Credit Card Processing Blog

Via CNNMoney.com we learn that N.Y. Sen. Charles Schumer wants to force credit card companies to apply the same underwriting standards they use for issuing regular consumer cards to business credit cards. The recently passed CARD Act has placed a number of restrictions on what issuers can and cannot do regarding interest rates, fees and information disclosure, however the rules apply only to consumer cards.

Under the CARD Act, for example, if a cardholder is late on a payment, interest rates can only be raised if the delinquency is bigger than 60 days, and then only after the issuer has served a notice to its cardholder. Even then, the cardholder can opt not to accept the new interest rate, in which case he or she will have to close the account and repay the outstanding balance on the old rate. The CARD Act also limits the amount of penalty fees to the amount of the violation, but not to exceed $25.

These and other consumer protections do not apply to business cards and Sen. Schumer thinks that credit card companies are taking advantage of this loophole by making it too easy for consumers to get their hands on them. He’s asked Ben Bernanke, the chairman of the Federal Reserve, to do something about it. “I believe that credit card issuers are exploiting this distinction in order to evade the tougher regulations passed by Congress and preserve their ability to profit from unfair and excessive fees,” explained Schumer.

Schumer actually doesn’t want to amend the Act by extending its protections to holders of business cards, but rather to make them harder to obtain. One specific requirement he believes would help achieve this goal is to require issuers to collect Tax IDs from applicants. Currently, business card applications ask for little more than the business’ name, aside from the principal’s personal information. There are known instances of approved business credit card applications when a fictitious corporate name was provided.

Now, it is true that a consumer can open up a business credit card account fairly easily, but is that necessarily a bad thing? These cards are typically used by entrepreneurs and small business owners with limited access to business credit. Many of them do not have a Tax ID, using their social security numbers instead, so it would be difficult to prove that they actually own a business. It is true that credit cards are far from the ideal source of short-term capital, but for the most part entrepreneurs understand that and use it only when there is nothing better available, accepting the associated risks.

Placing additional hurdles in the application process will probably prevent some consumers from opening up business card accounts, but will also make that more difficult for small businesses. Even in the best of times entrepreneurs have plenty of issues to deal with and adding one more is not exactly helpful. Now is certainly not the best of times.

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JPMorgan Chase is still considering the possibility of purchasing Discover Financial Services, according to Gordon Smith, CEO of Chase Card Services, as quoted by Reuters. However, such a move would be challenging, he conceded, because “executionally it’s very difficult – not impossible, but it’s something we can always think about.”

Chase is currently the biggest issuer of Visa credit cards, and one of the top MasterCard issuers. However, processing card payments through Visa’s and MasterCard’s payment systems means paying fees to the two networks and this is exactly what makes a possible acquisition of Discover so appealing to the issuer.

Visa and MasterCard are associations of banks that can both issue cards bearing the logos of the two networks and acquire (process) payments made with these cards. The processing of each of these payments is depicted in the diagram below.

Each participant in the payment process charges a fee. The issuer gets the biggest cut, on average about 75 percent of the total fee paid by the merchant. The processor gets most of the rest, while Visa and MasterCard charge about a tenth of a percent of each payment’s amount. However, the issuer also pays a fee for the right to issue Visa- and MasterCard-branded cards. For the time being, Chase is doing its best to keep these fees to a minimum. “What we’ve chosen to do is negotiate very aggressively with both Visa and MasterCard, and get very very good deals with them,” according to Smith.

Discover, however, does things differently. Like bigger rival American Express, it is a bank, not an association of member financial institutions, like Visa and MasterCard. Being a bank allows Discover to both issue its cards and process payments made with them through its own payment network. The payment process is much simpler and the costs are down. This is what makes this model so appealing to a giant card issuer like Chase, especially at times when tough regulations and challenging economic conditions are squeezing profits.

Discover Card was first introduced by Sears in 1985 and was a unit of Dean Witter, which merged with Morgan Stanley in 1997, according to Wikipedia. Discover was spun off by Morgan Stanley in 2007.

Discover Financial Services, like its rivals, suffered from record high consumer defaults last year, however its charge-off and delinquency rates have been steadily improving. Charge-offs are loans issuers do not expect to be repaid and write off their books as losses, typically at 180 days after the last payment on the account. The latest available data showed that Discover’s charge-off rate fell to 7.28 percent in July, from 8 percent in June. Its early-stage delinquencies – payments late by 30 days or more – fell to 4.7 percent in July from 4.8 percent in June, the seventh consecutive month of decline.

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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.

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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.

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