How are card-issuing banks coping in the aftermath of phase two of the Credit Card Accountability, Responsibility and Disclosure Act, which took effect last Monday (limiting fees and interest rate charges and requiring specific disclosures in cardholder statements)? According to Ted Landis, senior executive, financial industry programs for payments and strategic cost reduction at Accenture, forward-thinking issuers such as Chase, Wells Fargo and American Express are making the best of it by coming up with new card profitability models and extending alternative payments to the young and undercarded population.The hard technology work of complying with the new legislation has been done, Landis notes. In 2008 and 2009 financial institutions had to allocate up to 40% of their development staff to this effort. The IT labor allocated to Card Act compliance should be much lower in 2010.
But the work of remaining profitable in the newly regulated environment is just beginning. "The new credit card law benefits consumers; it creates transparency and keeps them better informed of their costs," Landis points out. "Bankers I've spoken to don't argue that point, they see the benefit of that." Card issuers that will succeed in the post-Card Act environment, Landis believes, will be those that try to meet consumer preferences and provide security, to rebuild trust lost in the credit crisis; that are willing to let go of old profitability models and come up with new ones that shift from product centricity to consumer centricity; and that prepare themselves for new payments, preferences and devices.
A good example of a card-issuing bank that's gotten creative at catering to debt-sensitive customers, Landis says, is Chase with its Blueprint card. In this program, Chase lets customers choose how they want to pay down their debt; if someone's buying a couch, they can pay for it all right away or pay in half or thirds. While most cards allow the customer to pay as much of the bill beyond the minimum each month as he likes, what's different with Blueprint is that this choice is explicitly spelled out in the monthly statement. Banks could take this concept to the next level, for example providing a lower interest rate to the customer who chooses to pay the purchase down more quickly [which doesn't raise profitability but does lower risk]. Such variable pricing creates what Landis calls "dual accountability" between the consumer and the financial institution for how risk is managed and how debt is handled. Chase, Wells Fargo and American Express have been the best at marketing such plans, Landis says, although others are doing this too.
Recent articles have divulged how some banks snuck in extra new fees just before the main phase of the Card Act took effect last week. According to Landis, such short-term measures are not sustainable. "The consumer population will address that in their adoption and how well they stay with that card product or capability," he says. "Some banks are doing it, but we don't put those banks in a category of longer-term winning in the marketplace."
Card issuers that succeed in the wake of the Card Act, Landis says, will be those that take a page from the retail market and start doing more consumer segmenting and analysis to improve their pricing. "There's a lot of money left on the table that you can accomplish through pricing, and not so much flat fees," he says. For instance, some banks are linking products together and, say, offering a credit card customer with a consistent payment record higher interest on a new savings account.
The winners also will be those that embrace "alternative" payments such as person-to-person and business-to-consumer mobile payments. "The whole mobile space is growing and as soon as equipment manufacturers begin to introduce near-field communication, you'll really start to see it take off at the point of sale," Landis says. But there are other ways to leverage the mobile space as well, he says, through marketing, rewards programs, and ticketing as well as online banking initiatives that can deepen the consumer relationship. Younger consumers in particular have shown a preference for SMS payments and mobile money transfers.
It's hard to see how mobile payments can be anywhere near as profitable as credit card activity. But Landis says it's all about "diversifying profitability models," which could be reworded as "accepting the inevitable." "Because of consumer preferences, you're not going to be able to fight off emerging payment channels and access points for consumers," he points out. "You can either defend your old model or embrace a broader model of customer centricity."
One emerging payment type card providers will need to start supporting, Landis believes, is micropayments. "Banks will have to look at designing marketing programs to increase card use for small amount purchases," he says. "There's a market opportunity, at least in North America, for the underbanked."
Not everyone in the industry is taking the enlightened stance Landis describes. "You're still going to have folks that try to stick with the old profitability models," he says. "But consumers will root those folks out."