Aggressively competitive. The level of competition has been rising steadily since 1992. It is driven by new players with huge consumer bases and deep pockets. The co-branding craze which erupted with the introduction of the GM MasterCard in September 1992 has provided the avenue for the entry of these new players. Co-branded programs, which amount to joint ventures between a bank card issuer and a major consumer product/service provider, have raised the stakes and radically changed the playing field. Banks formerly competed with banks in the card business, now banks have to compete against the likes of General Motors, General Electric, AT&T, Viacom, Shell Oil and so on. To compete banks have been driven into two camps: the co-branded camp or the bargain pricing camp. Waffling issuers are paying the price by losing customers each day and will probably be gobbled up.
How can bank credit card issuers survive the new competition and the consumer pressure ?
For the long term the price camp will win the profitability war. The value camp or co-branding camp attracts a disproportionate number of cardholders with higher charge volumes but who are generally averse to carrying balances forward. Bank card profits come from balances not volume. To enter the price camp an issuer has to reduce the overall cost basis and accept a lower profit margin. This is a hard pill to swallow in the short-term. Some major issuers have been able to achieve this internally but many will be driven to outsourcing as the only way to achieve the economies of scale necessary to bring down costs. Other issuers may deliver competitive pricing by capitalizing on relationship banking thereby improving their risk assessments.
How do consumers fit into the current market ?
First off the bank credit card market place of 90's, unlike the 80's is clearly consumer driven. The fact is every American who wants a bank credit card has one or two or more. There are over 350 million cards for 250 million Americans in 95 million households. Seventy-one percent of American households have at least one bank credit card. Those numbers spell S-A-T-U-R-A-T-I-O-N. This point of market maturity was undoubtedly reached just prior to the recession of 1990-91. Shortly after the recession cardholders reevaluated the personal cost of card debt and began consolidating. Major card issuers started seeing attrition increase to unprecedented levels, they were losing more accounts then they could replace with the traditional pricing and marketing of 1980's. This change in the market place literally forced every major issuer in this country to re-position their products. At first, in early 1992, this took the form of good ole price competition, deep cuts in interest rates and annual fees. By 1993 this re-positioning took the form of value creation, the concept of adding value through givebacks like points, airmiles, cash, discounts, etc, etc. Perhaps one other point is today's cardholder is the most enlightened. The card associations, issuers and the media have educated consumers to look critically at their wallets.
Will consumers continue to be bombarded with credit card solicitations ?
Last year more than 2 billion solicitations hit mailboxes across the country. This year the pace has slowed a bit but not significantly. However response rates are dropping and this will most likely lead to a pull back by year's end.
Will so-called teaser rates continue to dominate direct mail offers ?
Yes but, all teaser rates are not created equal. As a matter of fact some major issuers have resorted to misleading solicitations and border line bait-and- switch tactics. For example we received a solicitation for a card with a boldly advertised 5.9% intro rate. Examining the disclosure box we found the teaser rate to be prime -1.85%, adjusted monthly, with a 5.9% minimum. The solicitation was printed in March of this year when the prime was 9.0% making the teaser rate 7.15%. The last time the card could have been at 5.9% was last September when the prime hit 7.75%. A few weeks ago we received a report from a consumer who responded to a card solicitation for very large credit line. The catch was you had to give the issuer permission to close and consolidate other card accounts. As it turns out his credit line was substantially reduced after his other accounts were closed. Some issuers offering lower interest rates in solicitations are tweaking up their interest calculations methods. The growth of issuers employing the "two cycle including new purchases method of calculating interest" and switching to daily compounding of interest from monthly compounding of interest is disturbing. Furthermore we have also received recent reports of issuers changing the terms after the first year by assessing annual fees or threatening to close a low activity account.
Are there any other areas consumers need to be concerned about ?
Given the intense spotlight on card interest rates and annual fees some issuers are now aggressively promoting life/disability/unemployment insurance, shopping services, card registration services, travel services, etc, etc. In most cases outside firms are involved in the marketing, usually telemarketing, of these services with the card issuer receiving a commission. The telephone calls may begin within a few weeks after receiving your card. If you have been solicited for these services you should monitor your card statement carefully for possible slamming. Inotherwords if you've been solicited for the service and refuse the service it may still show up on your bill. This practice is a disgrace to the credit card industry.
Where is the overall bank credit card market headed ?
One thing is for sure, American wallets will look a lot different by the end of this century. There are so many significant developments taking place, everything from debit cards to smart cards to business cards to pre-paid cards to home banking to electronic shopping to government benefits cards. Vying for the future are literally hundreds of companies like Microsoft, AT&T, First Data, EDS, other processors and card manufacturers. The payment card business is no longer the domain of VISA, MasterCard, American Express, Dean Witter/Discover and their traditional vendors. In a way it's an exciting time, with the vision of a cashless society becoming clearer each day.
