Inside the Black Hole

Square, a service that enables consumers to accept credit and debit cards for payment through a reader attached to their smart phones, has done extraordinarily well in the U.S. since its launch in October 2010 and, if anything, has been going even stronger since one of the biggest names in the industry mounted a stiff challenge to its supremacy. Since PayPal launched its Square-like device two months ago, Jack Dorsey’s company has accelerated its growth, increasing the aggregate volume of processed transactions from $4 billion to $5 billion on an annualized basis in a single month, according to Bloomberg. I do have a slight preference for PayPal’s service, but I like both of them and the competition between the two will certainly benefit their American users.

But what about the rest of the world? Neither Square, nor PayPal Here is available to users outside of the U.S. and we don’t know whether either of them, or indeed any of their other U.S. rivals, has any plans to venture abroad anytime soon. What we do know, however, is that there is a Swedish start-up, called iZettle (it has no link to Apple), which has taken up the task and has just made its first foray outside of Scandinavia and into the U.K. I thought it was about time to say a few words about it...

That is how two Cleveland Fed researchers – O. Emre Ergungor and Patricia Waiwood – interpret the fall of credit card interest rates in the past two years. There is not a mention in their short release of either of the two big payment-card-related legislations passed during that period – the Card Act of 2009 and the Durbin Amendment to the Dodd-Frank act – both of which had a huge impact on the way credit card issuers do business.

While I don’t think that anything that the card issuers have done in the past couple of years can be analyzed in isolation of the accompanying regulatory developments, Ergungor and Waiwood have produced several charts that help us make better sense of recent trends. Let me share them with you...

That is the conclusion of a recent study by Fumiko Hayashi and Joanna Stavins from the Federal Reserve Bank of Boston. The researchers say that they set out to verify the anecdotal negative relationship between the use of debit cards and credit scores and have indeed confirmed the validity of this common assumption.

Hayashi and Stavins then go on to investigate whether the negative relationship is the result of supply-side or demand-side effects, i.e. whether consumer access to credit cards, the cost of using them and the credit limits are influenced by the credit score or whether the differences in consumer payment preferences are associated with a lower credit score. The researchers find that the former (supply-side) factors are the ones playing the important role. Let’s take a closer look at the paper’s findings...

Chase is the latest big bank to enter the prepaid card market in a serious way. Its new entry into the increasingly crowded field – called Liquid – is a worthy competitor to Americans Express’ prepaid card, which until now was the undisputed leader. AmEx’s product is still the best option for everyone with a poor FICO score whose primary goal is to get back into the credit system, because it offers a path to a charge card. Everyone else, however, now has a choice between two very good prepaid cards.

The Liquid card is very much like a Chase debit card, with the only difference, as far as I can tell, being that it is not linked to a checking account and so its users have no access to checks. Other than that, the two card types are indistinguishable. If there is still someone left out there who is asking “Why would a bank like Chase bother to be issuing debit-card-like prepaid cards?”, the answer, of course, is that the Durbin Amendment slashed the revenues big issuers are getting from debit transactions by 45 percent, while leaving credit and prepaid interchange fees untouched. The vastly improved quality of prepaid cards is one of the very few beneficial side effects to come out of this poorly designed legislation. Let’s take a closer look at the Liquid...

Americans have been in a debt-slashing mood ever since the onset of the financial crisis in September 2008 and they have been especially keen on paying down their credit card balances. The aggregate amount of credit card debt in the U.S. has been continually falling since the collapse of Lehman Brothers. It is now well below its pre-recession level and it has been surpassed by the student debt total for a first time ever.

We’ve been tracking the various credit card statistics in real time on this blog, but I thought that we could all benefit from a summary of what has taken place so far and from some historical perspective. So that’s what I will do in this post...