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Credit cards find new revenue sources
Credit Card Terminal
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TEXT OF STORY
Tess Vigeland: It didn't take long for memories of the financial crisis to start fading away. Today we got a look at the latest figures on consumer spending, and we are saving less and spending more. More than we earn. And that means we're whipping out the plastic again. The Credit Card Reform Act went into full effect last week. The banking industry has complained that the changes imposed by the new law will cost card issuers a lot of money.
But, as Marketplace's Stacey Vanek-Smith reports, they've already found myriad ways to make up for it.
STACEY VANEK-SMITH: I got an offer in the mail from my bank last week. It said when I use my debit card at the grocery store, I get 2 percent cash back if I push credit instead of entering my PIN.
SMITH: Can I use my debit card as a credit card? How do I do that?...
The money comes out of my checking account either way. So why is Wells Fargo was so interested in having me sign? I asked Bill Hardekopf -- CEO of Lowcards.com.
BILL HARDEKOPF: If you enter your PIN number, the issuer makes less of an interchange fee.
Interchange fees are what a store pays the card issuer every time you use your card. If you enter your PIN, the card company collects a flat fee, about a dime. But if you sign when you use your debit card, the card company collects a lot more -- about 2 percent of the purchase price.
JEFF LENARD: Welcome to the war on cash.
Jeff Lenard is with the National Association of Convenience Stores. He says merchants have noticed all the card companies doing more to drive up interchange fees since the credit card crackdown. Interchange fees bring in more than $48 billion a year.
LENARD: It's clear that the credit card companies have to find new revenue sources. One of those is going to be interchange.
Another one is going to be overdraft protection. New rules say card companies can't let you go over your credit limit then slap you with a big fee, unless you sign up for overdraft protection. So card companies are trying to convince you to sign up.
Josh Frank is with the Center for Responsible Lending.
JOSH FRANK: One of the top issuers has actively started calling people. They tell people things like: Oh, the federal government is going to take away your right to charge what you want, and you need to opt into this.
New regulations will cost card issuers more than $20 billion a year. They've also taken huge losses from rising defaults.
Nessa Feddis is with the American Bankers Association.
NESSA FEDDIS: They're going to have to figure out how to ensure that revenue is higher given that the new rules restrict the ability to get income in one area.
So we can expect to see more new kinds of cards and new kinds of promotions in coming months.
I'm Stacey Vanek-Smith for Marketplace.
John Donald, what you state about bank income is not entirely true. Yes, overdraft fees do cover some operating costs. However, what the banks really run on is the cash they make by loaning out or investing deposits from customers. Banks used to (and sometimes still) offer low-cost banking for customers in exchange for the use of their money. Those customers that keep healthy balances pay their way by making their cash available to banks, while those that keep low balances tend to incur overdraft fees, which pays their way. So, it's reasonable for most consumers to expect low-cost banking (depending on how much of their money they keep at the bank, of course).
However, this discussion is really about abuses on the credit card side of the business.
Another interesting aspect of the business that is usually overlooked is what merchants are experiencing. Credit card processors are abusing merchants on a grand scale. These companies, which provide merchants with credit card processing services, are notorious for deceptive sales pitches, hidden fees, changing rates, contract surprises and other fine-print-related charges. There are literally thousands of different rates that merchants can be charged for a single credit card sale, depending on the type of card used and the nature of each individual transaction. Merchants can't possibly sort this out by reconciling their statements, because detailed aspects of each transaction are not made available. Even the sales reps can't explain how it really works - only the people in finance really know. Credit card processing companies work this to their advantage to the tune of billions of dollars a year. The problem for merchants is that they can hardly afford to walk away from credit card processing altogether, because they will lose customers.
So, while credit card processing services certainly can add value to transactions, it's interesting that the consumer-merchant relationship is having its blood sucked from both sides of the value chain. It's giving the free market a kind of parasitical quality. I think the whole thing stinks, so I'm starting to use a lot more cash than I used to.
Thank you Burbank, CA. Banks need a "fair" profit, don't mind paying for that but the outrageous profit with no corresponding service reeks. I made a lot of money when I worked, then I retired. I asked one of my major cc companies for a $3,000 increase to get rid of an abusive lender. Once that company learned of my new income, they increased my interest rate from 4% to 11%, then 19%, then 29%. I paid this company 9 yrs, no late payments, even after retirement. Needless to say every one of my credit card interest rates went up. They traded the information--remember I was never late, had the cards for years. I was forced into default. I signed a home equity loan which is a nightmare. I've spent 6 months and 2000 pages later, it's the same thing. This lender is keeping a close watch on my credit report, using different company names.
I had had 40 years of credit record. Very high credit rating. I had no intention of defaulting on any cards.
One important thing that most people don't think about when complaining about all the fees banks charge is that a bank infrastructure is extremely expensive to maintain. It cost hundreds of millions to billions of dollars per year to pay all of those tellers, and all of the other costs that go along with maintaining a bank branch. Yet for some reason we the consumers think that we shouldn't have to pay for any of the bank services.
In the past the bank infrastructure was essentially paid for with overdraft fees. A very small percentage of consumers pay almost all of these fees. Now the costs will be spread to the rest of us via monthly maintenance fees or reduced service and branch closings.
In reality outlawing overdraft fees are the worst thing for 95% of the population who never or rarely pay an overdraft fee.
I just got in the mail a flier telling me "Don't lose the FLEXIBILITY".. Convenience, flexibility, a safety net and emergency backup.
I think I'm going to have to frame this flier. This is the first time consumers won over the banks in 15 years.
Mr. Hardekopf is not completely correct. He is correct when he says that the Issuers and Card Associations are promoting the use of Signature Debit over PIN Debit because the signature debit interchange fee is higher that of PIN debit. The justification for the different fees is that the financial risks associated with the two types of transaction are different; Signature being more risky than PIN and therefore meriting higher fees. The paradox is that the industry is promoting the use of the riskier transaction assumedly because it is more profitable. Mr. Hardekopt is wrong when he says that the average PIN Debit fee is “about a dimeâ€. According to NACS, as published in the NACS Magazine, May 2009 in a graph titled “current interchange by transaction typeâ€, the “Average PIN Debit Transactionâ€; costs around thirty two cents. (~$.32). This difference is important when comparing transactions averaging $30.00 - $50.00 dollars
The important point is that the payment industry has noticed the consumer’s preference for debit. As a result the ISSUERS are offering richer debit rewards programs as they compete for the consumers business. Merchants can expect to see the cost for these consumer transactions to rise as these programs grow in popularity.
Robert Andersen, with all due respect, your anecdote about the Australian woman who lost her life savings is not helpful here.
Did this really happen? I noticed that you did not provide any specific details about it - just a story. And, regardless of whether it really happened or not, do you really think this is a typical experience for people who choose not to use credit cards? Of course it isn't. If someone chooses to use cash exclusively, why in the world would she decide to carry all of it at one time in her purse? We all know that wouldn't be very smart.
Your second point is also not helpful. It's evident that American consumers are not against anyone (banks included) from making a fair profit for their efforts in an open market place. There's little doubt that Americans have fully embraced capitalism. The problem is that, somewhere along the way, many industries (primarily banking) have moved from making honest profits to using outright trickery to get money from consumers. I know this first-hand because I used to be a revenue analyst for a credit card processing company. What we did to our customers was legal, but it sure smelled badly.
Add to this the fact that the credit card industry is far from being an open market.
Banks and credit card companies have gotten into the habit of playing dirty (however legal) in order to make a profit. That's the point of this story.
Everyone is entitled to express their opinion, and I think it's great that Marketplace allowed both you and I to comment on this story.
Here's my opinion: Your comments are a clear example of what's currently going wrong with American discourse. This is what you are doing:
1) Tossing out unverified, unrepresentative anecdotes in order to stir up emotion
2) Exaggerating the opposing viewpoint, to polarize people into a "with us or against us" mentality
3) Simplifying (dumbing down) nuanced phenomenon into something that's easy for other angry, confused people to repeat
I have to admit that your comment is an easy target with which to point all of this out. However, many opinion leaders are doing the very same thing in a much more sophisticated, surreptitious and convincing way. Those of us who are genuinely interested in working to improve our society need to start calling people out on this kind of demagoguery.
Good comments. Card companies are providing a service as are banks. Both are in the business to provide a return to shareholders. The services cost money and it's up to us consumers to decide how much to give them. (Carry cash if the pain is too much). Consumers get to decide. Interchange fees are paid either by the consumer or merchant (the merchant then having to decide what to pass on to us). Don't believe that banks are only doing this to replace losses from the crisis. They'd be doing it anyway, the way Apple seeks the highest price on an iPad which will maximize their income.
Having said that, today my favorite bank (the one I trust with everything) offered me $25 to start using my debit card and 'automatic bill pay' (ka-ching), so it's clear even the good banks are stretching to replace lost income.
Mr. Andersen misses the point - and Ms. Vanek-Smith missed the important connection. These new charges are not related to the cost of providing credit cards. These charges are providing new revenue to make up for losses that were sustained by very bad decision making and very risky credit policies on the part of the bankers. These revenues do not add value for the consumer. These charges punish consumers who use their credit well -- and cover up for bad management. Shareholders who might be protected by increased profits are actually being lied to yet again by the same management who lost their money the first time. When it comes to providing credit to risky borrowers, the bankers should foot the bill -- and management should lose their jobs. The article we'd all like to hear from Ms. Vanek-Smith is the one which covers the banks that are provide credit cards that do not attempt to exploit their customers. I am sure there are some out there. Oh, and name the offending banks, as well.
A women in Australia recently had her live savings stolen when her purse was stolen. She didnt trust the banks, so kept all her money in her purse.
Most of us like the convenience of a credit or debit card versus using cash, so we all understand that there is value in the service that a card issuers provides. why is it then that we so against paying for, or allowing the banks to earn income from this service we love so much?
