Into the Black Hole

This is the inescapable conclusion from Fitch Ratings’ latest analysis (registration required) of the performance of the seven biggest U.S. credit card issuers in the third quarter. Low as they already were, the issuers’ charge-off and delinquency rates improved even further in the period, we are reminded. Yet, even as cardholders kept their resolve not to fall behind on their payments, they nevertheless continued to increase their credit card spending at a healthy pace, which Fitch explains with a desire to optimize card reward benefits.

Well, that trend of continually falling charge-offs and delinquencies and rising spending volumes is nothing new, of course. In fact, it has been ongoing since 2010, defying many a prediction about its imminent end along the way. Now Fitch Ratings makes another forecast, vague as it may be. Noting the record-low levels that have now been reached, and observing that charge-offs and delinquencies cannot actually hit zero, the ratings agency expects “some modest deterioration in 2014″. For my part, I’m not quite sure about that and believe that there may still be room for some further improvements. It seems to me that, if spending volumes continue to grow at their present rate, and there is a good reason to expect that they will as the economy keeps improving, it would take a noticeable shift in consumer attitude toward higher debt tolerance to send delinquencies and charge-offs higher and I just don’t see any signs of such a shift. But let’s take a look at the data...

Among the four major U.S. payment brands, American Express charges the highest credit card acceptance fees, by far. So much so that many retailers choose not to take AmEx cards at all, taking the risk of losing sales altogether in the process. Of course, for decades merchants have tried very hard to force American Express to lower its rates and in fact they’ve had some successes. The retailers scored their biggest victory in 1991, in the aftermath the “Boston Fee Party” — a protest that was orchestrated and paid for by a PR firm hired by AmEx’s rival Discover and which was joined by more than 250 restaurants across the U.S. American Express was eventually forced to gradually reduce its fees, which at the time averaged at around 4 percent. Yet, the difference between AmEx and Visa / MaterCard fees remains quite substantial.

In its latest annual report, AmEx told us that its average discount rate in 2012 was 2.52 percent, slightly below 2011′s level of 2.54 percent and 2010′s average of 2.55 percent. A direct comparison with Visa and MasterCard is not possible, as neither association releases average rates just for credit cards (credit and debit cards are lumped together) and AmEx doesn’t issue debit cards. However, the Nilson Report — a payments industry newsletter — told us a while back that in 2008 the weighted average for each of the two associations was below 2 percent and today it is almost certainly lower than that. But let’s take a closer look at American Express’ merchant fee structure...

The 2013 Electronic Payments Survey, published by the Association for Financial Professionals (AFP) and underwritten by J.P. Morgan finds that payment fraud in the U.S. has substantially declined for yet another year. The leading cause for the improvement, it turns out, is not some enhancement of our defenses, but the ongoing shift away from the use of paper checks and toward electronic payments. Checks continue to be the most frequently and successfully attacked payment method, but as their use dramatically declines, so does overall fraud or as the authors put it: “[w]ith fewer checks in the system, less check fraud occurs”.

So the survey’s results are not exactly reassuring, which is a sentiment shared by the authors who caution us not to be fooled by the overall reduction in fraud losses. On the contrary, they warn, as payment options evolve, so do fraudsters’ techniques. And anyway, at some point in the not-too-distant future, the transition from paper checks to e-payments will be complete and that will deprive us of our sole source of improvement. But let’s take a closer look at the survey’s findings...

Credit card security codes are used by all four major U.S. payment card brands to help their merchants prevent e-commerce fraud. The underlying idea is that, by being able to provide the security number that is printed on the card she is using to make a payment online, the customer proves that she in physical possession of the card at the time the transaction is taking place. As these numbers are not encoded into the card’s magnetic stripe and merchants are not allowed to store them into their transaction logs, criminals are having a much harder time getting their hands on them, which is what makes using them so valuable. And that’s why you should ask your customers to provide their cards’ security codes at your own website’s checkout.

Now, there is no universal standard governing the use of card security codes and each payment network maintains its own set of rules. However, these are all quite straightforward and anyway, they have more things in common than differences as will become evident if you keep reading. Many merchants still refuse to include a security code field in their online checkout forms, because they believe that doing so may confuse some of their customers or otherwise put them off and lead to lost sales. I believe that this fear is unfounded and that a merchant stands to lose more from not asking for the code than she stands to gain from it. Hopefully, by the end of this post, you will have come to agree with me...

Once again, this year’s Black Friday actually began on Thursday (Thanksgiving) evening and, as this is likely to become a trend going forward, we might want to consider rechristening this surreal festival of waiting in long lines for hours on end in the middle of the (often cold) night, pushing and shoving fellow bargain-hunters at retailers’ doors on opening and stampeding into the aisles in the hope of getting first to some coveted gadget selling at 50 percent off the regular price or other. One thing, however, is unlikely to change anytime soon: as Black Friday, and the holiday shopping season it ushers in, is a make-or-break time for American retailers, they are certain to remain deathly serious about getting their sales strategies right. And if they become convinced that it takes starting Black Friday on Wednesday to make it a success, there is little doubt that they’d do it in a heartbeat.

There is a lot of money at stake, as Black Friday is a truly big shopping day and even the Great Recession failed to slow it down. In fact, the same is true for the whole weekend, which culminates with the Cyber Monday — a much more recent phenomenon, but one that is now eclipsing in importance Black Friday itself. The term “Cyber Monday” was coined in 2006 by Shop.org, a division of the National Retail Federation, after a study found that 77 percent of e-commerce merchants had reported a significant increase in their sales on the Monday after Thanksgiving.

Well, on this Black Friday morning I decided to share with you some of the more interesting findings of the 2013 Holiday Spending Forecast, published by Nielsen — an information and measurement company — and meant to cover the whole shopping season. As is now customary for such reports, this one is accompanied by an infographic to illustrate the results. Let’s take a look...