Foggy 2003
From the January 2003 Issue of CardTrak
      I f there ever was a year of uncertainty, 2003 will most likely rank among the tops. While it appears fairly certain a war will be launched in the Mid-East within the first months of this year, there is a great deal of uncertainty over its impact on the economy. Even if war is averted, there is still uncertainty over the economy. Will interest rates rise? inflation return? deflation appear? unemployment drop? stocks grow?, etc, etc.

The payment card industry is also plagued with uncertainty. While credit card issuers are fairly confident that funding costs will remain favorable through most of this year, they do not have a handle on the direction of consumer credit quality and consumer spending. Card issuers are also hopeful they'll finally get bankruptcy reform sometime this year, but Congress may push it to the back burner again as its members grapple with more pressing national issues. Nevertheless, most credit card issuers should continue to enjoy solid profits for 2003, as they have for the past two years, unless the economy collapses.

What can credit cardholders expect for 2003?

Card issuers will continue to offer 0% APR deals to attract new cardholders. Most major issuers are already offering 0% interest rates on balance transfers or new purchases through all of 2003. In some cases the rates already extend well in 2004. This is unprecedented. But watch out as the "fine print" may get "finer" this year. Hidden fees such as balance transfer fees, and other requirements to trigger the 0% rate, may not produce a truly free ride.

Offers of smart cards (credit cards with imbedded computer chips) will fade this year, as many issuers have moved plans to upgrade their credit cards to 2004. American Express and Target will continue to add brains to their smart cards in 2003, but other issuers will wait it out in the USA.

Mini credit cards, or differently shaped payments cards, may spread this year. Bank of America and Discover are already on the leading edge of this new trend. The credit card market is so saturated that card issuers now want "out of the wallet" rather than battle competitors over the "front of the wallet." BofA says it will share its patented mini card with other VISA issuers by year's end.

Credit cards connected with airlines will get sweeter this year. The alliance between Delta, Continental and Northwest and the alliance between United Airlines and US Airways will produce an abundance of ways to rack up miles. But do not sit on your miles. Any of these major carriers could fold up completely this year and leave you high and dry.

Sub-prime credit cards, or those issued to credit challenged consumers, will slowly disappear this year. Many of these deals offered $300 to $500 credit limits but charged $200 to $500 in fees, not to mention very high interest rates. The government has finally cracked down on these offers. Consumers with bad credit will have to look to secured cards or debit cards for a way to pay or to build credit.

Perhaps the biggest trend of 2003 will be credit card penetration into fast food. Quick Service Restaurants are one of last frontiers for credit card usage. Technology introduced over the past few years has made credit card acceptance at fast food outlets faster than handling cash. Furthermore the analysis of consumer spending patterns with credit cards at QSRs shows that customers spend 20% to 30% more than they would with cash. Expect to see lots of promotions this year to "swipe" your burgers.

This year will also mark the climax of the debit card battle between major retailers and VISA and MasterCard. A trial has been set for April. The lawsuit, filed in October 1996, by Sears Roebuck, Safeway, Circuit City, Wal-Mart, The Limited, three trade associations -- the National Retail Federation, the International Mass Retail Association and the Food Marketing Institute -- and 13 other large and small retailers, charges VISA and MasterCard with violating U.S. antitrust law. The retailers are upset with paying the fees for accepting a debit card transaction wherein the cardholder signs for the purchase instead of using a PIN. The retailers claim that VISA and MasterCard built their business in an illegal manner and have harmed consumers. The retailers want the right to force cardholders to use a PIN with a VISA and MasterCard-branded debit card in their stores.

VISA and MasterCard say their long-standing rules prohibit merchants from discriminating among the cards issued by their members. VISA and MasterCard also say they have not hindered the growth of PIN-based debit card transactions.

For consumers this year's debit card battle could produce a bonanza. Banks prefer their customers to sign for purchases with debit cards rather than using the PIN. Most banks now charge a transaction fee to the cardholder for each PIN transaction. Some banks, like BB&T, have gone so far as to charge a monthly inactivity fee to debit card users who do not make signature debit card transactions. To encourage customers to sign and not to use the PIN, many banks now offer special incentives such as rewards or sweepstakes. Look for more debit card incentives this year as the high stakes battle gets hot and heavy.

While the future of the world is very foggy for 2003, it will clearly be another dynamic year for the payment card industry.
Issuer Guidelines
The Federal Financial Institutions Examination Council this month issued new guidance governing account management and loss allowance practices for credit card lending. The overhaul was largely driven by the collapse of sub-prime credit card market, however, the new standards will apply to all banks and thrifts regardless of portfolio quality. The new guidance says that institutions significantly increase credit exposure by offering customers additional cards, including store-specific private label cards and affinity relationship cards, without considering the entire relationship. In extreme cases, some institutions have granted additional cards to borrowers already experiencing payment problems on existing cards. It is expected that institutions offering multiple credit lines will have sufficient internal controls and management information systems to aggregate related exposures and analyze performance prior to offering additional credit lines. The new guidance also set new standards for minimum payment requirements. New formulas that have the effect of further delaying principal repayment are gaining popularity in the industry. These problems are exacerbated when minimum payments consistently fall short of covering all finance charges and fees assessed during the billing cycle, producing a negative amortization. In these cases, the lender is recording uncollected income by capitalizing the unpaid finance charges and fees into the account balance owed by the customer. The FFIEC says the pitfalls of negative amortization are magnified when sub-prime accounts are involved, and even more so when the condition is prolonged by programmatic, recurring over-limit fees and other charges that are primarily intended to increase recorded income for the lender rather than enhance the borrowers' performance or their access to credit.

Card Solicitations
Even though there are two major credit cards for every man, women, and child in the USA, direct mail volume for credit card offers increased 10% last year, by nearly 300 million pieces. Balance transfers were part of the package in approximately 60% of all acquisition offers last year. There was a growing trend to offer the balance transfer rate for 12 or more months. According to Mintel's Comperemedia, toward the end of 2002, over 70% of the balance transfer offers were for 12 or more months, compared to 30% to 40% in the beginning of the year. The marketing research firm says that to-date, 37% of the offers tracked were at an 8.00% to 9.99% APR, compared to only 19% in 2001. In 2002, only 22% of the offers were over a 14% APR compared to 51% in 2001.

Online Trust
Trust levels among Internet users for online transactions have improved from a year ago (fourth quarter 2001). Now, more than 33% express trust that their online financial transactions are safe, up from 27.5% a year ago. According to the "The Consumer Internet Barometer", produced jointly by NFO WorldGroup, Forrester Research and The Conference Board, overall Internet usage increased in the fourth quarter. Now, nearly 61% of consumers go online at least once a month. This is up from 58.7% a year ago. The "Consumer Internet Barometer" also finds the primary reason for using the Internet is personal communication (37.9%), followed by work-related activities (17.8%) and research (17.3%). Currently, 37.4% of users go online daily, up from 33.7% a year ago.

Beaming Payments
The move towards beaming financial transactions from hand-held PDAs and other mobile devices has picked up steam. After a three year effort, an infrared standard has been released for global, wireless, proximity payments. IrDA this month released the standard for infrared payments to be used by cell phones and PDA's that beam transaction information between card readers, ATMs, kiosks, gas pumps, turnstiles and toll booths. The new "IrFM" specification utilizes existing financial services infrastructures to process wireless payment transactions (credit cards, debit and smart cards, checks and loyalty programs) at the POS. Harex InfoTech in South Korea tested the standard in 2002 for nine months. During the past 4 years an estimated 200+ million IrDA enabled cell phones and PDA's have been shipped throughout the world.

Scam Busted
The FTC has filed charges against seven corporations and nine individuals for engaging in deceptive and unfair activities in the marketing of advance-fee credit card packages. The Assail Telemarketing Network marketed products under the names "Advantage Capital," "Capital First," and "Premier One." The FTC alleges that the defendants operate an advance-fee credit card scam through a network of boiler rooms, Canadian front men, and outsourced fulfillment and customer service centers. The court has temporarily halted the defendants' operation, froze their assets, and appointed a receiver to take over the corporate defendants. The defendants include: UT-based Assail, Inc. and Infinium, Inc., Market-Reps.com, Inc., all headquartered in Cedar City, Utah, TX-based Specialty Outsourcing Solutions, Inc. and NV-based Summit Communications International, Inc.; FL-based Capital First Benefits, Inc.; and, ID-based Premier One Benefits, Inc. According to the FTC, the scam works as follows: the defendants contact consumers with poor credit records, refer to their purported prior applications for credit, and tell them that they are now guaranteed to receive a credit card. In fact, the FTC says the defendants do not provide credit cards to consumers. Instead, they use an incomprehensible, digitally recorded "verification" process to conceal that the proffered credit card is actually a "benefit" package that includes an application for a stored value "pay as you go"card. After consumers submit the application, even this card also fails to materialize. In addition, the defendants slip in multiple "upsells" of expensive and dubious products at the end of the verification process. The defendants then debit consumers' bank accounts for the upsells, sometimes with additional recurring monthly charges, without the consumers' authorization. The FTC alleges that consumers commonly incur debits against their bank accounts for approximately $174 for the "credit card" package and an additional $50-$100 for each upsell.The FTC alleges that when consumers try to cancel their purchases and prevent further debits, they are frequently met with a well-orchestrated "customer service" scheme designed to frustrate consumers' attempts to obtain refunds and cancellations. Even when consumers are successful in canceling some of their debits, the defendants often fail to cancel future debits for other products purportedly purchased during the telemarketing call. As a result, consumers' accounts are later debited for additional sales about which they were not aware.