Bailout

The new world of credit cards: Still treacherous

By Felix Salmon

Barbara Kiviat asks whether credit card companies “might be getting their groove back”, and cites this chart:

But, as Eric Dash reports, it turns out that there’s an interesting change of composition hidden in that final uptick:

While most major card lenders sharply cut back on direct mail last year, almost nine out of 10 new card offers were attached to a rewards program that appeals to big spenders, according to Synovate, a global marketing research firm. Only six in 10 applications were for a rewards card program in 2007, before the financial crisis struck.

Now that the CARD Act has come into force, the amount of money that credit-card companies can extract from the sweat box of delinquency has dropped sharply, and they’re looking for more revenue sources. Cards carrying a high annual fee are one such source, since, well, they carry a high annual fee. But they also come with another, more hidden, income stream:

Retailers pay about 2.1 percent of the transaction value on a purchase made by a high-end rewards cardholder, compared to around 1.47 percent for an ordinary customer, according to Visa data.

I’ve never quite understood why and how interchange fees can be so much larger on rewards cards and business cards than on any other credit card. But the card companies are clearly drawing a bad on the fact that they are higher, and doing everything in their power to push rewards cards, even as they weaken the rewards which come with them:

Chase, for example, has overhauled its once generous Freedom rewards card no fewer than three times in the last three years.

In 2006, cardholders were offered a 1 percent rebate in cash or points on all purchases, and 3 percent on items bought at grocery stores, gas stations and fast-food restaurants. By last year, Chase?s Freedom program was far more restrictive. Cardholders had to register online to be eligible to receive the 3 percent rebates ? and they were available only in three categories that rotated each quarter.

In other words, the CARD Act might have passed, but the terrain here is still treacherous for both consumers and retailers. Maybe, eventually, we can have a Consumer Financial Protection Agency which helps to rein in some of the excesses. For the time being, though, the banks will chase every loophole they can find.

Full post as published by Macroprudential on February 22, 2010 (boomark / email).