Posts Tagged ‘Credit Cards’
Today I had the pleasure of a chat with Dave while he visited Toronto on business. Inevitably the conversation weaved in and around banks, payments, and what is wrong with both. As we chatted it is evident there is much change going on in the world of financial services, and that change may or may not be as expected. It appears banks are not innovating much anywhere at the moment as predicted, while on the payments front there is a host of activity and very different activity in many parts of the world.
This fits with my general theme of these times that innovation in banking will come from outside banks, and that banks will generally (not all) be relegated to a role of financial utilities. We spoke about the enormous challenge banks have to digest the mergers and takeovers which resulted from the banking crisis. The combination of mergers, new regulation, and concern for conservation of capital leads many banks down this path. Euro banks have the additional challenge of absorbing SEPA and the associated changes there which are neither easy nor cheap.
Innovation will come from non-banks, from payments providers, even credit card companies, and Dave was kind enough to provide some insight there, and show me some pretty cool stuff coming later this year.
Back to the topic of banks the one thing they generally appear to have grasped is the importance of mobile; they remain unsure how or what to implement, but mobile is important, so we can expect to see more work in that area.
Now off to read my newly autographed copy of the 2009 Digital Money Reader!
As noted in Nov 2007, the next thing to watch following sub prime which was already prevalent then was credit card defaults. It has taken longer than expected which is interesting, but it is now clearly a trend, although being managed so far. It is clear that credit card companies are pro-actively managing the situation knowing full well that to ignore would bring disaster. Read Calculated Risk here for examples.
Credit cards losses are accelerating at Capital One, a trend one should expect to continue given the rapidly rising unemployment rate. Interestingly, Capital One is returning TARP funds.
Rising defaults are also being noted in Japan as an issue.
［ニューヨーク １５日 ロイター］ 米国のクレジットカード利用者によるデフォルト（債務不履行）が５月に過去最悪を更新し、米国の消費者が置かれた厳しい状況が浮き彫りになった。
また、規模が小さいキャピタル・ワン・フィナンシャル(COF.N: 株価, 企業情報, レポート)やディスカバー・フィナンシャル・サービシス(DFS.N: 株価, 企業情報, レポート)では、デフォルト率の上昇幅は予想を下回った。デフォルト率は、キャピタル・ワン・フィナンシャルが８．５６％から９．４１％に、ディスカバー・フィナンシャルは８．２６％から８．９１％に上昇した。
Researched by Nobuyo Henderson: – Credit Card companies are next to have financial problems.
President Kohn of the Kansas City Fed speaks at the ECB/De Nederlandsche Bank Conference conference in Frankfurt. He argues for greater control by the Fed over the payments system. While his outline of problems makes sense, they also describe the failure of the current system, and the lack of foresight from the existing controls, and its unclear that the proposed solution from them will have any impact other than exacerbating those problems. The problems he describes are real and more importantly consumer facing. They are also imho problems that large banks could address given their scale and the opportunity for customer loyalty. I am thinking of BofA and Wells specifically, but that is for another post.
The Future of Retail Banking and Payments – President Thomas H. Hoenig
In light of the trend toward greater industry concentration and the existence of important payments system externalities, the Federal Reserve should play a larger and more active role in electronic retail payments if it wants to promote the efficiency and integrity of the payments system.
There are two broad categories of problems that he identifies with the payments networks
- lack of competitiveness: In 2007 81% of the payments volume went over three networks, compared to 46% just few years earlier. In addition the number of networks are down from 43 to 14.
- integrity of the system(s): He sees single point of failure and prominence of non-banks as issues of concern. The variety of systems introduce externalities that undermine the entire system. His example is the continued use of mag stripe and the security implications of not shifting to chip card as the rest of the world has done.
On that last point I would add that the fact of holding on to the mag stripe is influencing the rest of the world with counter productive results. For example in Canada banks are issuing cards with stripe and chip which makes no sense. So long as the stripe exists the flaws associated with strip exist. But the sheer size of the American market pressures the issuers to continue with stripe for the forseeable future.
Then he makes this statement:
Historically, the Federal Reserve’s role in both checks and ACH reflects a preference to operate within the market rather than as a pure regulator. We are well aware that industries can – and do – quickly develop methods to exploit any regulatory loopholes and avoid the intended outcome. By competing with the private sector on a level playing field, the Federal Reserve can encourage efficiency and integrity from an “on the ground” position.
That statement reads to me as rationalisation of inaction and continuation of the status quo. His conclusion is that the best form of regulation and solution to the aforementioned problems is to compete with the other networks.
Thus, in my view, the Federal Reserve’s future role in retail payments should be built around its current position in ACH. For example, in its operator role, the Federal Reserve could augment its ACH products and services, with the aim of enhancing competition and safety within the ACH industry.
… … …
Finally, the Federal Reserve could enhance competition in payment card markets by positioning ACH services as an alternative to debit card payment networks.
It certainly is a strategy and we can debate whether government ought to be engaged in payments systems directly, as regulators, or not at all. All I know is that consumers (and banks) will suffer from the real problems he identified at the outset, and its not at all clear that the Feds 14th network will address those problems at all. This reads as a recipe for disaster in American payments. For example the very issue he outlined of underinvestment in security and integrity will only accentuate as the other 13 networks work to compete with the Fed, and protect profits. Expect continued data leakages, network outages, and identity theft.