Other Credit Card Programs - Credit Card Industry Aims to Profit From Sterling Payers

Interesting article in the New York Times this morning.
http://www.nytimes.com/2009/05/19/business/19credit.html?hp

"Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups."

I'm sure we'll figure out which cards remain the best.

That's why I've been saying that a lot of these regulations are bad for consumers. The banks aim to be profit-making entities, they won't simply take the government imposed regulations without evaluating how to make future profits.

The law of unintended consequences at work again.

The credit card industry will find ways to make money regardless of government intervention.

As usual, the responsible users among us will be subsidizing the irresponsible ones.

I am all for requiring clear language when dealing with financial matters,but the other regulations will simply cause those who are irresponsible to find another way out of the messes they create for themselves.At taxpayers expense of course.

I was considering canceling some of my numerous cards,just to keep things easier for myself.But now I may leave them all open and see how this all shakes out.Maybe if I am lucky,not all issuers will approach this in the same way,and it will become clearer as to which ones to retain.

As usual, the responsible users among us will be subsidizing the irresponsible ones.

I am all for requiring clear language when dealing with financial matters,but the other regulations will simply cause those who are irresponsible to find another way out of the messes they create for themselves.At taxpayers expense of course.

I was considering canceling some of my numerous cards,just to keep things easier for myself.But now I may leave them all open and see how this all shakes out.Maybe if I am lucky,not all issuers will approach this in the same way,and it will become clearer as to which ones to retain.

+1

If issuers implement these charges so that lower risk customers would subsidize the activities of higher risk customers, someone is going to figure out that there is a huge market out there for lower risk customers who want to be able to pay their bill in full without interest fees. A smart bank could adopt more stringent eligibility guidelines (think back to the 70s, when people actually got rejected), and by so doing could offer a card that still includes a grace period. They would of course get less interest revenue, but they would still collect their hefty merchant fees, and could also dramatically lower their risk.

If issuers implement these charges so that lower risk customers would subsidize the activities of higher risk customers, someone is going to figure out that there is a huge market out there for lower risk customers who want to be able to pay their bill in full without interest fees. A smart bank could adopt more stringent eligibility guidelines (think back to the 70s, when people actually got rejected), and by so doing could offer a card that still includes a grace period. They would of course get less interest revenue, but they would still collect their hefty merchant fees, and could also dramatically lower their risk.

I agree with your point, but I would take the cited article with a grain of salt. Of course, the banks will talk gloom and doom and threaten higher fees upon us: they want to limit the amount of government regulation. The article conspicuously fails to mention merchant fees. The credit card companies make money from us regular payers because of merchant fees. If they didn't make money, they would cut us off now.

That being said, I wouldn't be surprised to see the rewards offers dry up a bit, just because they have been so rich lately. But I can't imagine banks ending grace periods altogether and charging annual fees to all customers.

...someone is going to figure out that there is a huge market out there for lower risk customers who want to be able to pay their bill in full without interest fees. A smart bank could adopt more stringent eligibility guidelines... Exactly right. The new regs aren't going to prohibit competition -- and they are going to represent a huge opportunity for smaller banks to offer more competitive card products while exercising more discrimination. We don't have to bank with the Chase / Citi / US Bank / etc. oligopoly -- we just have to shop and read the fine print.

People who use credit wisely and represent low risk will always be able to find good deals... just maybe not from big, sick, badly run megabanks.

After my wife read this article this AM, she suggested we open a new account at our credit union, stick $5k or so in it, attach a debit card, use it as a credit card with a $5k limit, and pay ourselves back each month instead of a bank. In other words, be our own credit provider. It's not a bad idea.

There is no content in this article. Not a single change has been announced; it's all nebulous.

My feeling is that it's a matter of off-the-record sulking by banks: "The sky is falling and we'll take it out on you". But if it were possible to charge 'sterling payers' annual fees and give no incentives, why aren't they doing so now anyway? Who gives up an opportunity to make even more money?

Let's see which bank adds fees or removes incentives first and whether they can make it stick.

Another article (http://www.nytimes.com/2009/05/20/your-money/20money.html?pagewanted=2&_r=1&hp) from the same paper:

So will card companies kill reward programs altogether, or scale them back drastically? Of course not. In fact, Chase is going ahead with the introduction of a major new rewards program this week, knowing full well that it is about to get beaten up by Congress.

“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson...

Sure, people who carry a lot of card debt without defaulting are profitable. But so are people who spend a ton, generating fees galore from merchants back to the card company, as are those customers who may have multiple cards or a checking account and a mortgage at the card-issuing bank, too....

As usual, the responsible users among us will be subsidizing the irresponsible ones.

I am all for requiring clear language when dealing with financial matters,but the other regulations will simply cause those who are irresponsible to find another way out of the messes they create for themselves.At taxpayers expense of course.



Not to interrupt a hot rant, but if the new rules mean responsible users will be subsidizing irresponsible ones, then I guess the good users should thank the irresponsible ones for subsidizing us for the last 30 years.

I think these are two broad distinct markets. We read a lot about the guy who doesn't pay, and gets hit with interest, fees, etc. Out of those big revenues, banks must spend money on collections and (now very big) bad debts.

The other group costs little-the banks get fees from merchants and do little more than run computers for their 1.5% or more. Not a bad stand alone business today, and it will be so in the future too.

Few seem to recall that 30 years or so ago, the law was changed to limit cardholder losses to $50 and gave them 60 days to dispute a charge. The banks howled (and so did the anti-government crowd) with predictions of huge losses for the banks. What happened in reality is that the public became confident in the CC system, and use of cards and bank profits exploded.

Well-crafted, competently applied regulation can be a big boost for business. If you don't believe that, ask any of Bernie Madoff's investors what they think.

One other observation:

On the evening news, a spokewoman for a US banking association said that if the new rules limit their profits, the banks would just raise their fees on good credits. She drew an analogy to insurance, where overall costs are spread over a large base. Sort of made me think that in the middle of all this, the banks' profits are fixed, and they'll just allocate them to the "Sterling Payers" if the new regs pass.

Nice try, m'am. Try this instead: If I open a letter from any of my card companies eliminating the grace period or otherwise imposing fees upon purchase, I will have a return letter closing all of my accounts with that company in the mail within one hour. I can live quite well without those FF miles, but I doubt any of the major US airlines can survive very long without payments the banks give them for my business and that of others like me.

As usual, the responsible users among us will be subsidizing the irresponsible ones.

Dead wrong.

For years the idiots who carry a balance have been subsidizing those of us who pay in full every month.

I have taken many free flights and gotten plenty of free hotel nights thanks to greedy and financially illiterate North American consumers' irresponsible credit card habits. Thanks for all the free rewards, perhaps I'll have to pay my own way in the future.

Quote:
Originally Posted by freeflyin
As usual, the responsible users among us will be subsidizing the irresponsible ones.
Dead wrong.

For years the idiots who carry a balance have been subsidizing those of us who pay in full every month.

I have taken many free flights and gotten plenty of free hotel nights thanks to greedy and financially illiterate North American consumers' irresponsible credit card habits. Thanks for all the free rewards, perhaps I'll have to pay my own way in the future.


My statement said WILL be.If these threats from the issuers become reality and fees rise and grace periods end,we will lose.Those irresponsible for it will simply have their debt wiped out eventually as they declare bankruptcy or similar actions.

I agree that we have benefited up until now with all the bonuses and subsequent free travel.Realistically I expect it to slow down considerably, if not end for the most part if the issuers clamp down as they are threatening to do.

Are the banks really this stupid to think they can do away with the grace period?

For a cardholder who always pay in full, why would he/she not use CASH if there is no grace period?

Banks can talk with scare tactics to bully Congress but if they really put this into implementation, they would be left with customers with much higher credit risk and have to markedly increase their bad account reserves.

I can see us the good customers subsidize the bad customers in the form of losing our reward programs, but certainly not losing the grace period.

After all, if there is no grace period, why not simply use CASH?

Quote:


My statement said WILL be.If these threats from the issuers become reality and fees rise and grace periods end,we will lose.Those irresponsible for it will simply have their debt wiped out eventually as they declare bankruptcy or similar actions.


Not unless Congress introduces a new Bankruptcy law. The law signed by President Bush back in late 2005, did away the "freebie" of writing off credit card debts. There was a huge jump of bankruptcy filing rate just before the law went into effect.

One other observation:

On the evening news, a spokewoman for a US banking association said that if the new rules limit their profits, the banks would just raise their fees on good credits. She drew an analogy to insurance, where overall costs are spread over a large base. Sort of made me think that in the middle of all this, the banks' profits are fixed, and they'll just allocate them to the "Sterling Payers" if the new regs pass.

Nice try, m'am. Try this instead: If I open a letter from any of my card companies eliminating the grace period or otherwise imposing fees upon purchase, I will have a return letter closing all of my accounts with that company in the mail within one hour. I can live quite well without those FF miles, but I doubt any of the major US airlines can survive very long without payments the banks give them for my business and that of others like me.

Yup. Those who pay in full can always use CASH. Why pay a fee and interest for a small convenience?

The airlines have sold millions of miles IN ADVANCE for the next several years. CC issuers have already paid the airlines the CASH. They could sit on those miles and see if they can barter it back with the airlines. :D

Some observations:

The legislation will make it harder for banks to manage risk. If unable to raise interest rates on high risk individuals, CC issuers will raise rates on everybody, making it harder for legitimate consumers to borrow. I wonder what the bill means by rate hike. If the rate is tied to an index, and the index goes up, is it a rate hike? If it is, this would make managing risk harder.

Even if 70% of CC revenues come from interest, expenses associated with this revenue are high compared to the merchant fee revenue. The latter probably brings more profit.

With no grace period, people who can afford to pay their bills in full will stop using credit cards, and this may be the end of CCs. If this happens, we'll be using charge and debit cards. This will be bad for certain industries such as car rentals where CCs are currently used to guarantee deposit. But this is very unlikely to happen.

The grace period won't go away. Banks know that they would lose a good portion of their cardholders if they were to eliminate it.

However, I would expect:

Rewards programs to become less rich or more restrictive
A return of annual fees - especially for programs with strong rewards
Higher general interest rates (and no, a rate tied to an index like Prime or LIBOR with the index going up is not considered a rate hike)
A decline of low interest or 0% intro rates and balance transfer offers

The grace period won't go away. Banks know that they would lose a good portion of their cardholders if they were to eliminate it.

However, I would expect:

Rewards programs to become less rich or more restrictive
A return of annual fees - especially for programs with strong rewards
Higher general interest rates (and no, a rate tied to an index like Prime or LIBOR with the index going up is not considered a rate hike)
A decline of low interest or 0% intro rates and balance transfer offers


The bolded parts already have happened for quite a while, especially the first and the last ones.

There is a difference between "survive" and "thrive". We want our financial institutions to do more than survive. And, I can state with experience that merchant fees alone will not cover costs and potential losses.

The bolded parts already have happened for quite a while, especially the first and the last ones.

Yes, they have but things will deteriorate much more quickly and deeply if the new regs go into effect

Interesting article in the New York Times this morning.
http://www.nytimes.com/2009/05/19/business/19credit.html?hp

"Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups."

I'm sure we'll figure out which cards remain the best.

A couple of points:

1. The New York Times can no longer be considered a responsible or reliable information source. I don't even consider its articles in my decisions. Judging by their dire financial situation (much worse than many other news sources), others must feel the same way.

2. I am sure I am not the only one that can figure marginal cost vs. marginal benefit for credit card use. I will never, ever subsidize card holders with poor credit risks. If my net benefit is not positive and better than other options, usage of a given card will go to ZERO.

2. I am sure I am not the only one that can figure marginal cost vs. marginal benefit for credit card use. I will never, ever subsidize card holders with poor credit risks. If my net benefit is not positive and better than other options, usage of a given card will go to ZERO.
Agree on this. I think the concern for many of us is that with less profit coming from those who maintain a balance, the net benefit, while not going to zero (or less than zero), may decrease significantly for those of us who use CC's for convenience and to acquire points/miles.

There is a difference between "survive" and "thrive". We want our financial institutions to do more than survive. And, I can state with experience that merchant fees alone will not cover costs and potential losses.

I think given the mortgage hangover, government bailout, and subsequent recession, most banks will be happy with "survive" right now.

And I agree with Centurion. The NYT article was a credit card lobbyist's dream. Credit card lenders are happy the the regs aren't much, much worse.