Is the end of credit cards coming?
Credit cards to die out?
Money magazine editors know how to write an arresting headline, and one published Monday was a real doozy: "The end of credit cards is coming."
For some time now, this blog has been predicting seismic changes in the business models of credit card companies, but it's never thought in those apocalyptic terms. So what did Money magazine go on to say?
Well, of course, it wasn't really forecasting the demise of credit card accounts, merely the plastic rectangles that are currently used to enable transactions. Instead, it thinks, people will increasingly use their smartphones to pay for goods and services. The story quotes figures from Aite Group, a research organization, that predict that the "pay-by-phone" market will be worth $22 billion by 2015.
Credit card companies' challenges
None of this is likely to help card issuers much with the very real challenges they face. The wave of credit card regulation enacted in 2009 has squeezed one of their major revenue streams, that of penalty fees and rates, and forced them to be more upfront in their disclosures of terms, conditions and rates.
Perhaps partly in response to this, the companies have sharply increased credit card rates, but one of the unexpected consequences of that move has been a change in consumer behavior. Many people are paying down their balances as quickly as they can, while others have simply stopped using credit cards.
The composition of the new Congress means that further credit card regulation is highly unlikely for at least two years, and possibly much longer. However, there's plenty of pent-up sentiment among Democrats for caps on both credit card rates and interchange fees (the cut of the transaction merchants must pay to a card issuer every time they swipe one of its cards). Smart credit card company CEOs will have contingency plans in place.
Credit card companies regaining strength
Of course it's not all doom and gloom. In fact, Kenneth I. Chenault, American Express CEO, must be very happy with his company's performance. In 2010 fourth-quarter results, published Tuesday, total revenue and cardmember spending showed double-digit growth, while overdue loans and written-off loans fell significantly. The problem of bad loans is easing for all issuers.
Bloomberg quoted Mr. Chenault:
"Credit indicators strengthened and the amount we needed to set aside for problem loans declined significantly. Unemployment levels and housing remain a concern, but other aspects of the economy continue to show signs of improvement."
To some extent, American Express is a special case. Its affluent customer base and tight lending rules have cushioned it throughout the downturn, and its business model--which includes many charge cards--may help it better weather the challenges that face many other card issuers.
The challenges are very real. But few yet believe (except possibly in the sense of those plastic rectangles) that "the end of credit cards is coming".
Published 01/27/11 (Modified 04/22/12)