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…..