Card companies choose different paths to recoup revenue
October 8, 2009 by admin
The back and forth battle between consumer groups and credit card companies is beginning to take shape. Over the past two weeks, major credit card issuers Bank of America and Wells Fargo have taken different approaches in trying to recoup lost revenue from their credit card divisions. The financial industry has taken many lumps, starting with the housing and mortgage markets. The next largest area of exposure for most lenders is within their personal lending portfolios (personal loans, credit cards, lines of credit) and the next major obstacle is likely to be the commercial loan business.
Consumer groups have been working for years to force credit card companies to change their marketing practices as well as their policy on handling late fees. Earlier this year, the consumer groups won a significant battle when the credit card industry agreed to a number of key reforms aimed at protecting consumers. Gone are the days of bait and switch advertisings, payments being applied to the lowest interest rate balances and card companies targeting kids right out of high school. The changes were welcomed by consumers across the country, which have seen balances on personal card debt increase by almost forty percent in the past five years. The credit card industry and leading banks have varied in their response to the legislation, but one trend has held constant, most lenders are now pursuing alternative methods to recoup their fees.
Traditionally, credit card balance transfers, have been a major marketing ploy by credit card companies to attract new consumers. Many card companies offered consumers low fixed interest rates and even zero percent rates as a way to attract new business. They were able to offset offering a below market rate by charging an upfront balance transfer fee between one and two percent of the transferred amount. Most card companies offering balance transfers today have increased this amount to five percent, greatly diminishing the potential savings for consumers. In addition, a large number of credit card companies have reduced the available credit lines for their existing customers and in many cases switched the type of cards that they have from fixed to variable rate finance cards.
This past week, Bank of America was in the news as it bucked the trend with raising rates for its card holders. The bank issued a statement that for the time being they would not be increasing rates for card holders, but would be pursing other methods to recoup losses and add revenue to this division of their company. This is the polar opposite approach that Wells Fargo has pursued, which will be increasing rates by as much as three percent for existing card holders. Credit card companies are likely to be under pressure from the economy for at least the next twelve to eighteen months. Personal bankruptcies have soared to historic highs as consumers struggle to balance their personal finances. The continued increase with rising unemployment will further pressure this area of lending as banks will have to revise their loss provisions within these groups.
The long term prognostication is that consumers appear to be positioning themselves to be less reliant on plastic and more focused on building their savings. The national savings rate has increased every month this year as consumers look to rebuild their balance sheets. The immediate challenge for both consumers and card holders is balancing the potential rate increases with the economy and personal finances. The free spending days of the past are almost certainly over as card companies look to put stricter underwriting guidelines in place to protect both themselves and their customer base. Credit cards are likely to be a more expensive method to finance purchases over an extended period of time and they appear more likely to give market share back to consumer debit and bank cards tied into personal checking accounts. Consumers are likely to see less advertising for new card offerings and may need to be more proactive in pursuing new credit card options if they are not satisfied with their current lender rates and terms.