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Tracking the consumer evolution of financial services

Archive for the ‘Credit Cards’ Category

Credit Card defaults rising although manageable so far


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.

jp.reuters.com

Capital One Chargeoffs Rise To 9.4%; American Express Chargeoffs 10%; Card Issuance Drops 50%

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.

5月の米クレジットカードローンのデフォルト率、過去最悪を更新

[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.

Written by Colin Henderson

June 15, 2009 at 22:51

Should the Fed be the 14th payment network, and how would that solve the 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

  1. 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.
  2. 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.

Written by Colin Henderson

May 26, 2009 at 10:59

If Planet Mars were banker to the world, this planets credit cards would be cut up


While this is an interesting article, the point of this post is only to capture the quotes that show the extent of the unreasonable and unsustainable runaway growth in various aspects of the financial markets, that have developed since the 1980’s.

Stock markets in the world are valued at a paltry $51 trillion compared to the $400 trillion in derivatives.

However the overall total of equities, bonds, and derivatives at $518 trillion was supported by a world economy of $49 trillion.  If Planet Mars were banker to the world, our credit cards would be cut up.

The emergence of an abstract, even absurd world—call it Planet Finance—where mathematical models ignored both history and human nature, and value had no meaning

This year we have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth.

Planet Finance seemed to spin faster, too. Every day $3.1 trillion changed hands on foreign-exchange markets. Every month $5.8 trillion changed hands on global stock markets. And all the time new financial life-forms were evolving. The total annual issuance of mortgage-backed securities, including fancy new “collateralized debt obligations” (C.D.O.’s), rose to more than $1 trillion. The volume of “derivatives”—contracts such as options and swaps—grew even faster, so that by the end of 2006 their notional value was just over $400 trillion. Before the 1980s, such things were virtually unknown. In the space of a few years their populations exploded. On Planet Finance, the securities outnumbered the people; the transactions outnumbered the relationships.

Written by Colin Henderson

November 7, 2008 at 02:37

The problem with card fraud is getting worse


Dave writes up the latest on card fraud in Europe and UK and touches on the US.  As Simon points out in the comments, its a chilling read, and highlights that the slow and gradual shift to secure cards and terminals is just wrong. 

I have similar worries for North America as US sticks to mag stripe, and Canada to chip and mag stripe combined.  The opportunities for criminals are simply too great.

I didn’t want to write about fraud yet again, but… | Digital Money Forum

Total card fraud last year was UKP 535 million (about a billion dollars) but the half-yearly figures for 2008 are predicting a full year well in excess of UKP 600 million. The prospects of fraud reducing remain, I think, slightly gloomy.

Written by Colin Henderson

October 22, 2008 at 21:42

Kiva introduces a credit card


Kiva, the philanthropic micro lender, has introduced a credit card that appears to fit with their model and philosophy.

The terms of the card seem quite open, and the matching programme means that your Kiva ‘grant’ paid through your Kiva credit card will be matched up to $200.

Advanta – Small Business Credit Cards and Services

Written by Colin Henderson

August 11, 2008 at 12:12

Posted in Credit Cards

Tagged with

Canadian government intervention on Interchange and the impact on rewards


Had an interesting conversation today with an executive of a Credit Card issuer. The topic (one of many) was interchange in Canada. Apparently there is discussion about government regulation on interchange, as we have seen in Australia, and beginning in the US.

My facts are limited here, but something to watch for is the unintended impact. This quote from an earlier post referred back to the Globe and Mails comment that interchange essentially funded rewards programmes.

Interchange and how it is the next new problem for consumers in Canada « CommunityLend blog

Banks take in an “interchange” fee, which is a percentage of the purchase, each time a customer uses the card. It covers many of the banks’ costs, including any loyalty or points programs they offer.

Thinking this through… should the government limit interchange, the [one of the … ] unintended consequence will be reduction or elimination of rewards programmes associated with credit card purchases. What will that mean for CIBC Aerogold, and RBC rewards?

Any Canadian credit card issuer readers care to comment?

Written by Colin Henderson

July 30, 2008 at 22:45

Posted in Credit Cards, Payments

US attempts (again) to reduce interchange fees


A move in the US to reduce interchange fees on credit card transactions, by (somehow) permitting retailers and merchants to negotiate them.

Finextra: New Senate bill launched to rein in interchange fees

Interchange fees currently comprise 90% of transaction fees charged to merchants. The percentage is set by the credit card companies – generally Visa or MasterCard – and averages 1.75% of the total purchase price. In 2006 Visa and MasterCard banks collected more than $36 billion in interchange fees last year, up 17% from 2005 and 117% since 2001. In 2007, the fees amounted to $42 billion.

The backdrop is to reduce the power of the MasterCard/ Visa oligolopoly.

Durbin says his Credit Card Fair Fee Act of 2008 would “safeguard
consumers and retailers by preventing credit card companies from using
their market power to charge unfair fees through an unfair process”

I tried to think of a relevant exercise that would give government the right to do something like this, and the anti trust legislation aimed at Microsoft might be a parallel. In any event, while no consumer likes fees, consumers expect service and services cost money.

I wonder if this approach is appropriate, and worse, if it will achieve the expected result, presumably of reduced prices to the consumer. The Australian experience where interchange was banned did not result in any savings to the customer, and in fact increased profits for some card issuers. I recall reading that Amex was the winner there.

UPDATE: more here from Dean Procter

Any of our Australian readers care to comment on that?

Written by Colin Henderson

June 8, 2008 at 22:14

Posted in Credit Cards

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