Credit Card Use to Change?

There are whispers circulating around credit card companies about fundamental changes ahead. A few are forecasting the effective death of the industry, but most predict something less radical.

The majority expect to see a new era in which banks take time to discover what consumers need–and value–in their credit card use, and respond with offers that both cost and deliver more. At the moment, card holders tend to see products as a commodity, and–in all but exceptional circumstances–make buying decisions based exclusively on cost–credit card rates and fees.

The hope is that, by offering (and charging for) new, valuable services, card issuers will move from being “fear-based” enterprises to “value-based” ones. But it’s hard to see how that can work out unless the companies drastically reduce the number of credit cards they issue, and cancel many of the accounts held by less profitable customers.

Credit Card Regulation Behind Move?

The industry would have you believe that recent and proposed credit card regulation is behind the possible changes. And they’d be right, at least in part. Earlier this week, the New York Times reported that JPMorgan alone could “lose income from legislation limiting credit card and overdraft charges, perhaps as much as $1.25 billion.” However, most card issuers are more exposed to unrepayable credit card debt than to regulatory issues, and double-digit rates of “charge offs” (when banks write off debts as uncollectible) have been routine for many card companies for some time.

But obviously it’s easier to rail against the government than come to terms with one’s own past unwise lending policies. And there’s a better chance of lobbyists heading off further regulation if the card companies focus on on the financial impact of the recent Credit CARD Act.

Credit Card Debt Main Driver?

When it comes to higher credit card rates and fees–and to any future structural changes in the industry–it seems likely that the main driver will be poor lending decisions in the past. And it’s not clear that things are getting much better today.

Last Friday, the Federal Reserve published its latest data on consumer debt and, on first reading, it contained good news. Outstanding revolving credit (which mostly comprises credit card debt) stood at $864.4 billion in January. Of course, that’s a huge amount, but it’s $70.7 billion less than it was in the first quarter of 2009, and a whopping $93.7 billion down on its highest recent level in the last quarter of 2008.

So surely that means that Americans have responded responsibly to the credit crunch, and have been paying down their credit card debt. Well, maybe not. Yesterday, the Associated Press ran a story that contained a sobering figure. It said: “In 2009, banks wrote off a record $83.27 billion in credit card debt.”

Credit Cards in the Future

It’s hard to see how that sort of charge-off rate can be sustained. And, if the economy picks up, it won’t have to be. But credit card companies are unlikely to want to put themselves in the same position ever again, so a restructuring of the industry is very much in the cards.

It may be that in the future many fewer Americans will have credit cards, and that those who do will pay more, and receive new and valuable benefits. But, as long as other financial products are created to fill the gaps, that may not be such a bad thing.

Published 03/11/10 (Modified 04/23/12)