- even before factoring in accounting expenses and credit losses.
“Citibank had a hell of a problem,” Janklow says, reminiscing during a three-hour dinner on a March evening at Foleys Steakhouse in Sioux Falls.
Wriston had learned that South Dakota’s bankers were already pushing to jettison the state’s usury caps and that the legislature was in session and might be able to move fast, he says. When the law that some still call the “Citibank bill” passed, “I became a celebrity in credit card circles in America,” Janklow says, with a laugh.
Delaware Joins In
A year after South Dakota lifted its rate caps, Delaware also relaxed its usury rules. JPMorgan and Bank of America’s card businesses are both based in the Middle Atlantic state. Federal law allows banks to lend according to the rules of the state in which they are based.
Once South Dakota and Delaware knocked the lid off interest charges, the U.S. credit card business exploded. A big player in the 1990s was Capital One, which began as the credit card arm of Richmond, Virginia-based Signet Bank.
Capital One developed computer programs designed to assess customers’ shifting risk profiles. The statistical modeling allowed for a much broader range of rate offerings in which stable customers would get lower rates and riskier borrowers could be charged more.
With data suggesting that handing out more credit was a safe bet, card issuers bumped up limits, passed out second and third cards to existing customers and marketed to a broader group.
‘Smoking Gun’
As the years passed, banks were lulled into thinking they could manage any economic downturn, Nilson Report’s Robertson says. They didn’t bargain for a sudden, severe economic plunge.
“The industry believed that they had enough experience to manage unsecured credit to higher risk consumers,” Robertson says. “But no one anticipated the depth of the recession and the impact it would have on jobs. The unemployment rate is the smoking gun.”
Still, bank adviser Hammer says, the card business isn’t going anywhere.
“The customer got lost in the days of easy money,” he says. “Now they just have to be much smarter about how they do all of this.”
Janklow, the man who brought those jobs to Sioux Falls, was re-elected governor of South Dakota in 1982 with 72 percent of the vote. He served again from 1995 to 2003 and was elected to the U.S. House of Representatives. Then, his career was marred by tragedy.
Fatal Accident
In August 2003, while driving a Cadillac near his home, he struck and killed a motorcyclist. He was found to have been speeding and to have gone through a stop sign; he was sentenced to 100 days in jail. He left public life and is now practicing law.
Janklow is sympathetic to the woes of the industry that helped make his career, he says. Yet he understands the public anger at the high rates and fees. He still uses an AT&T-branded credit card he got in the 1980s because he was guaranteed no annual fee for life.
“There is an old saying in capitalism: ‘What you abuse, you lose,’” Janklow says.
The question now is whether the executives running the credit card industry have gotten the message.
Saturday, February 20, 2010
Credit-Card Fees: the New Traps
The Wall Street Journal
A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.
The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.
Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.
"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.
Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.
The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.
The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.
All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.
The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.
Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.
In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate re-pricing for that risk."
Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.
For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.
Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.
Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.
True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.
So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.
And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.
Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.
Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.
Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.
That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.
Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.
Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.
"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."
The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.
Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.
"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.
Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.
The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.
The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.
All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.
The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.
Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.
In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate re-pricing for that risk."
Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.
For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.
Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.
Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.
True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.
So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.
And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.
Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.
Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.
Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.
That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.
Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.
Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.
"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."
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