Credit Card Processing Blog

American Express is the highest-ranked credit card company in J.D. Power and Associates’ Credit Card Customer Satisfaction Study for a fifth year in a row, with Discover a close second. Overall credit card satisfaction has improved for a second consecutive year, following a decline in 2009.

Issuers of MasterCard and Visa cards are lagging quite a distance behind the two leaders. Why is that? Let’s take a look.

AmEx Best in Satisfying Customers, HSBC – Worst

J.D. Power and Associates uses six broad factors to measure credit card satisfaction: interaction, credit card terms, billing and payment process, rewards, benefits and services and problem resolution. The average industry score for 2011 was estimated at 731 on a 1,000-point scale, up from 714 in 2010 and 705 in 2009.

American Express topped the list, slightly ahead of Discover. Barclaycard and Chase are the only other issuers with an above-average score. Bank of America ranks second to last with a score of just above 700, while HSBC is the only issuer to score below 700.

CARD Act Credited with Boosting Satisfaction Scores

The CARD Act of 2009 gets much of the credit for the marked improvement in consumer credit card satisfaction. In the words of Michael Beird, director of banking services at J.D. Power and Associates:

It appears that credit card companies are doing a better job of communicating with customers, which may be an effect of the CARD Act. This improved communication is key to ensuring that customers fully understand their credit card terms – particularly benefits and fees – which helps reduce the number of problems reported and improves the overall experience.

Not surprisingly, consumers also like the lower interest rates, which were a direct result of the wholesale switch to variable interest rates that issuers embarked on once the CARD Act was passed. Of course, once the Fed begins to raise its Funds Target Rate, the credit card variable interest rates will be raised automatically, but that is not a worry for the present.

Why Are AmEx and Discover Better?

Here is what the report has to say about the two top-ranked card issuers:

American Express ranks highest in customer satisfaction for a fifth consecutive year with a score of 786 and performs particularly well in the benefits and services, credit card terms and rewards factors. Discover Card follows with a score of 779, and performs well in the interaction factor.

But why is it that the two credit card companies have been able to put such a distance between themselves and the issuers of MasterCard and Visa cards who are mostly clustered around the average satisfaction score?

I don’t think that I have a complete answer to this question, but it seems to me that it could have something to do with the fact that AmEx and Discover act as both issuers of their cards and processors of their transactions. By comparison, their rivals issue cards whose transactions can be processed by any other Visa or MasterCard member.

As a consequence, it is much easier for AmEx and Discover to address customer inquiries and resolve disputes, because they don’t need to turn to another bank for assistance. This would directly affect the interaction, billing and payment process and problem resolution categories in J.D. Power and Associates’ study. That could be enough to account for the results.

The Takeaway

So should we all cut up our Visa and MasterCard-branded cards and switch to AmEx or Discover? Well, over the years I’ve used cards bearing the logos of each of these companies and have not really noticed that big of a difference. My choice has always been based on the size and type of rewards on offer and I think I’ll keep it this way.

Update. J.D. Power’s Michael Beird has provided some additional details about his study’s results in the comments below that help explain why AmEx and Discover score better than the issuers of MasterCard and Visa cards. Be sure to read it.

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Credit card associations (Visa and MasterCard) and companies (American Express and Discover) are not exactly famous for their flexibility and nimbleness in adjusting to fast-changing circumstances. In fact, they are rather conservatively run institutions that would like nothing better than for everything to remain static, so that they can keep on making money the way they always have. Come to think of it, we should not be too hard on them, as most of us change our ways of doing things only when we are forced to do so.

Well, it seems like changes are being forced on the credit card behemoths and they are reluctantly beginning to expand their offerings and beef up existing ones. Oh, and they are opening up their wallets too, big time.

The e-commerce is where the current events are unfolding and DMNews.com’s Alex Palmer has a great article about the latest developments. As usual, young, aggressive competitors have spurred the incumbents into action. PayPal and Google Checkout have gradually evolved from smallish blips on Visa’s and MasterCard’s radar screens into major players on the e-commerce front.

“The card companies have to make sure that they are relevant. These guys are not oblivious to the fact that new entrants have taken a bite out of the purchase volume,” said Allen Weinberg, payments consultant for Glenbrook Partners, a payment strategy consulting firm, as quoted by Palmer.

Palmer goes on to list some of the old guard’ recent moves in response of the threat posed by the upstarts:

Visa is moving aggressively to promote, and add to, its e-commerce capabilities. The company recently initiated a marketing program for its Rightcliq online shopping service. The platform not only allows customers to store their payment card numbers with the service, even for competing cards, but also offers to track order delivery status.

Visa also acquired CyberSource, the online fraud prevention and payment gateway, this year.

…

American Express announced last month that members will be able to use Membership Rewards points toward purchases on Amazon.com. Discover Financial Services said it will collaborate with Firethorn Holdings on the soon-to-be-released Swagg mobile gift card application, which will allow shoppers to purchase, customize and exchange gift cards on their smartphones.

MasterCard bought UK-based payment services company DataCash Group for $520 million in August to expand its online commerce business. It also launched the MasterCard MarketPlace, a discount site for card members, with e-commerce company NextJump.

It has to be pointed out, however, that although the newcomers pose a legitimate threat to the establishment, they are by no means total outsiders. In order for anyone, including PayPal and Google Checkout, to accept Visa and MasterCard cards, for example, they have to have a relationship with a processing bank that is a member of Visa and MasterCard. The processing bank “acquires” its client’s transactions and submits them for settlement with the credit card associations, all the while collecting its fees, as do the card issuer and the associations. Now, neither PayPal nor Google Checkout is a bank in the U.S., so they don’t even keep the processor’s fees for themselves, which are far lower than the issuer’s.

From a payment processor’s point of view, PayPal and Google Checkout look like oversized e-commerce businesses. What makes it slightly less obvious to the casual observer is the type of service they provide. Instead of downloadable software, the pair provides a means for payment on the internet.

But that is the present. The world of the e-commerce, and especially mobile, payments is evolving incredibly fast and in the not-too-distant future we may see payment services that completely circumvent the Visas of the world. We’ve actually already seen a glimpse of how this may look. A couple of months ago Verizon, AT&T and T-Mobile announced a partnership with Discover and Barclays to enable their customers to use their cell phones as credit cards. This is a potentially huge venture and Visa and MasterCard are out of the picture. True, a credit card company (Discover) and a major bank (Barclays) are in it, but it is not hard to imagine smaller-scale operations that completely circumvent the established players’ networks. Given time, some of these newcomers can grow sufficiently to change the face of the industry beyond recognition. This is exactly what keeps Visa and MasterCard on their toes.

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First there were the rumors of a possible Discover acquisition. Now JPMorgan Chase is going after Discover’s bigger rival, American Express. This time the strategy is different, though. Instead of pursuing the bank itself, which would probably be a step a bit too far anyway, Chase is wooing AmEx’s customers.

As NYT’s Robin Sidel and Susan Carey put it:

Once a credit-card company that catered to middle-class families who vacationed at Disney World, J.P. Morgan’s Chase credit-card unit is now pitching plastic to more affluent consumers who stay in luxury hotels and dine at fine restaurants.

Chase’s Discover and American Express projects are pursuing totally different objectives and the bank’s top management may well have decided that it has the resources to take them both on at the same time.

In its foray into American Express’ territory, Chase remains well within its core competence. It is simply looking for ways to expand its market share at the expense of a specific rival (there always has to be a loser). Of course it will be a bruising battle, as American Express is certain not be sitting idly by, watching Chase poach its customers.

In the words of Sidel and Carey:

The intrusion into AmEx’s segment of the market prompted AmEx, normally reserved and above the fray, to take the white gloves off. “You cannot be a leader if all you do is copy someone else’s innovation,” said AmEx spokeswoman Desiree Fish.

…

The high-end market that both firms are chasing always has been the sweet spot for American Express, which has spent the past 50 years building a reputation for cardholder loyalty, a generous rewards program and good customer service. Those well-heeled customers also happen to have less risk, and Chase has been courting them, and AmEx executives, to expand the business.

Discover’s project is a tiger of a different stripe. What makes a possible Discover acquisition so appealing to Chase is that it would allow the bank to cut off the access to its credit card transactions to all the middlemen it currently has to deal with. These middlemen include Visa and MasterCard. Currently, Chase has to pay a fee for the right to issue Visa- and MasterCard-branded cards. Additionally, the Associations charge a fee every time one of their cards is used for payment, as does the processing bank that provides payment processing services to the merchant.

Moreover, the recently enacted financial overhaul legislation charged the Federal Reserve with the task of ensuring that debit card interchange fees (collected solely by issuing banks) are “reasonable and proportional” (read lower). The Fed is expected to issue the new rules early next year, spelling out exactly how much lower these fees will have to go before they become reasonable.

Discover, on the other hand, as American Express and unlike Visa and MasterCard, is a bank that both issues and processes its own cards, using its proprietary payment system. The transaction process is a good deal simplified, bringing down payment processing costs. This is exactly why Chase finds a potential deal so appealing, even though its actual implementation would be far from straightforward.

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• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

Discover Financial Services is entering an expansionary mode and the bank is looking beyond its traditional credit card range of expertise. Last week Discover finalized a deal to purchase Citigroup’s stake in Student Loan Corp., for an estimated $600 million, which made it the third-biggest U.S. provider of private student loans. The purchase allowed Discover to acquire $4.2 billion of private student loans.

Today we learn that Discover is considering branching out into other types of financial services as well. Reuters’ Maria Aspan tells us that Discover is now interested in entering the mortgage and checking businesses. CEO David Nelms plans to do it either through buying existing businesses or starting them from scratch.

Here is the gist of how Nelms sees Discover’s expansion plans, as summarized by Aspan:

“There are some other products that we’re not in yet in direct banking that fit the strategy, things like direct mortgages … and a direct checking account,” Nelms said in an interview with Reuters on Monday.

Those products are “areas that we probably won’t be in this year … But if we found the right organic or inorganic way to enter some of these businesses, that would be another possibility,” he said.

Discover would be able to start up its own checking-account business without necessarily buying an existing company, Nelms said.

But “inorganically, with direct mortgages, there are a number of successful players in that space, so that’s an area that I wouldn’t rule out,” he said, adding that potential targets are “not necessarily that large, but things that could give us a good platform” for building a new business.

Such ambitions are far from surprising, considering the effects of the latest regulatory changes in the payment card industry. Most of us who follow these developments have been expecting that credit card companies would be actively looking for new ways to boost revenues, after the recently passed CARD Act severely limited their abilities to increase interest rates, while banning or placing caps on the amounts of the penalty fees they can charge. Additionally, the new financial overhaul legislation charged the Federal Reserve with ensuring that interchange fees on debit card transactions are “reasonable and proportional,” which means lower than they currently are.

Discover’s moves are giving us an indication that credit card companies will not be afraid of wading into new territories, if that’s what it takes to prevent revenues from falling. However, issuers still have a few more familiar options to exploit.

Prepaid cards, for example, are largely unregulated by the CARD Act, but are typically issued by second-tier issuers. Issued mostly to consumers with sub-prime credit scores, prepaid cards draw funds from an account with the issuer that is funded by the cardholder. Once the funds are used up, the cardholder has the option of re-loading the account.

Another option is the charge card. Already heavily marketed by some of the largest issuers, including American Express and Chase, charge card agreements require cardholders to pay their balance in full at the end of each monthly cycle.

Surely credit card companies will think of other ways to boost profits as well. Not all of their ideas will take off, yet past history teaches us that they will eventually find the winning formula.

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• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

U.S. consumers have reduced their revolving credit lines, comprised mostly of credit card balances, by 6.3 percent at an annualized rate in July from June, a decrease of $4.4 billion, according to the latest data released by the Federal Reserve. These latest figures continue the trend that began with the onset of the financial crisis two years ago. Overall, since the end of 2008, revolving credit in the U.S. has dropped by $129.7 billion to $827.8 billion, a decrease of 13.5 percent.

The latest regulatory filings from the major credit card issuers provide yet another indication that U.S. consumers have become more conservative with their debt management. Credit card delinquencies – payments late by 30 days or more – continued their downward trend at all major issuers. Charge-offs – loans lenders no longer expect to be repaid and have written off their books as losses – have risen from the previous month, but falling delinquency rates will eventually lead to decreasing charge-off rates as well. Credit card companies typically charge-off loans that are 180 days past due.

Here are the figures from the major credit card companies:

• JPMorgan Chase’s 30-day delinquency rate – payments late by 30 days or more – fell to 3.89 percent in August from 4.06 percent in July. Its charge-offs rose to 8.18 percent from 7.95 percent during the same period.
• Bank of America reported a 30-day delinquency rate of 5.68 percent in August, down from 5.92 percent in July. The Charlotte, N.C.-based bank’s charge-off rate rose to 11.72 percent in August, up from 11.39 percent during the previous month.
• Citibank said its 30-day delinquency rate in August was 4.95 percent, down from 5.3 percent the previous month. The New York-based bank charged off 11.18 percent of its balances, up from 9.75 percent in July.
• Capital One’s 30-day delinquency rate dropped to 4.56 percent in August from 4.66 percent in July. The bank’s annualized charge-off rate was 8.19 percent, up slightly from 8.13 percent during the same period.
• Discover reported a 30-day delinquency rate of 4.47 percent in August, down from 4.72 percent during the previous month. Its charge-off rate totaled 7.98 percent of credit card loans that have been packaged into bonds, up from 7.28 percent in July.
• American Express continued to lead its peers in both categories. The New York-based company reported a 30-day delinquency rate of 2.4 percent in August, down from 2.6 percent in July. AmEx’s charge-off rate was unchanged at 5.5 percent.

The rates of late payments determine the amounts issuers set aside to cover potential future losses when balances are written off. Lower levels of delinquent payments translate into lower potential losses.

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