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Lisa Hronek Posts Tagged ‘Durbin Amendment’
Credit Card Revival
Just in time for Black Friday and the holiday season, credit cards are making a comeback.
According to a USA Today article, “On Black Friday, payments made with credit cards rose 7.4% from a year earlier, vs. an increase of 3.4% for payments with signature debit cards,” according to First Data, a payments processing firm. An analysis by Javelin Strategy & Research forecasts that credit card payments for online purchases will increase 63% from 2011 to 2016, vs. 2% for debit cards. During the recession, the use of credit cards declined as cost-conscious consumers switched to debit cards and cash for their purchases.”
There are likely a number of reasons for the return to credit cards. Effective from Oct 1st, the Durbin Amendment, which capped interchange fees, resulted in most banks eliminating rewards on debit cards. Thus, consumers wanting rewards for purchases needed to place them on credit cards and those consumers without credit cards may have applied for them during the past six months. (Personally, I know I did apply for a new credit card with rewards during the past six months due to the elimination of rewards on my debit card.) Additional evidence supporting my theory comes from the Federal Reserve Bank of New York that reported that credit account inquiries increased for the second quarter in a row (an indicator of consumer credit demand). This may indicate a possible, albeit slow, return to borrowing habits. Anthony Karydakis, the chief economist at Commerzbank in New York, said “slowly but steadily, consumers are exploring more normal ways of returning to a more normal pattern when it comes to borrowing habits.”
It is interesting to note that retail sales during Thanksgiving weekend climbed 16% with shoppers spending $398.62 on average, which is up from $365.34 a year earlier, according to the National Retail Federation who cited a survey from BIGresearch. ComScore also reported that web sales for Black Friday surged 26% to $816 million and 18% to $479 million on Thanksgiving Day. Although, personally, I did not shop during the Thanksgiving weekend, I know I will be charging my Christmas gifts on a credit card in the near future for the rewards. The jury is still out whether or not I will spend more or less in comparison to last year…. Hopefully less! But doesn’t it always seem that you end up spending more than you expected to around the holidays?
Consumers could also be suffering from “frugal fatigue” from the past three years, says Gerri Detweiler, author of Reduce Debt, Reduce Stress. She stated that “people are tired of having to cut back, and that can lead to spending more on credit cards.” Again, I completely agree in thinking that people want to spend a little bit more this holiday season after cutting back in previous years. Why wouldn’t someone want to get something nice for their family and loved ones for the upcoming holiday season? Either way, more consumers are using credit cards, which is good for banks, retailers, and the overall economy.
Payments reform: learning from marketers around the globe
Payments reform has been sweeping across the globe. In many of the top payments markets, reform has either been implemented recently or is on the table for discussion. Governments such as the U.S., the U.K., Canada, Japan, Australia, South Africa and more, are placing restrictions on lending like never before.
Australia is the latest market to come under the spotlight. With a large economy and an advanced payments infrastructure, Australia is known for being a leader when it comes to regulatory reform in the payments industry. The impact of the Reserve Bank of Australia’s (RBA) regulation of debit and credit card interchange fees, in 2003, was frequently referenced in discussions here in the United States regarding debit card regulation. In fact, the initial proposal by the Federal Reserve, under the Durbin Amendment, was for 12 cents per debit transaction, as it is in Australia. (After overwhelming criticism this was increased to an average of 24 cents per transaction, according to Federal Reserve estimates).
In 2009, the Australian parliament passed new laws to further regulate its payments industry with many of them due to be implemented in July, 2012. The legislation is reminiscent of the CARD Act, passed by congress and signed into law by President Obama in May, 2009, as well as credit card reform introduced in Canada in early 2010. Card marketers in the U.S. and Canada will therefore find the following list of highlights reassuringly familiar:
- Payments must be allocated to highest interest rate balances first. (Introduced in the US and Canada.)
- Consumers must consent (opt-in) to overlimit fees. (Introduced in the US and Canada.)
- Consumers are allowed to go over-the-limit by 10% of their credit line without incurring a fee. (Australia only.)
- Consumers must provide their consent prior to having their credit limits raised. (Canada only.)
- Offers for credit should contain a box that outlines the terms, including rates and fees, in clear and concise language. (Introduced/improved in the US and Canada.)
- Issuers must provide a statement warning customers how long it will take to pay down a balance if they only pay the minimum amount due each month. (Introduced in the US and Canada).
Clearly, regulators are learning from reform around the globe by taking the most impactful regulations and adapting them to local markets. Marketers should take heed of the fact that not only are regulators learning from what is happening in other countries; but, they are also, to varying degrees, working together on committees and sub-committees which makes the global trade of payments regulation even more likely.
It therefore makes sense for payments marketers to learn from what is going on in other countries and adapt those ideas for local consumption. The changes to interchange in Australia caused Australian card marketers to cut perks and shrink rewards programs. Similarly, in the U.S., the Durbin Amendment has prompted the banks to charge fees for checking accounts and to scale back on debit rewards. The roles have now been reversed and Australian issuers are able to learn from how U.S. and Canadian card issuers responded to product and pricing regulations. In fact I just returned from a tour of Australia and New Zealand where I was asked to give a series of speeches on this very topic – “Card Marketers Response to Regulations,” with a focus on the U.S. and Canada.
The regulators are working together and learning from each other making the global trade of payments reform inevitable. Those marketers that keep an eye on how issuers are responding in other markets, whether here in the U.S., Australia or elsewhere, will gain a competitive advantage.
Will prepaid cards replace checking accounts?
Even if you haven’t heard of the Durbin Amendment or interchange fees, you may have heard rumblings of change coming to your checking account. The Durbin Amendment is attempting to regulate how much banks can earn from each purchase made with a debit card. A decrease in revenue from various fees is leading many top banks to consider doing away with the “free” checking account concept. As fees go up, could more traditionally-banked people turn to the prepaid card instead? Prepaid cards would be exempt from the new legislation, so they could offer a viable alternative. Recently, the Network Branded Prepaid Card Association sponsored a study which found that prepaid credit cards could outpace checking accounts in some cases.
If this all sounds serious, you’re right. It is serious.
Personally, I use my checking account and debit card for everything. I was definitely surprised to learn that Chase is considering capping debit card purchases at $50 or $100. That would create some serious changes to my entire financial routine – but I don’t know if I could forsake my checking account altogether. In addition to changes in how customers can use debit cards, banks are also considering lots of new fees – eBanking fees, statement fees, monthly fees. Fees, fees, fees, fees.
Have I freaked you out yet? My apologies, readers, that wasn’t quite the plan. Well, maybe just a little. There is a reason for this, I assure you. We’re always so quick to rush to doom and gloom and assume fees will skyrocket and send banking back under the mattress, but that may not be the case for the majority of consumers.
Not too long ago when the Credit CARD Act was passed, analysts from Wall Street to Main Street were quick to jump up and forecast that 0% intro rates would disappear, every card would carry an annual fee, credit would be unavailable and so forth. In most cases, that hasn’t really happened. 0% intro rates are still a-plenty, as are no-annual-fee cards.
Yes, banks are experimenting with new fees to combat lost revenue from regulated interchange fees, but those same banks are also including provisions to avoid those fees. So, if your free checking account now has a monthly fee, there’s a decent chance you can avoid that fee by having direct deposit or performing some other activity.
Are more checking account fees on the horizon? Anything is possible, especially if banks are nervous about the passage of the Durbin Amendment. Will people move to prepaid cards to avoid those fees? Some may, but I really don’t think that there will be a mass exodus from the bank to the prepaid card.
So if the sky didn’t fall back in 2009 after the passage of the Credit CARD Act, chances are the sky will stay up this time too – Durbin Amendment or not.
You can breathe now. It will all be ok.
Credit Card Strategy: A New Era for Loyalty Marketing Q&A
Q: What do you think will be the impact of the Durbin Amendment on
loyalty programs?
A: There will be significant pressure to scale back debit rewards programs – Chase has already announced that it will cut debit rewards for new customers in anticipation of the new rules. Also, I think the new rules will accelerate the trend towards relationship banking which was initially fuelled by the regulatory squeeze on overdraft fees. In an interesting twist we are now seeing consumers sign up for overdraft fees which might help the industry weather the potential reduction in debit card revenues.
Q: How is social media shaping loyalty marketing?
A: In my webinar we discussed the changing landscape for loyalty marketing and the fiercely competitive environment. Consumers are ruthless and will use the loyalty program with the highest cash back rate or the most points per dollar. These days consumers have easier access to information than ever before via the internet. The rapid growth of social media sites during the past two years means they also have access to vast array of recommendations and referrals. This represents a huge threat to loyalty marketers but, at the same time, it also presents an opportunity if positive news about your loyalty program goes viral.
Q: How can a card issuer build relationships if it doesn’t have a full
suite of banking products?
A: Focus on other touch points such as customer service, communications and branding. The best examples of this are American Express and Discover. Both have focused on customer service. Both compete aggressively for customer service awards so that they can promote this as a competitive advantage in their marketing materials.
Q: How can you create a loyalty program that is valuable to the consumer and something they will actually engage with and use?
A: Consumers want rewards for items they already purchase and they want instant redemption. The issuer that can crack instant redemption will be on to a winner.
Q: What features of the rewards program drives the decision to enroll and then engage – bonus at time of enrollment, bonus in certain merchant categories, earn rate, redemption options, point expiration, etc.?
A: In our research we found that the most powerful incentive for usage is simply being able to get more rewards for the dollar or the highest cash back rate. This was followed by the ability to redeem instantly which you can with many merchant (non credit card) rewards programs.
Q: Can you touch on firm offers of credit vs ITA?
A: The bulk of rewards offers continue to be pre-screened. ITA’s are used most frequently seen with cobranded rewards cards.
Q: ¬What is the biggest frustration with rewards that you have picked up in your research¬?
A: The missing piece is instant redemption. We discussed a couple of examples of issuers who have recently added instant redemption to their programs including Target and the Marriot Rewards program. Citi just announced that it is testing what it refers to as 2G cards developed by Dynamics, Inc. (see Lisa Hronek’s Blog “Cutting edge credit: push a button to pay with rewards”)
http://www.comperemedia.com/blog/2010/12/cutting-edge-credit-push-a-button-to-pay-with-rewards/
Q: ¬How do these trends apply to non-financial services loyalty cards?¬
A: The most popular rewards programs are those offered via a grocery or drug store chain. The challenge for the card industry is to figure out how to partner with these programs that are already entrenched in the wallet (consumers have 14 loyalty programs according to Colloquy). Non-financial loyalty programs are often more technologically advanced – Starbucks,for example, has a mobile loyalty program in operation – and credit card companies can learn from their experience.
Q: ¬What do you think the top 3 success metrics are for an effective loyalty program?¬
A: An interesting question given that rewards cards are, arguably, the “plain vanilla” cards of the new era. I say that because most people own a rewards card and many are receiving multiple offers for rewards cards in the mail. In other words, you have to have a rewards program if you want to compete for prime consumers. I would therefore say a measure of acquisition, such as new accounts, is measuring the rewards program; share of wallet – because that’s what it’s all about – and some type of redemption measure that factors in ROI.
Q: Given some of the downward trend you showed earlier, is there a market/consumer for a richer rewards card with a fee?
A: Yes, there is a market but it is very competitive and any new rewards program will need a clear advantage in order to stand-out. For example, Citi just launched a suite of new ThankYou Rewards cards which offer a 15% discount on travel booked through a partner and no foreign transaction fees. These additional features are necessary to differentiate this card from the competition.
Q: Are you seeing similar trends in the rewards small business space?
A: There are fewer players in the small business space, particularly when it comes to direct mail, so the dynamic is different. However, some trends stand-out such as the promotion of cash-back products from Chase and American Express. The result is a head-to-head between the two issuers that is playing out in this space. You’ll recall, one example from the webinar was a business card from American Express that demonstrated the use of aggressive marketing tactics.
Q: What data is available about the percent of rewards card owners who actually redeem their points?
A: Redeemers tend to be more satisfied and use their cards more often. This means that making it easy to redeem/removing barriers to redemption will have a positive impact.