Author Archives: mronan

Impact of credit card legislation on the Marketing Mix

Marketing 101 teaches us about four P’s of the Marketing Mix: Product, Price, Place and Promotion, with Positioning thrown in for good measure.  The passage of new credit card legislation means credit card issuers will have to do a refresher course on these elements, in order to figure out how to market credit cards in a radically changed environment.

Positioning: Credit cards have become a tarnished product category in recent years, having been associated by many with the excessive availability of credit. Issuers will need to figure out how to position credit cards as a useful and flexible source of credit. The largest issuers have traditional run their card units as standalone operations, but we also envisage this will change radically, with credit cards increasing integrated with other financial products and services.

Product: The restrictions on issuer’s ability to generate interest and fee income may lead to the emergence of stripped-down cards with fewer features and rewards. In addition, concern over defaults could lead to growth in secured cards as well as a hybrid cards with secured and unsecured components.

Pricing: The card offer is expected to change significantly with annual fees, less attractive introductory offers and higher APRs.

Place: Banks’ desire to go “back to basics” and focus more on a relationship banking approach means that the branch and online banking platform become increasingly important cross-selling tools.

Promotion: Comperemedia reported in DM News that credit card direct mail fell 72% year-over-year in 1Q09. While an economic recovery could lead to some issuers increasing their DM volume, there is little prospect of DM reaching the historic high levels of 2006. According to Cards and Payments, credit card advertising did increase in 2008, but with most issuers cutting back on acquisition activity and reducing  noninterest expenses, we expect a decline in ad spend in 2009.

Credit Card Legislation Leading to Greater Debit Card Usage

The passage of new credit card legislation may accelerate the growth of debit card spending, at the expense of credit card.

To date, debit card’s growing share of payments has mainly been at the expense of cash and checks. However, the next stage of debit cards growth may eat into credit cards’ share.

Even before the passage of new credit card legislation, data from MasterCard and Visa indicated continued growth in U.S. debit card spend and a marked reduction in U.S. credit card spend. One of the potential outcomes of the new legislation is the re-introduction of annual fees, even for transactors (cardholders who pay their balance in full each month). These transactors may now switch a portion of this credit card spending to credit to their debit cards.

This switch to debit card is being facilitated by the increased proliferation of debit card rewards programs, in particular merchant-funded programs. Merchants have a vested interest in consumers switching to debit card, as they pay lower merchant fees on debit card transactions.

Another impact of the legislation may be a reduction in the average number of credit cards held by consumers. This will lead to greater spending on the retained credit cards, but also some switch in spending to debit card.

Small Business Credit Card Fallout

The recent decision by Advanta to stop lending to its small business credit cardholders from June 10 underscores the challenges faced by small business credit card issuers. Advanta is in a unique position insofar as it is 100% exposed on the small business market, and its managed charge-off rate of almost 16% in 1Q09 underscores the scale of its challenges. However, leading banks with large small business card portfolios are also under severe stress. In fact, the viability of small business credit cards in their current configuration is open to question.

Issuers are already changing key elements of the small business card offer to mitigate the significant default risk. We have seen huge increases in APRs and decreases in credit limits. But how much further will issuers go? Will issuers introduce annual fees? Will we see secured small business cards?

There is also evidence that banks that have significant small business credit card portfolios (Bank of America, Chase, Citi, Wells Fargo) are narrowing their focus to their small business customer base. This is seen in the dramatic reduction in small business credit card direct mail acquisition volume. In addition, some of these banks no longer accepting unsolicited online applications.