2012 was a relatively quiet year for the credit card industry. However, there were a number of developments that may have a far-reaching impact in the years to come. Here are the top ten credit card stories of 2012:
Swipe Fee Settlement
In July, MasterCard, Visa and other major banks agreed to pay more than $6 billion to resolve accusations that they engaged in anti-competitive practices and price fixing in payment processing. In addition, credit card companies agreed to reduce swipe fees for eight months, an adjustment valued at $1.2 billion. The settlement would also allow retailers to charge higher prices to their customers for paying with credit cards. Before this settlement, the card companies prohibited retailers from adding this type of surcharge.
Just days after the proposed settlement, Walmart and Target came out against it, and were joined by major trade groups including the National Association of Convenience Stores, the National Retail Federation and the National Restaurant Association. Eventually, a majority of the original 19 plaintiffs would come out against the settlement.
They are challenging a part of the order that would free Visa and MasterCard from new legal claims over related interchange issues. The settlement received initial approval in the U.S. District Court in November but is being appealed in the appeals court.
Growth in Prepaid Cards
Thanks to regulations and legislation on credit cards, banks are turning renewed attention to prepaid cards. Prepaid cards have fewer regulations than credit cards and banks are embracing prepaid cards for needed revenue. Today, competition for the prepaid market is growing, and driving down rates and fees. Consumers loaded approximately $57 billion onto prepaid cards in 2011, and loads are projected to reach approximately $82 billion in 2012, $117 billion in 2013, and $167 billion in 2014, according to the Mercator Advisory Group. Currently, there are no government regulations and consumer protections on prepaid cards--debit and credit card rules and regulations do not apply. But that may soon change. The Consumer Financial Protection Bureau is investigating the fees and practices of prepaid cards and seeking input on ways to enforce safety for consumers.
The Libor rate-fixing scandal is far reaching for both consumers and financial institutions. Regulators are still investigating whether banks rigged interest rates to gain more profits or perhaps reported lower interest rates on loans in order to appear more financially stable. A rigged Libor rate means that millions of people around the world might have unknowingly paid more or less interest than they should have on their mortgages, student loans and credit cards.
Regulators have begun handing down fines. In June, British bank Barclays was fined $450 million by U.S. and British regulators. Just yesterday, Swiss bank UBS agreed to pay $1.5 billion in fines for its role in manipulating Libor and other benchmark interest rates. This is one of the biggest fines that regulators have given a financial institution.
Crackdowns in Deceptive Telemarketing Practices
The Consumer Financial Protection Bureau levied significant fines against American Express, Discover and Capital One for either misleading consumers into applying for credit cards or buying add-on services. The actions by the CFPB put $425 million back into the hands of nearly six million credit card consumers. In addition to these refunds to consumers, the three issuers had to pay a total of $66.5 million in penalties.
Discover refunded $200 million to their credit card customers for pressuring cardholders into buying expensive payment protection and credit monitoring services. In addition, Discover will pay a $14 million fine. The regulatory agencies reported the company's telemarketers misled customers about the programs, enrolled customers without their consent and led customers to believe the products were free. In some instances, the scripts suggested the cardholders would not be charged until after they had reviewed written materials, but the materials arrived after Discover had already charged the customers for the products.
Capital One agreed to pay up to $150 million to two million consumers as a result of the bank's telemarketers deceptively pushing these same credit monitoring and payment protection services. Capital One agreed to pay fines of $60 million to the CFPB and the Office of the Comptroller of the Currency.
American Express had to reimburse an estimated $85 million to nearly 250,000 cardholders who were either misled into paying an old debt because they thought it would be reported to the credit bureaus, promised up-front bonuses from signing up for credit cards, paid illegal late fees or were promised their debt would be forgiven and then denied new credit cards because the debt was not forgiven.
The FTC also cracked down on robocalls that deceived consumers into paying hundreds or sometimes thousands of dollars by claiming they could reduce credit card interest rates in return for an upfront fee. Federal judges in Florida and Arizona temporarily shut down five companies that performed these robocalls to consumers. The FTC said these five agencies could have defrauded consumers out of possibly $30 million over the past few years.
Monitoring of Credit Bureaus
The Consumer Financial Protection Bureau is now monitoring credit bureaus to bring transparency and public accountability to credit reporting agencies. This fall, it began monitoring over 30 of the country's biggest credit bureaus to investigate if they were following the law. This is a big step for the federal government which has never had widespread access to information about the credit reporting industry. The CFPB will also have oversight over specialty credit reporting companies, including those that focus on payday loans, resellers of credit reports, and companies that analyze credit report information. According to the CFPB, each of the three biggest credit reporting companies maintain files on an estimated 200 million Americans gathered from over 10,000 providers of information. Approximately three billion credit reports are issued annually and more than 36 billion updates are made to consumer credit files.
Impact of CFPB
Cracking down on deceptive telemarketing practices and monitoring credit bureaus shows the power and impact of the Consumer Financial Protection Bureau. Formed on July 21, 2011, the young agency has made strides to help consumers in other ways.
In October, the CFPB proposed a new rule to make it easier for stay-at-home spouses to obtain a credit card by allowing those consumers to rely on shared income when applying for a credit card account, rather than individual income.
In June, the CFPB created a database to take credit card complaints and made this information public. Prior to this action, there was no way for consumers to see the complaints or response rate when comparing credit card issuers. The database shows which issuers have had the most complaints on their cards and how specific complaints were ultimately handled. The data can be viewed online by company, consumer zip code and type of complaint. The CFPB reviews each complaint and forwards the ones that meet its criteria to the appropriate company for review and resolution. Companies have 15 days to provide a response to each consumer complaint. Most complaints are expected to be resolved and closed within 60 days. The filer can track the progress of the complaint and dispute the resolution provided by the financial institution. If the CFPB finds possible legal violations, it will work with other parts of the Bureau to deal with the potential violation. The database does not include private information.
Major Strides in Technology
Technological changes made in 2012 will re-shape the card industry for the future.
A number of products are now on the market that turn smartphones and iPads into credit card readers, allowing independent vendors to accept credit cards in remote locations. Products such as Square, Paypal's Here, Bank of America's Mobile Pay on Demand and Groupon Payments are becoming more popular.
Digital wallets showed tremendous growth in 2012. These products make online check-out faster, thus decreasing shopping cart abandonment. Instead of entering a long credit card number and shipping address, customers enter an email and password and the shipping information is automatically filled in.
Banks are slowly adding chip technology, also known as EMV, to international credit cards. Many countries have converted to EMV (EuroPay, MasterCard, Visa) technology with cards that are embedded with a microprocessor chip that encrypts and stores the account information. American travelers run into complications when the card reader in a foreign country does not accept the magnetic strip cards.
MasterCard announced plans to test a new credit card in the next few weeks in Singapore that contains a built-in LCD display and a keyboard. While functioning as a traditional credit card, the MasterCard Display Card will allow customers to use these unique features to create one-time passwords when they wish to purchase items online.
Spending on Mobile Devices
Consumers are changing the way they spend their money. A greater number of people are feeling more comfortable with spending on their mobile devices. The rapid growth underscores how retailers need to adjust to this booming mobile commerce. A study by Javelin Strategy & Research reveals over $20.7 billion in sales took place on mobile devices in 2011. Another report from IDC Financial Insights predicts that purchase volume on mobile devices throughout the world by consumers and businesses will exceed $1 trillion by 2017. The majority of this volume will come from mobile commerce which includes both e-commerce through a mobile web browser and the purchase of digital media.
Discontinuation of Payment Protection Plans
After a series of consumer lawsuits and new fines from the Consumer Financial Protection Bureau, some credit card issuers got out of the payment protection business. The payment protection plans were marketed as a way to help consumers through difficult times, but the protection plans had restrictions and were criticized as misleading consumers. The Government Accountability Office found that cardholders received just 21 cents in tangible financial benefits for every dollar spent in debt protection product fees from the nine largest credit card issuers.
Bank of America stopped promoting its Credit Protection program in August and no longer offers the program to new customers. It plans to drop the payment protection business next year. American Express is dropping the Account Protector program on December 31.
In November, Elizabeth Warren was elected to be a senator from Massachusetts. Warren helped create the Consumer Financial Protection Bureau, and the possibility of her leading the CFPB alarmed Republicans. She did not receive the post and instead entered politics. After her victory over Scott Brown, Warren was picked to have a seat on the Senate Banking Committee where, ironically, she will be a watchdog over banks and financial institutions.