Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of 2007, compared with the first half of 2006, according to Mintel International Group. Direct mail offers intended for customers with the best credit fell more than 13 percent over the same time period. This approach was highly profitable to the banking industry. Card issuers’ after-tax profits have increased 40% since 2005.
In 2007, before the recession began, 14.7 percent of U.S. families had debt exceeding 40 percent of their income. By 2008, total household consumer debt, including mortgages, was roughly 100 percent of gross domestic product.
About 40 percent of outstanding consumer debt is in credit cards. Unemployment officially is 9.7 percent, but actual unemployment is much higher. Currently, the ratio of job applicants to job openings is 6:1.
They say they won’t, but they will and they have.
Interchange fees generate approximately $48 billion in income annually to card issuers. Combined debit and credit card payments at merchants have nearly tripled over the past decade as more consumers switch from checks and cash to credit and debit card payments. Merchants such as 7-Eleven claim that store owners pay twice as much for interchange fees as they earn in profits. Other countries such as Israel and Australia have required banks to lower interchange fees, yet there is little evidence that the savings were passed along to consumers. In Australia, regulators required banks to lower interchange from 0.95 percent to 0.5 percent. Banks in those countries reduced rewards programs and increased annual fees. Seemingly, consumers did not ultimately benefit from lower interchange rates.
In 2009, banks are expected to bring in $27 billion from courtesy payment programs. Another $11.5 billion comes from fees for overdrafts and other items returned unpaid.
New Age In Card Marketing
A New age incard marketing<br />Kelsey Consulting Services<br />
The passage of credit card reform legislation during a banking crisis for card issuers and an economic crisis for consumers presents many interesting dynamics in the marketing of credit and debit cards. <br />A changing landscape<br />
As recently as 20 years ago, only about half of U.S. households had credit cards. By the end of last year, 78 percent of households held one or more credit cards.<br />Major issuers used technology beginning in the 1990s to target the riskiest borrowers. Credit card reform now makes it less profitable to market to sub-prime borrowers.<br />Democratization of credit<br />
According to CardTrak, average U.S. household credit card debt rose from $3,400 in 1990 to about $10,700 in 2008.<br />Consumers are beginning to de-leverage, but they have a lot of balances to pay down.<br />Bearing a heavy load<br />
Credit card defaults rose to a 26-year high of 9.7 percent in August. Bank of America, the nation’s largest bank, reported charge-offs of 14.54 percent in August. <br />Many analysts believe the worst is yet to come.<br />Recovery not in the cards<br />
Just weeks after legislation was passed reforming card industry practices, major credit card issuers began scaling back frequent flyer miles and cash rebates.<br />Not so rewarding<br />
First Data Competitive Intelligence reports a significant shift from credit card rewards programs to debit card rewards programs. Number of cardholders with a rewards credit card dropped from 71 percent last year to 67 percent this year. Number of cardholders with a rewards debit card increased from 34 percent last year to 45 percent this year. <br />Rewards shift to debit<br />
About 70 percent of cardholders say they won’t pay a higher interest rate to earn rewards. <br />Pay to play?<br />
Citigroup became first among the major issuers to introduce annual fees to existing credit card accounts. In August, Citi began notifying cardholders they will be charged a fee between $30 and $90 unless they spend a minimum amount each year, typically $2,400.<br />Citi gets testy<br />
In July, merchants mounted a fresh offensive against interchange fees, but legislation to reform the fee structure remains stalled in the House Committee on Financial Services.<br />Lost in committee<br />
Consumers are turning to debit cards to keep debt in check but often pay more for using debit cards than they would using credit cards. <br />In a 2008 study, FDIC notes that a $27 overdraft fee repaid in two weeks on a $20 debit card purchase incurs a 3250 percent APR.<br />By comparison, credit card penalty rates are typically 30 percent APR and payday loan rates are around 500 percent APR.<br />Stealth credit<br />
JP Morgan Chase, Wells Fargo and BOA all announced new policies regarding overdraft fees on September 22 and 23. All will eliminate fees when overdraft is $5 or less and limit overdraft fees to no more than four per day.<br />Chase will end re-ordering of transactions; Citi is not.<br />Industry earned $39.5 billion on deposit transaction fees in 2008, which is 25 percent of revenue.<br />Banks retreat on overdraft fees<br />
Frustrated with the industry, House leaders introduced a bill last week moving up the CARD Act effective date to December 1, 2009.<br />Since passage, major issuers have converted most cardholders to variable rates, increased balance transfer fees to five percent, and raised interest rates substantially.<br />CARD Act accelerated<br />
Since the start of the recession, the number of Visa and MasterCard accounts has fallen from 490 million in the first quarter of 2008 to an estimated 404 million by the second quarter of 2009, an 18 percent reduction in slightly more than one year, according to CardData.<br />Decline in credit cards<br />
From its peak in December 2008, consumer revolving debt, most of which is credit card debt, declined from $988 billion to $898 billion, a reduction of nine percent in nine months (July 09).<br />Consumer revolving debt did not exist in a material way until 1968.<br />Decline in balances<br />
According to FICO, nearly 60 million credit cardholders have seen their credit limits decreased over the past 12 months.<br />What happened to my limit?<br />
Discover and Amex are moving toward direct consumer banking. Disruption in the asset-backed securities market encouraged conversion to bank holding companies. Currently depend on brokered deposits, but as consumers shift more to debit transactions, Discover and Amex are shifting strategies. Amex announced launch of its direct-to-consumer deposit program this month. Direct banking model will target affluent consumers and successful small businesses (won’t compete on price).<br />Discover and Amex adapt<br />
Credit card solicitations peaked at 6.0 billion offers in 2005 but are expected to drop to 1.2 billion for 2009.<br />No mail<br />
Firms that advertise during times of economic recession will recover more quickly once the economy improves.<br />Your competitors aren’t advertising now; you’ll stand out.<br />The big bank brand is damaged. Market on themes of affinity, trust, thrift and fairness. <br />“We’re in this together.”<br />Time to advertise<br />
Credit quality is deteriorating. Household assets are declining. Incomes are falling. Unemployment is rising. <br />Review your cardholders’ scores and have them validated to your loss experience. Work with your credit bureau provider.<br />You’ll need more stringent underwriting criteria.<br />Time to validate<br />
Cardholders with excellent credit scores and good payment histories are looking for a safe place to park balances.<br />Offer promo rate for balance transfers. It doesn’t have to be a blowout rate. Or, waive fees for balance transfer. <br />Offer promo/convenience checks during tax season. Cardholders can use these to pay income taxes and/or consolidate high-rate interest cards to your cards after the holidays.<br />Market to revolvers<br />
Major card issuers made money on credit card reward programs using bait and switch, smoke and mirrors. Smaller issuers likely didn’t make money on rewards. <br />Institutions may migrate rewards programs over to debit, but must consider the impact of likely legislation that would curb transaction fees.<br />Shift rewards <br />
Major card issuers have higher cost of funds.<br />Major card issuers have higher losses.<br />Major card issuers have lower response rates to advertising offers.<br />Plus, major card issuers are having to raise capital and have liquidity issues.<br />Pricing advantage is all yours<br />
As larger issuers tighten standards, raise rates, lower limits and increase fees, smaller issuers see the chance to grab market share.<br />Many community banks are experiencing double-digit increases in portfolio growth.<br />However, smaller size means less economy of scale and possibly greater costs for compliance with new legislation.<br />Small issuers see opportunity<br />
There could be no better opportunity for smaller card issuers to differentiate their card programs than in this post-crisis environment.<br />Public sentiment has turned against the major card issuing banks, not only for the most egregious card practices, but also because of the bailout.<br />The most egregious practices now are occurring in the realm of checking accounts.<br />Timing could not be better<br />
Doreen Fox Kelsey provides marketing consulting services to financial institutions, small businesses and non-profit organizations.<br />She writes magazine articles on financial literacy topics and speaks to groups on consumer advocacy issues.<br />Doreen can be contacted at P.O. Box 8483, Spokane, WA 99203-0483 or (509) 499-5223.<br />About the speaker<br />