The new world of credit cards: Still treacherous

By Felix Salmon
February 22, 2010
Barbara Kiviat asks whether credit card companies "might be getting their groove back", and cites this chart:

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Barbara Kiviat asks whether credit card companies “might be getting their groove back”, and cites this chart:

creditcards.jpg

But, as Eric Dash reports, it turns out that there’s an interesting change of composition hidden in that final uptick:

While most major card lenders sharply cut back on direct mail last year, almost nine out of 10 new card offers were attached to a rewards program that appeals to big spenders, according to Synovate, a global marketing research firm. Only six in 10 applications were for a rewards card program in 2007, before the financial crisis struck.

Now that the CARD Act has come into force, the amount of money that credit-card companies can extract from the sweat box of delinquency has dropped sharply, and they’re looking for more revenue sources. Cards carrying a high annual fee are one such source, since, well, they carry a high annual fee. But they also come with another, more hidden, income stream:

Retailers pay about 2.1 percent of the transaction value on a purchase made by a high-end rewards cardholder, compared to around 1.47 percent for an ordinary customer, according to Visa data.

I’ve never quite understood why and how interchange fees can be so much larger on rewards cards and business cards than on any other credit card. But the card companies are clearly drawing a bad on the fact that they are higher, and doing everything in their power to push rewards cards, even as they weaken the rewards which come with them:

Chase, for example, has overhauled its once generous Freedom rewards card no fewer than three times in the last three years.

In 2006, cardholders were offered a 1 percent rebate in cash or points on all purchases, and 3 percent on items bought at grocery stores, gas stations and fast-food restaurants. By last year, Chase’s Freedom program was far more restrictive. Cardholders had to register online to be eligible to receive the 3 percent rebates — and they were available only in three categories that rotated each quarter.

In other words, the CARD Act might have passed, but the terrain here is still treacherous for both consumers and retailers. Maybe, eventually, we can have a Consumer Financial Protection Agency which helps to rein in some of the excesses. For the time being, though, the banks will chase every loophole they can find.

11 comments

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Of interest– I got a letter yesterday from one of my credit card issuers. My account has been ‘upgraded’ to a fancier rewards card. What’s interesting here is that, from my point of view, the terms are the same– i.e., the card still has no annual fee. So, I conclude (at least provisionally) that the added benefits are being paid for by someone else.

My guess is that the issuer is hoping that I’ll put more purchases on the card in order to earn the greater rewards, on which purchases, as you point out, they will earn a higher fee. Everybody wins! Except… for all the other retailers’ customers, who will pay higher prices to cover the costs of my new card…

Posted by MattF | Report as abusive

It helps to recognize that, though they are all called ‘credit cards,’ that those that are used for credit-users are functionally a different product (from the issuer perspective) from those used by high-spend-full-payoff customer (“Transactors”). The CARD Act and the current economy in general have made it all too clear to most large issuers that they underpriced and overgranted credit to the first group for several years, and most of their repricing now is trying to retrench on that segment. The second segment, Transactors, has been much healthier and is more than ever the most sought after cohort. It can be profitable on its own even with decent rewards being funded and no annual fee. Unless/until interchange rates are pushed down it will remain as such. And, yes, those of us in that category do get subsized by others to pay for the rewards. But the subsidy is not from the credit-using cardholders; the subsidy is paid by any one who buys any retail product without getting rewards for the purchase.

Posted by TRKAdvisors | Report as abusive

To understand “how interchange fees can be so much larger on rewards cards and business cards than on any other credit card”, you need only consider the case of American Express. American Express specializes in high-end rewards cards and corporate cards. Its interchange fees are 50 to 100 basis points higher than an average no-rewards Visa or Mastercard. Retailers are free to decline to accept Amex, while still accepting Visa and MC. Yet a large number of retailers still choose to take Amex.

American Express justifies these numbers based on higher average spend per transaction and various other statistics. I assume Visa and MC do the same, adding a line about how their rewards/corporate card is “has the same profile as an American Express” and probably has an interchange rate several basis points below Amex.

By the way, though the terrain is clearly treacherous for retailers, you don’t really support how it’s treacherous for consumers. Having to jump through hoops to get benefits (rewards) that are completely unavailable to people who pay with cash is not my definition of treacherous. Rewards cards generally benefit cardholders and card issuers at the expense of retailers and cashpayers. That’s what makes it such a beautiful racket.

Posted by ZJA | Report as abusive

Do you have smartcards in the US yet ? What a pain in the butt.

Posted by Ghandiolfini | Report as abusive

The US consumer is dead. If you have a job, you are scared to death of losing it and real unemployment stands at a nifty 25%. I work for http://storyburn.com, and I can see why folks are pulling their hair out over the temp job being the new full time job, China stealing our mojo, Wall Street bonuses at record highs, and people taking a 10% paycut and asked to work unpaid overtime. We have the most read home foreclosure story as well as several job hunting stories

Posted by muchstardude | Report as abusive

In re: Chase. Due to Chase’s outrageous APR, I did everything I could to pay off a credit balance I had with them; then unfortunately as my account was nearing zero, WaMu (where I also had a balance) fell into their hands and once again I was in their clutches.

On my credit card, they charged me 23% while on my Savings account they paid me .5%. I closed out my savings acct, transferring most of my banking to a local community bank.

Only a checking acct which I almost never used still remained with Chase. Then I noticed they were charging me an “inactivity” fee which was so Orwellian that I immediately closed the Checking acct as well.

There’s a way that you operate when you call all the shots and get to make all the rules. That’s how Chase operates.

Posted by leoklein | Report as abusive

Leo, if that is the APR (annual percentage rate), can you imagine what the the EAR (effective annual rate is)?

EAR=((1+(APR/12)) to the power of 12) -1

I really don’t know why we should pay anything for a piece of plastic and a carrier system that has long been paid off. Master and VISA is the monopolies of all monopolies. I don’t know how Diners and Amex works.

That is why I support one Fed Smartcard and Treasury ID for life, the admin and carrier fees paid for by my OWN taxes, who needs these other guys ?

Posted by Ghandiolfini | Report as abusive

“Fed Smartcard”? Sounds like the 21th Century equivalent to Postal Banks. I’d go for it, though I think we ought to try breaking up the monopolies first and seeing what that produces.

Posted by leoklein | Report as abusive

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Posted by MsCamellia2010 | Report as abusive

The second segment, Transactors, has been much healthier and is more than ever the most sought after cohort. It can be profitable on its own even with decent rewards being funded and no annual fee. Unless/until interchange rates are pushed down it will remain as such. louis vuitton neverfull And, yes, those of us in that category do get subsized by others to pay for the rewards. But the subsidy is not from the credit-using cardholders; the subsidy is paid by any one who buys any retail product without getting rewards for the purchase.

Posted by luckze | Report as abusive

I am upset that American Express didn’t send me any notice with charge my late fee, which I thought I have already set up the auto pay. I called in and asked the representative set that up for me, but NOT! There is also interest fee charge.
I am going to cancel American Express and will never use it again!!!!!!!!!!!!!!!!!!

Posted by Kammy_MO | Report as abusive