Weekly Credit Card Update October 7
BANKS HOPE CREDIT CARD USAGE INCREASES DUE TO NEW DEBIT CARD FEES
Consumers are outraged that banks are now charging monthly fees if they use their debit cards. Regions and SunTrust have already levied this monthly fee; Bank of America will begin charging a fee in 2012; and Chase (one state) and Wells Fargo (five states) are testing this fee in various areas. The common explanation from banks is that they are losing billions of dollars in revenue from the Durbin Amendment which basically cut the interchange fee on debit card transactions in half. Banks feel they need to make up for this loss of revenue, and charging customers to use their debit card is one way to generate revenue. But could there be another reason for a monthly charge on debit cards? Are banks trying to indirectly force consumers to use credit cards because credit cards are much more profitable to these financial institutions? If consumers choose to now go without a debit card in order to avoid these monthly fees, consumers will turn to other forms of payment, and credit card usage could increase dramatically.
That would be great news for banks because credit cards are a much greater profit center for two reasons.
THE MATH BEHIND BANK OF AMERICA’S $5 FEE
Why $5 a month? Because that’s a reasonable amount to assume the bank will lose per customer under the new fee structure. The old fee was 44 cents per transaction and the new maximum fee is 24 cents, making for a loss of 20 cents per transaction per customer. Assuming the average customer makes 25 debit card transactions each month, that’s $5 per customer that Bank of America is losing under the new swipe fee. Charging each customer who uses a debit card to make a purchase an extra $5 a month, the bank makes up for the lost revenue. Interestingly, the $5 fee will not be charged to consumers who have a debit card and use it only at ATMs. ATMs have their own set of fees, not affected by the new swipe fee rule.
Story by Mark Huffman for ConsumerAffairs.com
THE DICK DURBIN BANK FEES
Conceived of as a narrow special-interest giveaway to large retailers, the Durbin amendment will have long-term consequences for the consumer banking system. Wealthier consumers will be able to avoid the pinch of higher banking fees by increasing their use of credit cards. Many low-income consumers will not. Banking will become less innovative and consumer-friendly. As many as one million individuals will drop out of the
mainstream banking system and turn to check cashers, pawn shops and high-fee prepaid cards. Consumers will also be encouraged to shift from debit cards to more profitable alternatives such as credit cards, which remain outside the Durbin amendment’s price controls. Prepaid cards, also exempt from the Durbin amendment’s price controls, may also become a more attractive alternative to debit cards for many consumers. These cards were once the province of low-income consumers without bank accounts, but over the summer American Express rolled out a new prepaid card aimed at higher-income consumers looking for alternatives to debit cards.
Article by Todd Zywicki for the Wall Street Journal
BANKING ON A NEW GENERATION OF CREDIT ALTERNATIVES
Financial institutions, which tend to ratchet up their fees across a wide swath of their customer base to make up for lost income, have always banked on the “stickiness” of their customers. While customers may have been “stuck” several years ago, that is no longer the case. Companies such as Google, PayPal and Square are now offering a wide range of alternative payment mechanisms that could finally mean lower transaction costs for consumers. Instead of competing with smaller community banks, the largest financial institutions will be forced to contend with new technology options that enable consumers to make payments at the point of sale, often without the need for a debit or credit card. (Google Wallet enables prepaid cards) This is exciting stuff if you’re a customer, and downright frightening if you’re a financial institution. It’s one thing to compete with a sleepy community bank for your business, it’s another thing entirely to compete with Google. When customers feel at home using tablets and smart phones to make payments, they have less inclination to pull a piece of plastic out of a leather wallet. For now, these payment alternatives have a significant amount of ground to make up before they truly represent a threat to
financial institutions and the old way of doing business. It may be too early now to talk about the Law of Unintended Consequences, but years from now, we may owe a debt to reforms like Dodd-Frank for finally
weaning us off the physical wallet and encouraging us to experiment with the new technologies helping to create the Digital Wallet. Why carry around a wallet full of plastic when your smart phone or tablet
can do the same thing? Better yet, why pay higher fees for financial services when technology will soon make it possible to get a similar service at a cheaper rate?
Story by Dominic Basulto for the Washington Post
CREDIT CARD BILLS PAID LATE DECREASED IN SECOND QUARTER
The number of credit card bills paid late decreased in the second quarter, according to the American Bankers Association. The number of credit cards bills paid late fell to 3.22 percent from 3.4 percent in the first quarter. The average bank card delinquency rate over the last two years is 3.78 percent. The ABA’s composite ratio, which tracks eight types of closed-end consumer installment loans, was up to 2.88 percent.
Story by Alex Tanzi for Bloomberg
CHASE’S CARD CHIEF REBUILDS BUSINESS PART BY PART
Gordon Smith, credit card chief of JPMorgan Chase, is applying several lessons taken from the consumer finance industry’s playbook: improving customer service, combining many rewards programs into one and shedding cards that are not profitable enough. Along the way, he is spending hundreds of millions of dollars mailing card offers. Step back and look at what Smith is building, and it looks a lot like American Express: a business that caters to rich clients and relies increasingly on processing fees to make money. Chase starts with some big disadvantages. Although its Paymentech processes transactions for merchants, it does not run the Visa or MasterCard global networks that accept its cards and influence how much it can charge for credit card transactions. Chase’s credit card business is second in size only to American Express, and contributed 12 percent of JPMorgan’s $17.4 billion of profits last year. If Smith pulls off the transformation, the rewards could be handsome. Smith is making progress. Profits have recovered under his watch. He’s improved the bank’s customer service rankings for credit cards, and he is getting ahead of competitors who also issue MasterCard and Visa cards.
Story by David Henry and David Wilchins for Reuters