In many ways>, the economy has been as tough on credit-card issuers as it has been on their debt-ridden customers.
Charge-offs and delinquencies are rising as unemployed credit-card holders are falling behind on their payments. Interchange revenues are declining, as suddenly-frugal consumers are opting to leave their cards at home and pay with cash. And a new credit-card law is reining in practices, like charging over-limit fees and retroactive rate increases, which used to bring in reliable cash for the industry.
Not only is a card issuer now somewhat hamstrung about the pricing they can apply to an account, but even good accounts are underperforming because everyone has a recession psychology, says David Robertson, owner of The Nilson Report, which tracks credit-card industry trends.
Yet, the industry may recover sooner than many of its customers. Recently, Citigroup analyst Donald Fandetti upgraded Capital One and MasterCard (MA)
With the recession likely over, as Federal Reserve Chairman Ben Bernanke said last week, banks now can focus on repositioning their credit-card portfolios for growth, albeit at a slower pace than they ve seen after past recessions. They ll face tougher regulations -- and that s not necessarily good news for consumers.
[Banks] are, of course, looking to make money on their cards so it s reasonable for them to adjust to the new regulatory environment, says David Ely, professor of finance at San Diego State University. You d expect them to seek ways to make these cards profitable.
Here are six strategies that credit-card issuers are using to lift their bottom lines:
1. Higher rates for everyone
Unable to increase interest rates on past purchases under the new credit-card laws, card issuers warned that they may have to start charging higher interest rates across the board.
Cue in the latest card from Bank of America. The BankAmericard Basic Visa card, launched last week, boasts simplified rates and terms, including charging the same interest rate for purchases, cash advances and balance transfers. But its annual-percentage rate -- a variable pegged to the prime rate plus 14% -- is currently 17.25%. That s considerably higher than the 9.99%-plus-prime that issuers like Bank of America, Citi and Chase used to charge, says Robert McKinley, the founder of CardWeb.com, which provides industry research and analysis. So unless you re among the 10% or so of card holders trapped paying off an expensive cash advance or balance-transfer offer, you ll end up paying a lot more interest with this card, McKinley says.
Bank of America spokeswoman Betty Reiss says the Basic card is for consumers looking for greater simplicity and predictability in their financial products, and that the rate will not change over the life of the account, except if the prime rate moves up or down.
2. Moving from fixed to variable rates
Just three years ago, more than 80% of all credit cards charged a fixed interest rate. Now, 80% to 85% of credit cards carry a variable rate: a shift that means most card holders will see their rates go up as the prime rate starts increasing, McKinley says.
Making the switch was a real stampede, says Linda Sherry, a spokeswoman for consumer advocacy group Consumer Action, which publishes a comprehensive annual study on credit-card trends. The majority of issuers switched over the past 12 months and many did just weeks before a provisionClick here
The new credit-card law may have lead banks to reconsider over-limit fees, as exceeding one s limit will soon become an opt-in feature but they re reintroducing others. The model is moving toward what was popular in the 1980s: higher interest rates and annual fees, says Dennis Moroney, a senior analyst for financial-services research firm TowerGroup.
Offers for fee-based credit cards mailed to consumers rose significantly during the first quarter of this year to 27% of all offers, up from 18% a year ago, according to Synovate Mail Monitor, which tracks credit-card mailings.
4. Usage fees
An annual fee can be a big turn-off for consumers. To avoid user backlash, some issuers will get creative with how they charge usage fees. One possibility: tying fees to card usage. The issuers may try to incent you to become profitable and if you don t, they may introduce a fee, Robertson says. In other words, you may be required to exceed a certain spending threshold to avoid an extra charge. That s a lose-lose situation for anyone carrying a balance: upping your card usage will cost you more in interest payments, while keeping it low will cost you an annual (or monthly) fee.
5. More junk mail
It s no secret that card issuers have cut back on new-card offers. But if you re a customer of good means and credit, chances are those envelopes will keep coming. As card issuers seek ways to become profitable, they re focusing on their best and most affluent customers. JP Morgan Chase, for example, recently launched Chase Sapphire, a rewards card designed specifically for affluent consumers and has been mailing 0% APR balance-transfer offers in an effort to grab market share from its competitors.
We might be seeing a fundamental shift in which banks will approach managing the relationship with the customer and it will be on a household basis rather than a product basis, Moroney says. What s the risk of the household? What are the other products we may sell them?
6. Reward hoops
Rewards programs are expensive to run, yet they are so popular with consumers that getting rid of a program could create a public disaster for any issuer. Some are getting around the problem by introducing surreptitious changes, such as fees for redeeming rewards, making rewards more expensive, or shortening their shelf life. Think about what the airlines did with the frequent-flier programs, Moroney says. They ve created more challenges for getting free flights. Read about some of the latest rewards programs cutbacks here.