Credit Card Processing Blog

Billing disputes edged interest rates, identity theft and fraud to top the long list of credit card complaints lodged by American consumers with the Consumer Financial Protection Bureau (CFPB) in the four months since it opened for business, we learn from a newly released report.

The CFPB was established by Congress through the Dodd-Frank financial reform legislation and was charged with addressing consumer complaints about financial products and services. Until last week the Bureau was only collecting credit card complaints, but it is now also taking mortgage-related disputes and it plans to handle all types of financial products and services by the end of 2012.

Billing Disputes Top Credit Card Grievance

The CFPB has received more than 5,000 credit card complaints since July 21^st, when it began operations. These grievances are categorized into more than thirty different groups, from which consumers are asked to choose when reporting an issue. Here are the categories that received the most complaints:

The categories’ names can be interpreted differently by different consumers, as the Bureau itself acknowledges. However, it seems to me that the CFPB can do better to minimize confusion. For example, why do we need a “billing disputes” and a “billing statement” option, rather than having a single “billing” category? Still, the list gives us a fairly good idea of what consumers’ biggest credit card issues are.

More than 4,200 of the complaints received by the CFPB were forwarded to the card issuers who then reported to have resolved about three-quarters of them. Consumers accepted the issuers’ resolutions in 71 percent of the cases. These are good results, especially considering that a substantial proportion of the other answers and actions are categorized as “pending,” reviewing or “incomplete.”

What Do These Numbers Tell Us?

In addition to helping consumers resolve credit card disputes, the CFPB will be using these data to perform its other duties: supervision, enforcement, rulemaking, research, and consumer education. With that in mind, here is how the Bureau reads the results:

First, many complaints show consumers struggling to understand the terms of credit cards and associated products like debt protection services. These show a mismatch between consumer understanding and product function or issuer practice.

Second, complaints have revealed allegedly fraudulent charges to consumers’ credit cards made by third parties. The complaint system has identified recurring scams and helped to obtain redress for defrauded consumers. In some cases, the Bureau has conferred with appropriate criminal authorities.

Third, there are a large volume of complaint cases in which the issuer and consumer present conflicting factual accounts. In many such cases, however, issuers have been willing to resolve the complaint.

I would add that the fact that three-quarters of the complaints were resolved and a number of them are still pending tells us that the process established by the CFPB is working. Of course, we don’t know whether and how many of these consumers had filed a complaint with their credit card company prior to reporting the issue to the CFPB. In other words, we don’t know how an issuer’s response would differ if a complaint were received directly from the consumer, rather than routed through the governmental watchdog. Now, that would be an interesting piece of statistic.

The Takeaway

I don’t think that any of the above three observations is particularly novel. Nor do I think that we will ever be able to completely eradicate consumer misunderstanding of financial products, fraudulent charges or conflicting factual representation of credit card transactions. Still, if the CFPB manages to make even modest headway into these problem areas, it will have more than justified its existence.

Image credit: Financial Planner

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).

I didn’t see that one coming, although I guess I should have. Several retail groups have filed a lawsuit, claiming that the Federal Reserve has not complied with key requirements of the Durbin Amendment to the Dodd-Frank financial legislation that was passed in 2010.

Now, a lot has been written on this blog about the Durbin Amendment and regular readers know where we stand on the subject. We believe that the legislation amounts to a government-mandated redistribution of revenues ($7 billion or so annually) from one industry to another. Moreover, as we and others predicted when the amendment was first proposed, it has led to an increase in banking costs for consumers, as issuers ramped up fees to make up for lost interchange revenues.

So far, so straightforward, but now the clear winners of the interchange war are suing the Fed for not doing enough for them. I think that warrants a re-examination of the situation.

What Did the Durbin Amendment Do?

Famously, the Durbin Amendment charged the Fed with, among other things, ensuring that debit interchange fees – the fees issuers collect each time a merchant accepts one of their cards for payment – are “reasonable” and “proportional” to the banks’ processing costs. Though that mandate may seem to be somewhat lacking in clarity, there was never any doubt about how the Fed was expected to interpret it. The retail and bank lobbies did their best to help the Fed in its task and eventually Ben Bernanke’s outfit decided to place a limit on debit interchange fees that averages $0.24 per transaction, 45 percent lower than the pre-Durbin average of $0.44 per transaction.

At the time many of us thought that the Fed’s decision, while disliked by both sides, was a compromise they would each learn to live with. Well, the banks, for one, did move on and promptly began implementing strategies they had already devised for recouping their interchange losses. Some of these failed rather spectacularly, while others flew under the radar and yet others are still to come. However, the retailers, it now turns out, have never quite got over their displeasure and are now suing the Fed for placing the cap too high for their liking.

The Retailers’ Complaint

Initially the Fed proposed a debit interchange cap of $0.12 per transaction that was later lifted to its current level. It is likely, though we can’t be certain, that the retailers would have accepted the lower limit (and the extra billions of dollars in revenues that would have come with it), if it had stayed. By doubling it, however, the Fed had revealed whose interests it serves, their lobbyists now say. Here is Mallory Duncan, Senior Vice President of the National Retail Federation (NRF), one of the claimants in the suit:

The Federal Reserve was required by law to come up with swipe fees [interchange fees] that were ‘reasonable’ and ‘proportional’ but what we got were neither… Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time.

Never mind that Duncan repeats the completely unsubstantiated claim that retailers would pass the interchange windfall to their customers, here is the interesting part:

Rather than following the law, it’s almost as if the banks and the Fed were working hand-in-glove to block the genuine competition and common-sense price reductions Congress directed… The Fed’s regulations have blunted the competition that would have made greater savings possible.

In other words, by slashing their interchange revenues by 45 percent, the Fed had revealed itself as an accomplice to the evil banks in preventing the retailers from saving even more money for their customers. Right.

The Takeaway

I don’t quite know what to make of this story. It all seems so ludicrous to me that the only way I can make some kind of sense of it is to view it as the first salvo in the retailers’ campaign for a far bigger prize – a limit on the credit card interchange fees.

Now, considering that as a result of the debit interchange cap, our banking has become more expensive, while we are yet to see the promised reduction in retail prices, I would expect that our legislators would not repeat their mistake. But then, these side effects have always been so obvious that I didn’t expect them to make it in the first place.

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).

“Would you like to save 10 percent on your purchase today?” Surely you’ve been asked this question more than once before and you know exactly what the cashier means. She wants you to open up a credit card with her store in exchange for an immediate discount.

But what is a store-branded card? It must be a credit card, because you get an access to a credit line, but it feels different, because you can only use it at the stores of the particular retailer whose logo it displays. And above all, is opening up such an account worth the discount? Well, in order to answer this question, we should first learn exactly what this type of card is.

Store Card Basics

Store card (also known as a “private-label” card) is a type of credit card that is issued by or on behalf of a particular retailer or group of retail stores and can be used for purchases only at that retailer or group of stores. In all other respects, private-label functions like a credit card, although there can be other differences as well.

The above definition sounds quite simple, but things can easily get confusing. Some stores, especially the big-box retailers, often offer several different, but similarly looking, store-branded payment cards. For example, Wal-Mart offers gift, private-label and regular credit cards, all of which bear the retail giant’s logo. Yet, these are very different payment products and you need to be able to differentiate among them. The table below gives you a side-by-side comparison:

*At time of writing.

As you see, these three products are very different from one another.

The CARD Act Effects

The CARD Act of 2009 changed the rules on store card promotional pricing and APR (annual percentage rate) increases. However, although it was initially proposed, the final version of the act released issuers from the obligation to collect financial documentation to verify each store card applicant’s income and ability to pay back the loan. Instead, issuers can now use statistical income estimation models.

The new regulations set limits on the types of promotions merchants can offer, including putting an end to one of their favorites: marketing cards with no monthly payments required for up to a year, but charging interest throughout the promotional period. Under the CARD Act either consumers must make at least a minimum payment each month or issuers must offer such an arrangement that no interest accrues over the promotional term.

The Takeaway

Whether a store card is a good payment option or not very much depends on the circumstances. If, for example, you are offered a 15 percent discount on a $2,000 TV set, applying for the card probably makes sense, as you would immediately save $300. However, if the rebate is $10, it’s probably not worth it, considering that the benefit would be offset by the slightly negative effect the application would have on your credit history.

On the other hand, for your day-to-day needs, regular credit cards are typically the better choice, as they are usually issued on better terms and their rewards programs, if available, cover a much wider array of merchants and purchases. So, if you did open a private-label account and unless you were offered discounts or promotions on an ongoing basis, I don’t see a reason to keep it open after the initial rebate is applied.

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).

We’ve received a lot of pushback for our assertion that card issuers will manage to find ways to make up for the huge revenue losses they’ve suffered as a result of the enactment of the Durbin Amendment last month. It seems to me that some of our readers felt that we were advocating for it, when we’ve been simply pointing out what should’ve been obvious to everyone who’s been paying attention.

Whether anyone likes it or not, in an open-market economy a business whose revenue has been sharply reduced by whatever cause must do whatever it takes, within the boundaries of the law, to recoup its losses. No viable business can afford to accept the new status quo and move on.

Banks Introduce New Fees, Ramp up Existing Ones

Sure enough, new bank fees are now popping up all over the place and existing ones are being ramped up, we learn from the New York Times. Here is what NYT’s Eric Dash’s has found out:

Need to replace a lost debit card? Bank of America now charges $5 – or $20 for rush delivery.

Deposit money with a mobile phone? At U.S. Bancorp, it is now 50 cents a check.

Want cash wired to your account? Starting in December, that will cost $15 for each incoming domestic payment at TD Bank.

…

Even the much-maligned debit usage charges have effectively been bundled into higher monthly fees on checking accounts. Bank of America abandoned its $5 a month debit card usage fee in late October amid a firestorm of criticism. Yet, it more quietly raised the cost of its basic MyAccess checking account by more than $3 a month earlier this year. Monthly maintenance fees now run $12 a month, up from $8.95.

There it is. “Everything, it seems, has a price,” is Dash’s conclusion. Well, he is correct of course, but that’s always been the case. What’s different in the post-Durbin world is that banks are now passing on to consumers costs they were previously willing to absorb.

Winners and Losers from the Debit Fee Reform

The Durbin Amendment will cost card issuers about $7 billion in annual debit interchange fee revenues. However, as Dash’s and many other reports are making it clear, banks are finding ways to recoup their losses and, when the dust settles, they will not be worse off, and will probably be better off, than they were before the reform.

Whatever interchange revenues the banks lost were a gain for the merchants accepting their debit cards. Now, the big-box retailers, who were the major force behind the push for interchange reduction, were telling everyone who would listen that lower debit fees would translate into lower consumer prices, but that is a decision they alone can make and there are no signs that it is happening.

Actually, when it’s all said and done, the merchants’ cumulative gain will be lower than the issuers’ aggregate interchange loss, even if no transfer is made to consumers in the form of lower retail prices. The reason is that banks have launched a strong campaign to drive consumers away from debit and toward types of cards that were unaffected by the reform, e.g. credit and prepaid. Yet, even when these dynamics are accounted for, merchants will still be huge net winners.

So, if the upshot of the Durbin Amendment is that banks’ revenues will at worst be unaffected and the merchants’ – much higher, who will end up making up the difference? Yes, you guessed correctly. There is no one left in the picture, but the consumer group.

The Silver Lining

Yet, there is a silver lining of a sort for consumers and it is that issuers, in their push to drive their customers away from debit, are ramping up credit card rewards programs to a level not seen in a very long time, if ever. Of course, the best terms are reserved for consumers with the highest credit scores, but even mid-range scores are good enough for pretty decent offers these days.

Even sub-prime borrowers are now getting easier access to credit. According to Equifax, one of the three national credit reporting agencies, in the first half of this year 5.4 million new bank cards were issued to consumers with credit scores below 660 (which is Equifax’s definition of sub-prime). This represents a three-year high and a 27 percent increase over the same period of 2010. New credit limits rose at the same rate.

If used prudently, credit cards can be a much better payment option than debit. Not only can they give you cash back or airline miles, but they help build your credit history, which is unaffected by debit card use.

The Takeaway

The bottom line is that banks will find ways to make up for their lost revenues and banking will on aggregate become more expensive for consumers. However, that does not mean that your banking costs should necessarily rise. Most of the new fees can be avoided and you should learn under what conditions this can be done.

Moreover, if you can qualify for one of those credit card offers that come with a $200 cash back sign-up bonus, the bonus itself will probably be enough to cover any new bank fees you may have to pay for a year ahead, in case you are not able to get them waived. Even without the bonus, a moderately generous rewards program will help you achieve your objective.

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).