Category Archives: Banking

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.

Credit or Debit?

How will the credit card industry be transformed, given rising charge-off rates and the credit card bill of rights that is expected to go to the White House this week? Some analysts are predicting higher APRs, more fees and less rewards for all credit card holders – even the (good) transactors who pay off their balance each month.

While card issuers will attempt to balance their costs with their profit through rates and fees, it seems uncertain that they will do so while not losing some of their best customers. However, rates have already begun to creep up, and many customers already feeling the pinch are starting to turn away from their credit cards to their debit cards.

This shift to debit may turn out to be good news for customers and banks alike, especially those banks that have extended rewards to debit card users to create deeper “enterprise” relationships. EMI research shows that approximately 25% of debit cardholders are already earning rewards on their debit transactions. And given America’s recent shift to thrift, we can expect to see more banks offering debit rewards to their customers to help encourage greater consumer spending and deepen the increasingly important relationship.

Interested in optimizing your rewards programs? For a copy of our whitepaper on the impact of rewards on program ROI, or to purchase our our full report, “The Evolution of Rewards,” call 617-224-1192 or email us at: results@emiboston.com.