The End of Buy Now – Pay Later? – Part II

So today’s the big day eh? (sorry about the Canadian reference – been watching a lot of the Olympics). Today is the first day of the Credit Card Act of 2009.

In this week’s rant, let me briefly tell you 2 personal stories with my own credit cards (both are from one of the 10 that control over 90% of the credit card receivables today.)

Story No. 1. Last fall, I made a sizeable payment on a credit card that I use for my consulting work. I’ve had this account for over 15 years because of the rewards program it had. The next day, the card issuer slashed my credit line to the current balance – essentially leaving me without any available credit on that account. I called the customer service number and spoke at length with an “account manager” who, after reviewing my 30-year credit history, my 10-year employment history (13 years previous employment history), my homeownership status with available equity, and my total debt ratio of less than 30% - informed me that she couldn’t extend my credit line.

The whole exercise was a crock – she looked at my credit score, plugged in the variables of an application score into a program to determine the debt ratio and that was that. I explained to her that I was the same borrower today that I was yesterday and that her action has adversely affected my credit score – through no fault of my own. It made no difference – policy is policy and that’s the way it is.

Story No. 2. Two weeks ago, I inadvertently placed the wrong payment date in my online payment system with my bank for payment on my other credit card account. The payment (paying the statement balance in full) was received one day after the due date triggering a late charge. No problem, I should be charged a late charge as a consequence of making the payment late. Two days later, I receive a letter from the issuer informing me that my interest rate would now be increased to 25%.

I called the “account manager” and after getting nowhere, insisted on speaking with her supervisor named Alex. Alex told me that there was nothing he could do – the bank’s position was to institute the new requirements of the Card Act of 2009 in January and as such, the 25% interest would remain for 6 months. If I made regular payments during those 6 months, then the rate would be returned to the retail rate. I reminded him that the Card Act only allows the rate increase once the account becomes 60-days delinquent and he said the bank was not honoring that part of the Act until the official date – how nice of them. He went on to say that he doesn’t even have the system access to make any changes at his level – the bank’s policy is now driven by the computer’s parameters. He concluded by saying that I can avoid the 25% interest rate by paying my balances in full each month – wow, I didn’t know that (sarcasm inserted).

Okay, so here's why I question the survival of the future of the credit card industry:

1. Card issuers cannot have profitable portfolios unless cardholders carry balances – you can’t make up the loss of finance charge income with fees.


2. Card issuers cannot build portfolio balances unless they offer available credit lines and cardholders carry a balance. Encouraging them to pay off their balances each month is a sure way to go out of business.


3. Card issuers need higher portfolio balances to deflect their growing delinquency and loss ratio reports to their regulators and shareholders (see my 12/13/2009 post)

The credit card business is no longer driven by customer service, product differentiation and competition – it is driven now by computer algorithms, product parameters, and technological efficiencies. Human beings no longer run the credit card industry – they run the machines which are configured by math equations.

And the math doesn’t add up.

The End of Buy Now – Pay Later? – Part I

It’s interesting to watch what’s happening in the credit card business. With many elements of the Credit Card Act of 2009 set to take effect this month, I’m beginning to wonder, after 30 years of evolution, if the credit card business is on a death watch.

During the 80’s and early 90’s, the credit card business became a very lucrative product line for financial institutions – primarily because credit cards became a status symbol (remember the movie, “Trading Places” when Dan Aykroyd’s character bragged about having a Gold Card?) and issuers were touting the convenience of using a credit card vs. writing a check. Issuers made money on the interchange fee as well as the finance charges for the 30% or so of the card portfolio that did not pay off its balance each month.

The problem in the mid-late 90s became the operational expenses to run a credit card program. Clearly, with only 30% of the portfolio carrying balances, issuers needed larger card portfolios in order to gain operational efficiencies as they transitioned to an electronic authorization environment (anyone remember the paper authorization books at the cash registers?). So the way to gain balances was to provide incentives, reduce or eliminate cardholder fees, offer teaser rates and rewards for usage.

This strategy continued into the new millennium until the issuers reached a saturation point – most Americans carried 3-4 different cards and it was getting harder to build portfolio balances. This led to three significant changes in the business in my view:

1. Smaller issuers sold their portfolios to larger issuers – what faster way to build balances then to buy another issuer’s portfolio
2. Issuers targeted college students – that new crop of young adults who were suddenly independent and spent hours in malls and stores buying stuff
3. Issuers lowered credit standards which placed more credit cards in the hands of more borrowers

The result:

• Over 90% of today’s credit card business is controlled by just 10 credit card issuers. The loan product became a mathematical analysis and not a consumer-related product.
• Local community banks and credit unions stopped cross-selling credit cards because the control and ownership of this commodity was now owned by someone else. They could hand a customer an application if someone inquired, but it really wasn’t that big of a deal because “someone else” made the decisions and handled the details and questions.
• Stories about credit card misuse and abuse took to the airwaves and Congress felt compelled to swoop in and rescue the citizenry with credit card reform.

What happens now? Predictions next week in Part II…..

Love, American Style

For those of you old enough to remember this TV show in the late ‘60’s, I’ll bet you can still sing the theme song….

Valentine's Day is Sunday and spending for the holiday could give an indication as to how consumers feel about the economy.

The National Retail Federation projects that the average consumer will spend $103 on the day, up slightly from $102.50 last year. That translates into $14.1 billion in Valentine's Day spending. Interestingly, couples report they plan to spend less on one another, but will spend more on family, friends and co-workers.

This year, couples plan to spend an average of $63.34 on gifts for their significant other or spouse, down nearly 6 percent from $67.22 last year, according to the National Retail Federation’s 2010 Valentine’s Day Consumer Intentions and Actions Survey. At the same time, the average person plans to spend $5.37 on their friends, up 13 percent from $4.74 last year.

The survey also found people plan to spend more on classmates and teachers, co-workers and pets.

Yet another, more optimistic survey from research firm IBISWorld predicted that total Valentine’s Day spending will be up 3.3 percent from last year, reaching $17.6 billion. The caveat here though is that since the holiday falls on a Sunday, more of the spending will move from traditional gift-giving toward dining out.

Either way, that’s a lot of love

The Age of the Skimmer

First the good news.

The Secret Service has apprehended an alleged ring of ATM skimmer crooks in eastern Massachusetts. The group set up skimmers with pinhole cameras on Bank of America and Citizens Bank ATMs in the greater Boston area. According to authorities, when one of the suspects was caught, he had almost $100,000 in twenties in his possession.

The Secret Service learned in December that a Bank of America ATM in Saugus had been rigged with the scanner device, called a skimmer, and a pinhole camera, according to a court affidavit from a Secret Service agent. A surveillance photo showed the thief attaching the skimmer, the affidavit said. Another photo allegedly showed jis partner removing the camera.

Authorities were informed on Jan. 22 of ATM tampering at Citizens Bank locations in Quincy, Milton, Braintree, and Somerville, the affidavit said. Surveillance photos showed the same men at the Citizens locations, according to the affidavit.

Three days later, photos showed the men rigging Bank of America ATM machines in Saugus, Milton, Weymouth, Cambridge, Dorchester, and Roslindale, the affidavit said.

Now the bad news – skimming has been around for some time, but like everything else, things are becoming more sophisticated.

Don’t fall prey to ATM skimming scams. Scammers can quickly read a card’s information and use it to access your account fraudulently. With a small device, your card’s information gets stored so that criminals can easily get to it later.

Skimmers may be installed on ATM machines, and sometimes you can’t even notice them. A small device goes over the normal card reading slot and reads your card’s magnetic stripe. Here’s an example:

The equipment used to capture your ATM card number and PIN is cleverly disguised to look like normal ATM equipment. A “skimmer” is mounted to the front of the normal ATM card slot that reads the ATM card number and transmits it to the criminals sitting in a nearby car.

At the same time, a wireless camera is disguised to look like a leaflet holder and is mounted in a position to view ATM PIN entries.

The thieves copy the cards and use the PIN numbers to withdraw thousands from many accounts in a very short time directly from the bank ATM. The equipment as it appears installed over the normal ATM bank slot.

To avoid any hassles, use these tricks to avoid getting caught in a skimming scam:

• Use secure ATM machines – under video surveillance or inside of a bank lobby. They're less likely to be tampered with. Thieves have to take more risk installing skimmers where there are security cameras.
  
• Cover the ATM keypad as you're entering your PIN -- just in case there's a hidden camera around.
  
• Skimming devices will stick out a few extra inches from an ATM. If something looks suspicious, find another ATM. Don't fall for a poor fitting device (or a sticker or sign that says "Swipe Here First", or “Use This Machine Only”).
  
• If a machine keeps your card, call the bank immediately and report it.
  
• Don't accept "help" from anybody hanging around the ATM machine. They may say they were having trouble also and you just need to enter your PIN again.

Now I'm not trying to freak you out - all I'm saying is just be aware. Look at all the ATMs in the bank you're in to make sure they all look the same. Look for hidden cameras or extra seams that seem out of place. Look for odd protrusions or elements that have colors that don't match the rest of the machine. If you're paying attention, you should be OK. But if you aren't, you could be at risk for giving up your checking account and your hard-earned money to a scammer.