Credit Card Processing Blog

Target has been unable to sell its private-label credit card portfolio, which has been on the market since last January and has now suspended the sale, we learn from Reuters. The retailer had sold half of its credit card loans to JPMorgan Chase for $3.6 billion in 2008 and had been actively looking this past year for a buyer for its current pool of receivables.

Target isn’t actually trying to sell its credit card business, which is a quite profitable part of the struggling retailer’s operations. What it is selling, or attempting to anyway, are the outstanding credit card balances owed by the holders of Target-branded credit cards. Observers are split on the merits of the decision to sell the portfolio, as the long-term benefits of such a move are indeed questionable. But there is another question that deserves reflection: how does such a sale affect the cardholder?

What Is a Store-Branded Credit Card?

Before I weigh in on the issue, let me briefly describe what a store-branded credit card is. Also called “private-label,” this type of bank card is a credit card that is issued by or on behalf of a given retailer or other merchant type and can be used for purchases solely at that merchant’s stores. Other than that, private-label functions just like any other credit card and is subject to the same rules and regulations.

In a way, private-label is similar to a store-issued gift card, as both payment types can only be used at the merchant whose logo they display. The difference, of course, is that, while using a gift card requires that you first load it up with your own money, when using a private-label one you are spending from the credit line you’ve been approved for.

There is one thing both credit and prepaid cards have in common, which helps distinguish all-purpose credit from private-label: cards that display the logo of a credit card company (e.g. Discover, American Express, etc.) or network (i.e. Visa or MasterCard), can be accepted by any merchant that accepts that brand’s cards.

What Does Target Get from a Private-Label Program?

From a merchant’s point of view, a private-label program can be operated in two distinctly different ways. The first is to have a financial institution underwrite and manage the cardholder accounts and the alternative is to operate the whole thing yourself, which is the path chosen by Target. The former option allows you to stick to what you’re good at and let the banks do what they are designed to do. Managing the program yourself is a costly undertaking and you risk taking a huge hit if things go bad. The upside, of course, is that, should you do a good job at it, you would create a whole new, and potentially big, revenue source.

Well, things have worked out quite well for Target. In fact, as Reuters reminds us, the retailer’s private-label arm has positively contributed to the bottom line in every quarter since the last one of 2008, right after the Lehman collapsed and all financial hell broke loose. Few issuers can boast such results. In the third quarter of last year, Target reported profit of $143 million from its credit card unit, a ten percent gain from the same period of 2010.

Additionally, the private-label program benefits retailers through the higher sales spurred by the discounts claimed by customers who agree to open up a card at the checkout. Moreover, Target has managed to boost the subsequent use of its cards by launching a rewards program, increasing its share of sales to 9.5 percent from 5.5 percent, according to a statement issued Nov. 16.

The Takeaway

So it is clear that Target’s private-label program is hugely beneficial for the retailer. Yet, Target is trying to sell the credit card receivables for reasons known to its management. How will such a sale impact cardholders? Well, there are a couple of separate issues here.

Firstly, the immediate result of a sale of your Target credit card account to a different company will turn this new company into your creditor. The contract you signed with Target will remain in force, but your new creditor will be solely responsible for making decisions in case of events that are not covered in your agreement. So, if you keep making payments on time, which you should be doing anyway, you will not be affected in any way. If, on the other hand, you are late on a payment, and the consequences of such an omission are not clearly spelled out in the contract, the new creditor will make a decision on what changes will take place, within the parameters of the existing laws.

On the other hand, Target will remain in charge of your rewards program, so there will be no changes there, for as long as your account is active.

The bottom line is that a change in ownership of your Target account, if it happens at all, will not affect you in any way, provided you stick to your part of the agreement. As with all other types of plastic, bad things begin to happen only when you stop doing that. But then, that would be the case even if Target never sold the account.

Image credit: FinancialPost.com.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Last week we wrote about the U.S. Consumer Financial Protection Bureau’s ongoing crusade aiming to simplify credit card agreements, even as the CFPB’s own survey had found that consumers reported to be fairly satisfied with how the current, post-CARD Act, version is presenting the terms and conditions of these contracts.

As promised, the CFPB has now released its vision of a “shorter, simpler credit card agreement” and has posted it on its website for comments. Well, having reviewed CFPB’s version and compared it to a generic agreement, my conclusion is that it is neither shorter, nor simpler, although it is made to look that way. Let me explain.

CFPB’s Proposed Agreement

The bureau has split the credit card agreement into two separate parts. The first one lists the terms and conditions of the contract, which runs into two pages and I think that most Americans who have ever applied for credit cards will find it familiar.

The second part of the agreement consists of definitions of the terms used in the contract, listed in an alphabetical order. It runs into six pages, extending the total length of the agreement to eight pages, although it is presented as not being a part of the agreement.

Now let’s see how the proposed version compares to a currently used generic agreement.

CFPB vs. American Express

You can find generic versions of the agreements used by U.S. banks on CFPB’s website here. I picked the agreement used by American Express Bank, FSB, because this is one of the biggest U.S. issuers and I’m pretty sure it is fairly representative for the field.

The first observation is that the AmEx agreement, just like the CFPB’s, is split into two separate parts. The first one contains the terms and conditions and the second – titled “Supplement to the Cardmember Agreement” – provides explanations of terms, as well as a description of the associated rewards program.

Both agreements run into eight pages, even though the CFPB version does not have to describe a rewards program, which takes about a page of AmEx’s. So CFPB’s agreement is in fact a page longer than AmEx’s.

But has the CFPB managed to simplify the agreement? Well, let’s look at how the agency’s version explains the way interest is calculated:

How is interest calculated?

We calculate interest using the daily balance method with compounding. This means that interest compounds daily.

We will not charge you interest on purchases if you pay your full account balance by the due date each month. This is called a grace period. If you do not take advantage of the grace period, we will charge interest starting the day you make a purchase. If you do not pay your full account balance on time in any month you will lose your grace period until you pay your full account balance on time x months in a row. You pay interest on cash advances or balance transfers from [date].

Here is how AmEx has done it:

We use the Average Daily Balance method (including new transactions) to figure interest charges for each balance. The total interest charged for a billing period is the sum of the interest charged on each balance.

Interest

The interest charged for a balance in a billing period, except for variations caused by rounding, equals:

• Average Daily Balance (ADB) x
• Daily Periodic Rate (DPR) x
• number of days the DPR was in effect.

ADB

To get the ADB for a balance, we add up its daily balances. Then we divide the result by the number of days the DPR for that balance was in effect. If the daily balance is negative, we treat it as zero.

DPR

A DPR is 1/365th of an APR, rounded to one tenthousandth of a percentage point. Your DPRs are shown in How Rates and Fees Work on page 2 of Part 1.

I can’t find anything particularly novel in CFPB’s proposal. People will still need to look up what prime rate means and will still need to learn how to calculate compound interest, if they want to know what their interest payments will be.

Let’s take another example, this one informing cardholders when they have to make payments. First, CFPB:

We will send your bill to the address on file. You agree to pay all authorized charges on the bill, including interest and fees. You agree to pay us for charges that we allow over your credit limits. You must pay at least the minimum payment by the due date stated on each bill. Your minimum payment will be [insert formula].

Now AmEx:

You must pay at least the Minimum Payment Due by the Payment Due Date. The Minimum Payment Due and Payment Due Date are shown on each billing statement.

Each statement also states the time and manner by which you must make your payment for it to be credited as of the same day it is received. For your payment to be considered on time, we must receive at least the Minimum Payment Due in such time and manner by the Payment Due Date shown on your billing statement.

Once again, there is no difference. I can go on, but you get the idea.

The Takeaway

The point is that the CARD Act did a pretty good job at simplifying credit card agreements, as consumers have already told the CFPB. It is true that some terms are still not well understood, but I don’t think that any amount of explanation will change that.

In fact, the CFPB may be in agreement with me on that last point. For example, its proposed agreement refers to the compound interest rate in its explanation of how interest is calculated (see quote above), but it does not even attempt to explain it. I can understand why. The only way to do so in a meaningful way would involve a formula – A = P(1 + r/n)^nt – and I would bet you $10,000 (sorry Mitt Romney) a quarter that most Americans would find this confusing and would accuse the offending card issuer (or the CFPB, for that matter) of using math to hide the truth.

So yes, the CARD Act has already succeeded in simplifying and shortening credit card agreements and the CFPB is wasting government resources in its attempt to do it all over again.

Image credit: MyBank4.me.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

The government is once again attempting to simplify credit card agreements, various news outlets are reporting this morning. This time the agency in charge of the project is the recently founded U.S. Consumer Financial Protection Bureau (CFPB).

You may remember that not too long ago, Congress itself passed the CARD Act, which was intended to protect consumers against unfair practices employed by credit card companies. Prominent among the act’s provisions were mandates for clear and easy-to-understand disclosures of the terms of agreement, which were supposed to eliminate confusion among consumers. Now the CFPB is trying to achieve exactly the same objective all over again.

CFPB’s Goal: Short, Simple Credit Card Agreements

Bloomberg has a reference to a “prototype” of CFPB’s vision for the ideal credit card agreement, but the link is broken and I have not been able to locate the document on CFPB’s website. So I’m relying on Bloomberg’s description:

The standardized, two-page card agreement outlines prices, risks and terms that are shorter and more concise than conventional agreements, augmented by an online glossary to aid consumers on such items as billing disputes, privacy, rights, interest-rate calculations and the consequences of late payments.

What this new agreement template is expected to achieve is summarized by Raj Date, a special adviser to the Secretary of the Treasury, as quoted in Bloomberg’s piece:

Credit cards can be complicated… With a short, simple, easy-to-understand credit card agreement, consumers can clearly see the terms of the deal and make decisions that are right for them.

Well, as I said, the CARD Act was supposed to achieve precisely that.

CARD Act on Credit Card Agreements

Let’s take a look the part of the act dealing with credit card agreements:

Plain Sight / Plain Language Disclosures: Credit card contract terms will be disclosed in language that consumers can see and understand so they can avoid unnecessary costs and manage their finances.

• Plain Language in Plain Sight:  Creditors will give consumers clear disclosures of account terms before consumers open an account, and clear statements of the activity on consumers’ accounts afterwards.  For example, pre-opening disclosures will highlight fees consumers may be charged and periodic statements will conspicuously display fees they have paid in the current month and the year to date as well as the reasons for those fees.  These disclosures will help consumers make informed choices about using the right financial products and managing their own financial needs.  Model disclosures will be updated regularly based on reviews of the market, empirical research, and testing with consumers to ensure that disclosures remain clear, useful, and relevant.
• Real Information about the Financial Consequences of Decisions: Issuers will be required to show the consequences to consumers of their credit decisions.
  • Issuers will need to display on periodic statements how long it would take to pay off the existing balance – and the total interest cost – if the consumer paid only the minimum due.
  • Issuers will also have to display the payment amount and total interest cost to pay off the existing balance in 36 months.

Additionally, the act required issuers to post credit card agreements on the internet, so that both consumers and regulators would have an easy access to them. So what was the effect of these changes? Let’s look at CFPB’s own assessment.

CFPB on CARD Act’s Effect on Credit Card Agreements

Here is how the CFPB assessed the Act’s success at clarifying credit card terms and conditions for consumers:

• 80 percent of cardholders have noticed that their payments are now due on the same day of each month
• 77 percent have noticed that the monthly statements contain a warning about the cost of making a late payment
• 70 percent of cardholders have noticed that monthly statements now contain information about the consequences of making only minimum payments
• 48 percent of consumers recall that their bill now tells them how much to pay each month in order to pay off the balance within three years
• 31 percent of cardholders who recall seeing the new information on their statement report that this information has caused them either to increase the payments they make or to reduce their use of credit.
• Of the cardholders who have noticed at least one of the changes in their monthly billing statements, 60 percent say that their monthly statements are easier to read and understand than they were a year ago.  Additionally, 60 percent say that the terms of their credit card are clearer than they used to be.
• At the same time, 32 percent of those who carry a balance from month to month say they do not know how much interest they paid on their primary credit card last year.

This sounds to me like a fairly positive evaluation. Fully 60 percent of consumers already find the agreements both easier to read and more clear. Considering that a substantial number of consumers will not have read their agreements to begin with, two of Mr. Date’s objectives seem to have been achieved quite successfully by the CARD Act.

What about helping consumers understand the meaning of terms like “billing disputes, privacy, rights, interest-rate calculations and the consequences of late payments?” Well, isn’t it obvious what a billing dispute is? I mean, what is there to be clarified? And isn’t it equally obvious that payments should be made on time and that the consequences of not doing it would be unpleasant? Not to mention that these consequences are already prominently disclosed in each agreement in the form of a late payment fee and that the CFPB’s own assessment states that 77 percent of consumers are aware of them.

Regarding privacy and rights, these terms need no explanation, but a disclosure and have already been heavily regulated in the CARD Act and other legislations. Finally, interest rate calculations can indeed be difficult to understand for everyone and I don’t think that any amount of explanation can change that fact. However, that does not mean that consumers are not protected against high interest rates. For example, the CARD Act banned retroactive interest rate hikes, required a clear disclosure of any promotional rates, gave consumers the right to close an account, with no negative consequences, if they did not agree with a proposed rate increase, put a stop to the practice of “universal default,” etc.

The Takeaway

The way I see it, what the CFPB is attempting to do with credit card agreements has already been achieved quite successfully by the CARD Act, even by the CFPB’s own assessment. I have no idea why the agency has taken up this task, but I think that it is wasting government resources.

Image credit: LoveToKnow.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

The CARD Act of 2009 was a truly comprehensive reform that fundamentally changed the way credit card companies do business. It is best known for the restrictions its provisions placed on credit card-related practices, including a requirement for the contract terms to be clearly spelled out and disclosed, as well as to be made publicly available on the internet, placing an upper limit on penalty fees, prohibiting retroactive interest rate increases due to “any time, any reason” or “universal default,” banning issuers from charging multiple fees for the same violation, etc.

What is less well known is that the CARD Act also featured rules for stored-value and gift cards. These changes have been in force for more than a year now (since August 22, 2010, to be precise), so it’s about time we wrote about them.

Which Cards Are Covered by the New Rules?

Not all types of prepaid cards are covered by the CARD Act’s gift card provisions and you need to be able to distinguish among them. The ones that are covered include:

• Gift cards that can be used only at a particular merchant or group of stores, such as a department store and a book retailer.
• Gift cards bearing a MasterCard, Visa, American Express, or Discover brand logo. These cards can be used wherever the brand whose logo they display is accepted. However, not all prepaid cards featuring a brand logo are covered (see below for details).


The new rules do not apply to the following types of cards:

• Reloadable prepaid cards. Gift cards cannot be reloaded (although the Walmart gift card can be reloaded, which makes it a special case). A reloadable prepaid card bearing a MasterCard, Visa, American Express, or Discover brand logo is considered to be a checking account substitute and is not covered.
• Cards given as a reward or as part of a promotion. If, for example, you are given a free $25 gift card by a store for some reason, that card, although it may be a gift card, is not covered by the CARD Act protections.

Now that you know which cards are covered by the rules and which are not, let’s take a look at the new protections themselves.

4 Gift Card Rules Everyone Should Know

Here is the list:

1. The card must be good for at least five years. Your card must not expire for at least five years from the date it is purchased.
2. Unspent money may be good after the card expires. The rule says that when your gift card expires, any unspent money you may still have on it does not necessarily have to expire with it. Although the card can no longer be used, because as any other payment card it is invalid past its expiration date, the unspent amount can be transferred to a replacement card, which you can request at no charge.
3. All fees must be disclosed. This is a theme that goes through the entire CARD Act. All gift card fees must be clearly disclosed on the card itself or on its packaging.
4. Fees are limited. The CARD Act limits gift card-related fees, which typically can be charged if:
   • You haven’t used the card for at least one year, and
   • You are only charged one fee per month.

   
   The restrictions apply to the following fees:

   • Inactivity or dormancy fees.
   • Card usage fees (applied when you do use your card).
   • Fees for adding funds to your card. I am not sure what to make of this one, as reloadable cards are excluded from the Act’s protections.
   • Maintenance fees.

Other fees can still be charged, including for example a fee to purchase a card or to replace a lost or stolen one.

The Takeaway

Perhaps the most important change brought about by the sweeping CARD Act was the requirement for issuers to make all information about their products freely and easily available to consumers, which helps them make informed buying decisions.

Arguably, gift card users were the biggest beneficiaries of the information disclosure mandate. Not only are now all gift card-related fees greatly restricted, but whatever charges there still remain are prominently disclosed at the time of purchase. Make sure you read the terms and understand what all applicable fees are. There is no excuse for not doing so.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Last week we looked into store-branded (also called private-label) cards and examined what makes them different from regular credit and gift cards, from a consumer standpoint. However, the differences can be even greater from a retailer’s point of view.

Private-label cards present merchants with the unique, although often underutilized, opportunity to use the cards to influence their customers’ buying decisions. It is true that gift cards can be used for the same purpose, but store-branded cards provide both more options and flexibility. An example for a merchant who has taken a great advantage of this opportunity is Zales, a jewelry retailer, which reported that 40 percent of its U.S. revenues came from purchases made with its private-label cards.

Are you getting the most out of your own private-label program? Is using your store’s card an attractive a payment option for your customers as it could be? This article will help you answer these questions and will give an idea or two on how to increase private-label revenues.

6 Ways to Make Customers Like Your Store-branded Credit Cards

Here is a list of six strategies to help you make store cards a more attractive payment option for your customers and increase your private-label revenue in the process:

1. Use ongoing discounts and special offers. Why limit your program to the usual 10 – 15 percent discount on the first purchase? Give your customers a discount every time they use your store’s card. The discount does not have to be as big as the initial one (many credit card rewards programs do perfectly well with one or two percent cash-back options). Or you can offer discounts on specific items (e.g., exclusive or private-label branded products).
2. Offer more attractive payment terms. Extend the promotional terms to make the minimum payment option a more appealing one to your customers. Alternatively, offer a plan consisting of equal monthly payments, which is the preferred choice for many consumers.
3. Give rebates. There is no need to rediscover the wheel. Card issuers have been very successful with rewards programs that give customers various rebates or points when using their cards. Take a page of their book.
4. Upgrade your account management tools. Give your customers access to advanced features like fraud alerts, payment reminders, paperless statements and mobile payments. It will not only help them manage their accounts more easily and conveniently, but it will also make you look like a “real” card issuer, not one who’s doing it as a sideshow.
5. Offer co-branded debit cards. Debit cards are the most-widely used payment card in the U.S. and the second-fastest growing, behind prepaid. The Durbin Amendment made them less profitable for issuers, but your primary objective should be to increase sales. Profits from transaction fees, while welcome, should be a secondary priority (and anyway that’s only a consideration if you issue your cards directly). Consumers like debit, so why not giving them what they want?
6. Offer prepaid cards. As already mentioned, prepaid is the fastest-growing payment card type in the U.S., so the same rationale about giving people what they want applies to them as it does to debit. Moreover, they were exempted from the Durbin Amendment regulations, so prepaid is good from an issuer’s perspective as well.

I’m sure there are other items that can be added to that list, but it will at least get you started. Feel free to tell us about your own ideas in the comments below.

The Takeaway

You should constantly be looking for ways to improve your private-label program. Remember that, even if your cards are underwritten and issued by a bank, rather than by your own company, your customers will still associate them with your own brand, so their experiences as cardholders and customers will blend into one.

This equivalence in the minds of your customers between their shopping and payment experiences is unique to store cards and presents both an opportunity, as well as a challenge. To take advantage of the former and successfully meet the latter, you should treat your private-label card program as an inseparable part of your brand, rather than simply as another tool for generating revenue.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).