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Future Shock- How Credit Card Companies Will Continue Making Money

For credit card issuers, the good times of easy profits seen over the last decade is coming to an end. A recent survey showed that revenue per card has halved over the past five years. Why is this? Intense pressure from all sides is squeezing profits as never before:

• Competitors: with over 1300 on the UK market, credit cards are now close to being viewed as a commodity by the consumer. It is extremely difficult to offer a distinctive package that will bring customers flocking, no matter what the Marketing Department come up with. Sites like Compare-Online, offering instant comparisons between card offers, make any weaknesses difficult to hide.

• Customers: Card loyalty is at an all-time low. ‘Tarts’ surfing their debts around the latest 0% transfer deals are currently estimated to cost issuers £600m a year in ‘lost revenue’ (i.e. interest they would charge us if we were too lazy and stayed put).

Bad debts are also on the increase, as the chickens come home to roost on over-stretched households in an atmosphere of rising utility bills and mortgage repayments. Barclaycard, the UK’s biggest issuer, is currently sitting on around £1.5 billion of bad debts over its 11m customers.

• Regulators: They’re on the warpath, and the bankers hate them. Last year the Office of Fair Trading forced late payment fees down to £12 from the customary £20-£25. Now the possible misleading presentation of headline APRs is under attack following a ‘supercomplaint’ against the whole industry made by consumer watchdog Which?.

Even the interchange fees charged to merchants aren’t sacred, the Australian government recently imposing caps on these down under. No wonder a spokesman from the British Banker’s Association recently wailed that there were "a lot of [different issues] for banks to absorb, and it's not easy to do so when they are coming at you from left, right and centre”.

OK, I know this is all very upsetting- but let’s put those handkerchiefs away and see how those poor card issuers plan to keep profit levels high enough to pay those hungry shareholder’s dividends going forward.

Getting Choosy Over Customers- the ‘Flight to Quality’ Begins

Sorry to break this to you, but you may no longer be a valued customer. The fact is that customer portfolios for most credit cards follow the 80/20 rule- that is, 20% of customers make 80% of their profits. No longer will marketing departments be judged by simply how many new applicants they get through the door, it will be the profit-making quality of the applicants that’s important. If you’re a mere convenience user or 0% transfer surfer, expect to feel less loved in the future, with more fees and less rewards coming your way (see below). Your issuer probably won’t be that bothered if you move elsewhere, as you weren’t making them any money anyway.

Bad debt is also being tackled head-on. According to new research, 2.8m people in the UK had their credit card applications turned down in the last six months. Surprise, surprise, most of the rejections were in the debt-laden 25-34 age bracket, where 11% of applicants were turned away. So much for the young professionals- it seems card issuers are happy for youngsters to rack up debt at university, after that they’re on their own!

Land of the Fee, Home of the Annual Charge

Many people think that credit card fees and charges are for delinquents only, following late payments and breaching credit limits. Not so! In future look out for more of these, and at higher rates than before:

• Annual fees: an old industry favourite. Issuers last tried this en masse back in the 1980s, but like a dodgy reunion tour it’s back on the agenda. MBNA introduced annual fees earlier this year, and others could well follow. Look out for a sneaky £10+ charge on your next statement.
  
• Balance transfer fees. No longer will carefree surfers be able to shuffle debts endlessly around different cards free of charge. Sure, the 0% APR period will still be there, but up-front fees of 2-3% of the balance taken over could well end up being the norm.
  
• Currency conversion fees. Using your card abroad? Check the smallprint, as another 2-3% fee could well be added to every purchase you make. That’s an extra £4-6 on a £200 purchase, just for multiplying two numbers together- are the computers demanding overtime?
  
• Cash withdrawal fees. Using a credit card at a cashpoint- not one of the best decisions you could ever make. That’s another 2-3% (with a typical minimum charge of £2.50) you’ve just cost yourself. Oh, and by the way, the APR is higher too (a mailing through my door today stated 27.9% for cash withdrawals, as opposed to 19.9% for all other transactions).

Notice how these fees are all in that annoying 2-3% range. Taken individually, they aren’t quite enough for you to get hot and bothered about. Psychologically, issuers are depending upon the ‘salami’ effect, taking a small slice of income out of millions of transactions, adding up to big profits. This range could well be nudged forward into the 3-5% territory in the near future.

Going Unrewarded

Barclaycard’s dropping of their tie-in with Nectar points in 2005 could well prove to be a pointer for the future. All over the credit card industry, the dark mutterings can be heard- reward schemes don’t work and are too expensive.

Usually reward schemes are not simply cut without offering anything in return. Barclaycard replaced Nectar with in-house travel insurance, stating that customers preferred cuddly “security and peace of mind” to tangible rewards. Well, perhaps, but it does seem rather convenient. Blanket reward schemes typically cost issuers around 2% of transaction value, and cutting them saves money. You can expect cashback programmes to be cut or replaced in similar fashion in the near future.

Payment Protection Insurance (PPI) offered by card issuers is usually overpriced and often inappropriate. Well, no matter, in these uncertain times their ‘necessity’ can be emphasised to you just that little bit more. Yes, the sell is going to get harder, and the premiums are going to get higher. Note also that your repayments are allocated against the monthly PPI premium due first, before the outstanding balance on purchases. This effectively increases the minimum monthly payment and therefore the likelihood of late payment charges being triggered.

Now we also have the dubious benefits of Card Protection, PPI’s unpleasant younger brother, seen lurking increasingly on card applications. This offers insurance against card theft and identity fraud, but again is usually vastly overpriced and may well simply replicate protection you have elsewhere.

The advice here is simple. Remember these schemes are always optional , no matter how much they are pushed by sales teams, so opt out.

Yes, card issuers certainly have a few tricks up their sleeve when it comes to retaining profit levels in the future. However, you should take note of how much of the above depends on sloppy customer behaviour. By shopping around and steering clear the avoidable pitfalls, good credit deals for yourself should still be achievable.

Other Related Articles 
How Credit Card Companies Make Their Money - Wedneday 25th April 2007
Revolvers, Tarts and Deadbeats – How Do You Use Yours? - Monday 16th April 2007
The Credit Card- Growing Old Disgracefully? - Friday 13th April 2007