There have been many exciting developments in the legislative and regulatory arenas so we’re including a lengthy “Washington Viewpoint” with as much up-to-date information for the financial services industry as possible. We anticipate having even more details to share in the coming issues.
Our overview of the Discover U.S. Spending Monitor has relevant information on the current spending habits and trends in the economy as a whole, as well as some credit union–specific customer spending details. In our consultant’s corner, we have an interesting article from the Tower Group about credit card retention tactics and from Philliou Partners, a great comparison between Main Street retailers and online merchants.
SM Brought to you by Discover ... your partner in payment services Issue # 5 • summer 2011 Welcome to Horizon Main Street and Online Finally Coexist SM The newest issue of HorizonSM is here and By Philip J. Philliou, Philliou Partners LLC we welcome the opportunity to once again Local Mom and Pop retailers all over the United States have been under enormous update our partners on relevant topics in pressures. The downturn in the economy and intense discounting by national the payments industry. retailers have been a challenge for many Main Street retailers. The small retailers’ There have been many exciting developments efforts to fight back with superior customer service has been matched by equally in the legislative and regulatory arenas so strong customer service from online retailers. The online retailers, who already had we’re including a lengthy “Washington the advantage of low overhead, being open 24/7 and massive warehouses full Viewpoint” with as much up-to-date of inventory, have mastered next-day delivery. Online retailers and their overnight information for the financial services industry delivery partners, FedEx and UPS, have made every household with an Internet as possible. We anticipate having even more connection a customer. The tension between Main Street and online retailing is palpable. details to share in the coming issues. The good news is that the relationship between Main Street and online appears to Our overview of the Discover U.S. Spending be evolving. The notion of Online to Offline (O2O) commerce is breathing life into Monitor has relevant information on the participating local merchants. The definition of O2O includes group-buying sites current spending habits and trends in the where purchases are made online and fulfilled offline, as well as offline purchases economy as a whole, as well as some that are influenced by online. Finding customers online through coupons, deals, credit union–specific customer spending sweepstakes and other incentives are bringing customers into local merchants. details. In our consultant’s corner, we have The bottom line is that online is finally starting to help Main Street sell. an interesting article from the Tower Group about credit card retention tactics and Location technologies use a consumer’s mobile device as a beacon from Philliou Partners, a great comparison From a technology perspective, location-based technologies and the slick applications between Main Street retailers and online that leverage them have helped to bring about O2O. Foursquare, Gowalla and merchants. Facebook’s Places are location-based social networking tools. On Foursquare, a Please enjoy and, as always, we appreciate user “checks in” to locations (as pinpointed via satellite) to invite along friends, leave your comments. tips glued to GPS coordinates (like ordering advice at restaurants), and compete for digital rewards in the form of badges, or titles like “mayor” (for the user who Best, checks in the most at a venue). Similarly, Gowalla asked users to check into places in order to collect digital goodies, akin to virtual geocaching. With Facebook’s Places, consumers check in to get individual discounts, share savings with friends, and Kevin O’Donnell earn rewards for repeat visits. For Mom and Pop businesses it couldn’t be easier to Group Executive, Credit Issuance participate with all three of these companies. Amazon will continue to give local booksellers a run for their money just as Zappos IN THIS ISSUE (acquired by Amazon) will do the same against local shoe stores. However, Online to Offline now provides local retailersWashington Viewpoint .............................. 2 with a meaningful way to participate and benefit from the immense power of the Internet. nDid You Know? ....................................... 2Timely Resolution of Customer Disputes Philip J. Philliou is Managing Partner of Philliou Partners, LLC, trusted advisors to Card Issuers and Retailers. Philip has over 16 years ofRetains Customers and Improves Profits ....... 3 payments industry and consulting experience with a track record forConsumer Confidence Impacts Credit Union product leadership, developing new market opportunities, and structuring innovative partnerships. See www.philliou.comMembers’ Spending ................................. 3Point of Sale Acquisition ........................... 4
Washington ViewpointBy Kathryn C. Kling, Nelson, Mullins, Riley & Scarborough, LLPIt has been a busy summer in Washington. This update discusses five-member commission, suspend therecent legislative and regulatory activity relevant to the financial transfer to the CFPB of further powers untilservices industry. a chair of such commission is confirmed and make it easier for other regulatorsDurbin Amendment Update to override the CFPB’s rules. Other billsWhen Horizon last visited the Durbin Amendment, the July deadline aiming to restructure the CFPB have beenfor compliance was fast approaching amid heated debate in introduced in the Senate. It is currentlyCongress, lawsuits challenging its constitutionality and concerns thought that any bill restructuring theof our nation’s top regulators as to its affect on the banking CFPB is unlikely to pass the Senate, and theindustry. The Federal Reserve received over 11,000 comments President has vowed to veto any such legislation.on its proposed rules implementing the statute, over half of whichcame from credit unions. Since the last Horizon issue, the Tester Martin Gruenberg, former vice chairman of the FDIC, wasAmendment to delay implementation failed to pass in the Senate, nominated on June 10 to succeed Sheila Bair as FDIC chair.paving the way for the Federal Reserve’s final rules, issued June Prior to joining the FDIC Board, Gruenberg was counsel to Senator29. The final rule has been criticized by both retailers and financial Paul Sarbanes and the Senate Banking Committee. Gruenberg isinstitutions alike. thought to enjoy wide support from industry, consumer advocates and members of both parties. Gruenberg is the Acting ChairmanThe final rule caps interchange at $.21 per transaction plus an of the FDIC pending his confirmation. Observers say he is quietlyadjustment equal to 0.05 percent of the transaction value to cover assertive and takes time to dig into policy details. nfraud losses — almost double the $.12 cap set forth in the FederalReserve’s proposed rules. Under an interim final rule, issuers thatcomply with certain Federal Reserve guidelines may collect anadditional $.01 per transaction to recover fraud prevention costs. Did You Know?The final rule maintains the exemption in the proposed rule for The Discover Offers product can be used to enable issuers andthe interchange cap for small issuers and government programs, merchants to build deeper consumer engagement throughbut greatly narrows the exemption for prepaid card issuers to targeted messages and offers.only apply to transactions using prepaid cards which are the only Capabilities available with the initial product release will include:means of accessing the funds underlying the card. 4 Merchant ability to load and manage offersWith regard to the Durbin Amendment’s network-routing provisions, 4 Issuer ability to distribute targeted messagesthe final rule adopts “Alternative A” from the proposed rule whichrequires issuers to enable two or more unaffiliated networks on 4 Cardmember ability to receive offers through multipleeach debit card (which can be any combination of unaffiliated channels — email, online, mobile and statementsnetworks, including one signature network and one PIN network, A six-month pilot of the Discover Offers product will begin intwo signature networks and two PIN networks). Most of the final mid to late August 2011.rule’s provisions take effect October 1, about 10 weeks later thanthe Durbin Amendment’s July 21 effective date. DiscoverNetwork.com Website Relaunch We are excited toNew Regulators Appointed announce the redesignedOn July 17, President Obama nominated Richard Cordray, the Discover Network website.CFPB’s current enforcement chief and a former Ohio attorney The launch is set for lategeneral, to be the director of the CFPB, created by the Dodd–Frank September and includesAct. The CFPB gained limited statutory authority on July 21 but will an entire section devotednot have its full powers until a director is confirmed. to our Issuing Partners.If confirmed, Cordray plans to have several aspects of the CFPB’s Check out “News & Events”agenda ready for immediate implementation. This could include an for the latest details onenforcement plan for the credit card industry — one of his stated products and servicesmain priorities. The CFPB has already launched a credit card enhancements. ncomplaints portal.Cordray’s road to confirmation will not be smooth, as SenateRepublicans have vowed to block any director nominee absentsignificant structural changes to the CFPB. On July 21, the Housepassed a bill which would replace the CFPB’s director with a 2
Timely Resolution of Customer Disputes RetainsCustomers and Improves ProfitsBy Dennis Moroney, Research Director, Bank Cards, TowerGroup Credit Card Issuers Improve Customer ServiceRetaining the most creditworthy and profitable customers TowerGroup estimates that industry-wide credit card voluntaryis essential for financial services institutions in this complex and involuntary account attrition exceeded 20 percent for 2009,economic and regulatory environment. Credit card issuers should a 30 percent increase from 2008. A 20 percent customer attritionexamine their customer dispute resolution departments to ensure rate is a formula for business failure. Credit card issuers havethat their business process results in the timely and equitable been committed to address the challenge and reverse this trend.resolution of customer billing and merchant disputes. Failure to The 2011 FTC Sentinel Report, which covers activity for 2010,resolve customer disputes in a timely manner will increase account reported a 33 percent increase in total consumer complaints fromattrition and reduce profits. 2009 but a 15 percent decrease in the number of credit cardBecause in reality the customer is not always right, any credit complaints. Credit card issuers provided clearer communicationscard issuer must determine if the long-term customer relationship to consumers (mandated by the CARD Act), eased credit policiesvalue (CRV) of the customer in question justifies absorbing the cost and made back office improvements to the customer dispute andof the dispute. The cost of replacing that customer and long-term resolution process and decreased customer attrition to 10 percentrevenue potential of the relationship may or may not exceed the for 2010.amount in dispute. These costs must be calculated to justify any Credit Card Industry Trends Improvingdecision. Despite the sluggish U.S. economy and a changing regulatoryManaging Credit Card Risk and Profitability environment, recent trends are improving for credit card issuers.To manage profitability during the recent financial crisis, credit The most recent financial updates from the Federal Depositcard issuers tightened their lending policies, reduced new offers Insurance Corporation (FDIC) reported for the fourth quarterof credit, and decreased customer credit lines in 2008 and 2009. 2010 and first quarter 2011 that credit card lender return onThis led to an increase in customer attrition and complaints to the assets (ROA), a key measure of credit card profitably, improved toFederal Trade Commission (FTC). 2.77 percent and 3.68 percent respectively. This is a significantMany of these credit card complaints were the result of intensive improvement compared to 0.55 percent and 0.68 percent forcredit card portfolio management by card issuers and questions the same periods one year prior, fourth quarter 2009 and firstpertaining to practices unfavorable to consumers that were quarter 2010.addressed by the Credit Card Accountability, Responsibility, The current economic and legislative environment requires thatand Disclosure (CARD) Act of 2009. During this period, credit credit card issuers focus on their most creditworthy and profitablecard lenders closed large numbers of accounts and/or reduced customers. Credit card issuers should ensure that their chargebackconsumer credit lines by a cumulative total of more than and disputes resolution account teams are well trained and$1.2 trillion. prepared to answer and resolve customer questions and disputes within one billing cycle. When complex disputes exceed oneRetaining the Best Customer billing cycle, credit card issuers should keep the customerResolving customer billing and merchandise disputes in a timely informed throughout the dispute resolution process. Consumersand fair manner is essential to hold on to valued customers. expect timely and equitable resolution of billing and merchandiseCredit card issuers that fail to quickly resolve credit card billing disputes. Failure to satisfy this expectation will increase customerand merchant disputes will experience steep account attrition. attrition and reduce profits. nThose that do not resolve a customer question and/or dispute This article is based on research by the Retail Banking and Cards practice atwithin one billing cycle increase their chance of losing profitable TowerGroup, a leading research and advisory services firm focused exclusivelyand creditworthy customers. The result is costly, since the on the global financial services industry. Research Director Dennis C. Moroneyestimated cost of replacing a creditworthy customer is more than can be reached at firstname.lastname@example.org. Those interested in learning more about TowerGroup or subscribing to its research services may call$125 plus the loss of future revenue from the lost customer. 1.617.488.2000 or e-mail email@example.comConsumer Confidence Impacts Credit Union Members’ SpendingIn the first quarter of 2011, both credit union members and the first time there is very little difference between the attitudesnon-members said economic conditions are impacting their of credit union members vs. non-members.discretionary spending — causing them to cut back on things Economic and financial optimism amonglike dinner, movies, and other entertainment spending. A rise consumers is also reflected in the spendingin overall expenses necessitates that most will need to spend patterns of credit union members. Quarterlymore on regular household expenses like gas, groceries and data released from the credit union membermortgages. The Discover U.S. Spending Monitor reports that for (continued on page 4) 3