Card industry top line/bottom line pressures to hit customer offerings

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The past 2 years have seen Banks being closed, merged, and funded by the US government to keep them afloat. The loan portfolio grew faster and cards were issued to consumers while adhering to minimal credit appraisal standards. As the economy went into a down turn and unemployment rates went up, banks were at the receiving end with default rates rising steadily. Customers were also at the receiving end with rates hiked, cards closed down and a lot of newer fees being introduced. In light of what happened, the US Congress passed the Credit Card Act 2009 and majority of its rules came into force from Feb 2010. Some of the salient features of the Act are:
[list]
[*]Banks will no longer be able to raise interest rates during the first 12 months after opening an account – or hike rates on pre-existing balances altogether
[*]Credit-card payments, if exceeding the minimum, will be allocated to the higher-rate balances first
[*]Monthly statements will become easier to understand and the ability to issue credit cards to college students will be severely restricted
[*]Customers who pay on time should not be penalized
[*]Cardholders should be protected from misleading terms
[*]Banks should not impose excessive fees on cardholders
[*]Vulnerable consumers should be protected from fee-heavy sub prime credit cards
[*]Congress should provide better oversight of the credit card industry
[/list]
As these rules started to take force, banks started doing a reconciliation of what future held for them in a market where the economy also was on a downturn and unemployment rates were at high levels. Consumers were trying and saving every penny they earned and repayments on loans taken started taking a back seat. Banks in the meanwhile to beat the deadline on regulations started increasing the APR’s, Fees etc.

As Banks have to protect their revenue and profits, the market in the years to come will see drastic changes the way Banks deal with customers. Banks will look for quality and not for quantity and effort on Direct Marketing, Cross Sell /Up Sell will come down. Some of the changes which are likely to happen are

Card Act 2009

Act has been in force since Feb 2010. Banks will have lesser leverage the way they act with customers. Banks will have to come with innovative ideas and products to beat the provision of the Act, without loosing customer confidence and antagonizing regulators. Banks will also start looking at increasing revenues from other alternate streams.

Debit over Credit

Consumers have started saving every penny for their hard days and have started use of their Debit cards and gain control over their debt. Every penny saved is important when the economy has not been stable and the job market has not been picking up. It has been their endeavors to keep track of there spend and not get into more debt by using credit cards. This will hit banks as credit cards circulation will come down due to voluntary attrition and spends on existing cards come down thereby hitting the revenue of banks. To mitigate the downfall Banks will be forced to charge Annual fees on Debit cards and allied rewards program which some banks had introduced may be pruned.

Cut down in Rewards

Banks were liberal with rewards and had come out with rewards cards. All these should see a slowdown or drastic pruning. Rewards will be harder to earn and the eligibility to earn points will be made tougher. Banks will try to limit reward points with an expiry period to redeem them, reduce reward points being accumulated for spending etc. Also the number of items which can be redeemed can be brought down.

Annual fees on credit cards

All these years banks were on a major acquisition drive, Cards were being liberally issued to people across the entire spectrum and most of them were free credit cards. All these may come to a stop as banks will now start charging Annual fees. This will also affect their profitable customers. This will turn out to be a major revenue earner for Banks.

Cards Churning

Periodic churning of portfolio to weed out inactive cards, limit resetting, restrict cash advances, withdraw add on cards, spouse cards, special purpose cards such as petro cards, airlines cards, etc. may also happen, As banks start adopting a conservative approach towards lending, the first casualty will be reducing limits. Cards inactive/ reduced limit usage for considerable longer period of time may be closed/ or limit reduced without informing customers.

Stringent credit approval process

As the economy slowly crunches along, banks will be forced to look back at their credit appraisal system. Selective approval will be the norm and the processing times for cards may go up. Credit scores from agencies may not be the only one to be looked as applications will be scrutinized carefully before cards are setup. Newer scoring models will come into picture to take care of Banks risks and customer sensitivity.

Come down hard on payment defaults

Banks will start closing accounts on a slightest sign of customer overshooting their balance or a single payment default. These measures have already been happening and this will now be done with full vigor. Clearly consumers will give precedent to clear Mortgage over card debts thereby missing on payments. As banks now have limited ability to increase rates, the option to close cards will be high. Banks would like to keep only profitable customers on their books and offers to these will be on a selective basis.

Interchange issues

Merchants have been coming down hard on Banks and Visa/MasterCard on the idea of reducing interchange rates.(Interchange is part of the merchant discount rate which is paid to issuers) One of the major sources of income for banks is from interchange and there is likelihood of interchange rates coming down thereby hitting the banks revenue stream which used to constitute a major portion.

In summary, banks will take stringent measures to protect their top line and bottom-line and start introducing newer products which will comply with the Card Act. They will also be cautious in lending and hope for the economy to turn around for good things to come by.

Disclosure: The opinions expressed herein are my own and do not reflect those of the company

Girish P B
TCS
Girish is a Consultant with expertise in Retail Banking(Cards & Loans) and has extensively worked in the areas of People Management, Operational Management , Contact Centre Management-Voice & Non-Voice, Client Servicing and Relationship Management.

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