Credit Card Processing Blog

It seems like U.S. and U.K. credit card companies are going through different stages of the financial crisis. For U.S. issuers, both credit card charge-offs and delinquencies have been falling steadily this year and the industry appears to have left the worst behind it. In the U.K., however, the direction is reversed, as banks have reported record-high levels of write-offs in the second quarter of 2010, as reported by the BBC, quoting data released by the Bank of England.

The latest monthly data released by U.S. issuers showed default and delinquency levels at the biggest U.S. credit card companies were falling across the board in July:

• Capital One reported its charge-offs – overdue loans that lenders do not expect to be repaid – fell to 8.13 percent in July from 9.28 percent in June. Its delinquency rate fell to 4.66 percent from 4.79 percent.
• Charge-offs at J.P. Morgan Chase fell to 7.95 percent from 8.38 percent during the same period and delinquencies dropped to 4.06 percent from 4.13 percent.
• Discover’s charge-offs in July stood at 7.28 percent, down from 8 percent in June and its delinquency rate dipped to 4.72 percent from 4.81 percent.
• At 11.39 percent, Bank of America’s charge-off rate was the highest among its peers in July, but it was lower than the bank’s June rate of 11.98 percent. BofA’s delinquencies also fell – to 5.92 percent last month, down from 6.16 percent in June.
• Citigroup reported the most substantial drop in charged-off credit card loans among the biggest issuers. Its rate fell to 9.10 percent in July from 11.98 percent the previous month.
• American Express led the pack in lowest delinquencies, reporting a rate of 2.6 percent, down from 2.7 in June. AmEx’s charge-offs fell to 5.5 percent from 5.7 percent.

Not a single big U.S. issuer reported a rise in either the delinquency or the charge-off rate in July.

Things could not have been more different in the U.K., where the total value of charge-offs jumped more than 50 percent in the second quarter, reaching £2.1 billion ($3.2 billion), up from £1.3 billion ($1.98 billion) in the first three months of the year, according to the BBC report.

U.K. issuers wrote off a record £4.1 billion ($6.25 billion) in 2009 and are well on their way to easily set a new record this year, having already written off £3.4 billion ($5.18 billion) in the first half. Moreover, according to the London-based Times newspaper, British households have the biggest debt burden in the Group of Seven advanced countries, at 180 percent of personal incomes. There are indications, however, that Britons may have reached the bottom and that the worst may be behind them. Debt charities, offering financial advice, report that fewer people are calling for help, according to the BBC. The Money Advice Trust, one such organization that runs the National Debtline, reports that less than 60 percent of its callers were facing credit card debt problems, down from between 66 percent and 70 percent in recent years.

As is the case in the U.S., U.K. debt repayment is on the rise, according to the unbiased.co.uk, a firm providing financial advice to consumers. Britons have repaid £1 billion more than what they borrowed during the second quarter of 2010, the website reported. The latest U.S. Federal Reserve data showed that Americans’ outstanding balances on consumer credit cards have fallen by $144.9 billion, or 14.85 percent, from September 2008 to August 2010.

The common thread in all these reports from both sides of the pond is that both U.K. and U.S. consumers are clearly concerned with the levels of their indebtedness and are taking actions to reduce it, even as unemployment is at record highs in both countries. It will be interesting to see whether the trend will hold when the economy starts to recover and unemployment goes down, or whether consumers will promptly rediscover their buy-now-pay-for-it-tomorrow mood.

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Credit card companies are pushing hard their small business card offerings, even as they continue to contract their regular loans. Issuers mailed out 47 million business card offers in the first quarter of 2010, an increase of 256 percent from the same period last year, according to research firm Synovate. Three-quarters of all small business applicants for credit cards were approved, according to a report from the Federal Reserve, published in May. At the same time, small business lending has shrunk by $40 billion in the first quarter of 2010 as compared to 2008. Moreover, only a third to half of small businesses were actually approved for a loan or line of credit in 2009. Often, credit card approvals were given by the same banks that previously denied the business a regular loan. Here is the gist of the Fed’s report:

The vast majority of small businesses use personal or small business credit cards. Most small businesses that use cards pay their balance in full each month, but some carry a balance, or borrow, on their credit cards. Small business credit cards differ from personal cards in that they are issued to firms, rather than individual consumers, and are intended to be used for business purposes only. Small business credit cards are also distinct from other types of card products designed for businesses, such as corporate cards, procurement cards, and fleet cards.

As of the end of 2009, 83 percent of small businesses used credit cards; 64 percent used small business cards, and 41 percent used personal cards. Despite the widespread use of credit cards, only a minority of small businesses – 18 percent – reported borrowing on credit cards. About 12 percent of small businesses borrowed on small business cards, and about 12 percent 2 Board of Governors of the Federal Reserve System borrowed on personal cards. In the aggregate, credit card debt represents a very small percentage of total debt held by small business owners to finance their business operations. In 2003, when 24 percent of small businesses reported borrowing on credit cards, credit card debt accounted for just 1.4 percent of all debt held by small businesses and the majority of credit card–borrowing firms reported borrowing less than $5,000 in total on all their credit cards.

It is not all that hard to understand the rationale behind the banks’ lending decision process. On the one hand, credit card interest rates are typically higher than those of regular loans and contracts can be changed much more easily.

The bigger reason for the banks’ eagerness to issue small business credit cards, however, is the fact that they are not covered by the protections of the recently passed CARD Act. Yes, although they look the same on the surface, there are huge differences between business and regular consumer cards.

The CARD Act’s ban on inactivity fees and the $25 cap on late fees, for example, do not apply to small business cards. Nor does the requirement that cardholders get notified prior to a rate increase, of which they can opt out and close their accounts. Additionally, issuers can retroactively raise interest rates on small business cardholders, even if they are only late on a payment by a day. Retroactive fees can now only be applied to consumer cards if the cardholder is late on a payment by 60 days or more. For a more detailed list of the protections the CARD Act provides to consumer card, you can review this summary of its key features.

So you should think twice before responding to your next small business card offer. Yes, you will have a higher chance for approval, but you may end up paying dearly for it and will probably be better off sticking to your personal card.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

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• No fixed monthly fees.
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The mobile payments market has just become even more crowded. QuickBooks maker Intuit and mophie, creator of the JuicePack battery for iPhone, have launched the Complete Credit Card Solution, which enables iPhone users to accept credit card payments, the companies announced. The product is now available in Apple stores and will soon be available online as well.

We have seen a number of credit card processing product releases for smart phones and specifically for the iPhone in the past few months, most notably Square, but also MasterCard MoneySend, Visa payWave and Swipe It, among others. In fact, Mophie first announced that it was planning to start producing credit card readers for the iPhone back in December of last year.

The Complete Credit Card Solution works by integrating “Intuit’s GoPayment credit card processing app and quick-to-activate merchant account with the mophie marketplace iPhone credit card reader,” according to Intuit. Users can have the service up and running “in as few as 15 minutes.”

Unlike previous announcements, this one comes with a fairly detailed pricing list, which is worth taking a close look at:

The Complete Credit Card Solution from Intuit and mophie is available for the iPhone 3G and 3GS for $179.95 at Apple Retail Stores and soon on Apple.com.

…

GoPayment, including the Intuit merchant account, offers competitive pricing at $12.95 a month, a 1.7 to 3.7 percent discount rate and $0.30 to $0.34 per transaction fee. There are no long-term contracts, cancellation, gateway or set-up fees, and one account can enable up to 50 users.

First, it should be noted that mophie’s card reader enables the acceptance of “card-present” transactions, which get the lowest processing rates from Visa and MasterCard. Now let’s break down the pricing:

• Cost of product – $179.95. This is essentially the cost of uploading the GoPayment app to an iPhone. It seems a bit excessive, as similar uploads to point-of-sale (POS) terminals are typically provided for free. True, you don’t have to actually buy a terminal, but it’s still high.
• Merchant account fee – $12.95. This fee is comparable to what other merchant account providers charge for keeping the account open.
• Discount rate – 1.7 – 3.7 percent. Most processors now charge qualified rates of around 1.65 percent and non-qualified of 3.25 – 3.50 percent, so GoPayment is priced higher than the average.
• Per-transaction fee – $0.30 – $0.34. Here is the most substantial pricing difference. The average qualified rate for card-present transactions in the industry is currently $0.20, 50 percent less than what GoPayment charges. The average non-qualified rate in the industry is $0.30.
• Other fees. Most processors no longer charge set-up fees, and a gateway fee is not associated with card-present accounts. GoPayment does offer a no-contract service, however the user must pay $179.95 upfront to enroll.

Overall, the service does seem a bit pricey and it is unlikely that it will be adopted by consumers who may just want to have another option for splitting up a restaurant bill with friends. The more likely adopters would be the small business or self-employed types of users who need a way for accepting card payments on the go, e.g. at a trade show or at a customer’s location. These types of users, however, typically only need the service intermittently, which makes them highly cost-sensitive and may cause them to balk at paying a high upfront fee, in addition to the monthly fee.

We’ll have to wait and see how well Intuit and mophie will deal with fraud-prevention and reliability issues, which have plagued previous entrants into the mobile payments market, including Square.

Whether this particular venture will succeed or not, however, the concept of using smart phones for processing payments will eventually be proven right. After all, wireless credit card processing terminals use the same signals to transmit transaction information that cell phones use to communicate voice and data. Why not combine them?

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

American Express is the highest-ranked credit card company in J.D. Power and Associates’ Credit Card Customer Satisfaction Study for a fourth year in a row. The study’s results are based on responses from more than 8,500 credit card users, collected in May and June. Here are the top three issuers:

American Express ranks highest in customer satisfaction for a fourth consecutive year with a score of 769 and performs well across all six factors that drive satisfaction. Discover Card follows with a score of 757 and performs particularly well in the interaction factor. U.S. Bank ranks third with a score of 727.

Not surprisingly, the top-ranked issuers shared high scores for the quality of their rewards programs and benefits and for the problem-solving abilities of their customer service departments.

The report, released earlier this week, shows that cardholders were more satisfied with their credit card companies than they were a year ago. Issuers scored 714 on J.D. Power and Associates’ 1,000-point satisfaction scale, up slightly from 709 a year ago. Somewhat contrary to this result, however, the proportion of cardholders who “definitely will not switch” their primary cards in the next 12 months continues to decline, reaching 22 percent in the 2010 study, down from 25 percent in 2009 and 30 percent in 2008.

Here is how J.D. Power and Associates defines “customer satisfaction with credit cards” and explains the study’s results:

The study, now in its fourth year, measures customer satisfaction with credit cards by examining six key factors: interaction; credit card terms; billing and payment process; benefits and services; rewards; and problem resolution. The increase in overall satisfaction from 2009 is driven primarily by improvements in satisfaction with credit card terms and billing and payment process. The largest increase in satisfaction with credit card terms is among revolvers, or customers who typically carry account balances from month to month. In contrast, satisfaction among transactors, or customers who always or usually pay their entire credit card balance each month, has declined slightly, compared with 2009.

One interesting result from the study is that the largest increase in customer satisfaction was recorded among what the study authors call “revolvers.” The reason it’s interesting is that these card users are the ones most affected by the sharp increase in credit card interest rates that preceded the full enactment of the CARD Act’s provisions. According to CreditCards.com, the average interest rate on new credit card offers stood at 14.23 percent on 2 June, 2010, up 1.52 percent from December 2009. The study shows that 29 percent of revolvers saw their interest rates increase in 2010, up from 24 percent in 2009.

How do we explain that? Well, one plausible explanation is offered by Michael Beird, director of banking services at J.D. Power and Associates. “It appears that revolvers are expressing a perception that ‘it could have been worse,’” said Beird. “In addition, revolvers, who tend to be more sensitive to fees and rates, are significantly more likely to say that CARD Act disclosures improved their understanding of their credit card terms.”

It will be interesting to see if the CARD Act, now that it’s fully in force, will have any further effect on cardholders’ interactions with their card issuers.

Accept card payments quickly and safely

Accept credit and debit card payments at the lowest processing costs. You will get:

• Free merchant account set-up.
• No fixed monthly fees.
• 24 / 7 customer support.

Credit card companies are having a real difficult time rediscovering the winning formula that enabled them to rake in huge profits before the financial crisis hit and losses started piling up. The record-high default and delinquency rates from last year have subsided, although they are still above historic levels, but consumers are now much more conservative in their spending and debt management. Additionally, now that the CARD Act is fully in force, issuers are restricted in their ability to raise interest rates, while penalty fees are capped and charging over-the-limit fees requires the cardholders’ prior enrollment in an overdraft protection program.

Here are some data from the WSJ:

Card companies are struggling to recover from $1 billion in losses racked up last year as a result of the financial crisis. Auriemma Consulting Group, a New York firm that specializes in the payments industry, estimates that card companies could earn about $4 billion this year. That is less than a quarter of the record $18 billion earned in both 2006 and 2007, according to Auriemma, which doesn’t include financial results from American Express Co. or Discover Financial Services Inc.

It is hard for issuers to make money when cardholders are not using their cards. Again from the WSJ:

The amount of outstanding credit-card loans shrank 10% last year, to $772.19 billion, due to tighter lending standards and a drop in consumer spending, according to the Nilson Report, a Carpinteria, Calif., industry newsletter.

Those loan portfolios are continuing to shrink. Chase, one of the largest issuers, has shaved more than $20 billion from its $127 billion portfolio. Over the past year, the bank has pulled back credit from its riskiest and least profitable customers.

The CARD Act is taking its toll too:

New federal card rules are expected to drain $11 billion a year from the industry over the next five years, said Robert Hammer, who runs a credit-card-consulting firm in Thousand Oaks, Calif. Those losses represent lost fee and interest revenue from charges that the law, enacted this year, bans. The losses also include higher costs of compliance with the law.

The CARD Act ensures that, even if consumers soon relapse into their happy spend-now-pay-for-it-later habit of the pre-crisis days, traditional card products will never be as profitable for credit card companies as they once were. Issuers of course realize that they need to get creative and are hard in search for alternatives.

One such alternative may turn out to be the prepaid card, until now the domain of little known, second-tier issuers. They are largely unregulated by the CARD Act and are typically issued to consumers with sub-prime credit scores. Used as debit cards, prepaid cards draw funds not from the cardholder’s checking account, but from an account with the issuer that is funded by the cardholder. Once the funds are used up, the cardholder has the option of re-loading the account.

Another alternative is the charge card, which is already being pushed hard by some of the largest issuers, including American Express and Chase. The biggest difference between credit and charge cards is that with the latter product, cardholders must pay off their balance at the end of each monthly cycle.

Yet another possible alternative is the private label card. Such cards are issued by credit card companies under the name of a different organization, such as Home Depot credit card offered by Citibank. Recently we learned that Target’s credit card profit rose to $149 million in the second quarter, up from $63 million a year earlier.

It may take them some time, but issuers will surely find a way to boost their profits. Whether they will be able to take them back to the pre-crisis levels remains to be seen, but that will depend not only on their own creativity, but also on the consumers’ willingness to cooperate.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.