What's up wth all the CC Apr increases here lately ?

[Bigwoodystyl]

Banks, especially in today's market, would really prefer that every customer have perfect credit and that every customer PIF and that nobody ever defaulted.

Prime borrowers and large transactors who PIF have quickly become the most coveted market segment.



Rewards programs are now seen as the panacea to attract top customers.

A lot of credit card rewards programs across the board have been significantly increased on the higher-end products. Chase introduced Sapphire, Slate, Ink and Freedom Plus, which are all designed specifically for consumers making over $200K per year. Each of the rewards programs were increased on these accounts, at the same time that Chase reigned in rewards programs on their lesser products.

AMEX has increased benefits on their high-end platinum cards, while dropping benefits on their Blue and Clear cards, which were marketed toward the non-traditional AMEX customer.

Last month, I received a $100 bonus check in the mail as a thank you for being a loyal Citi cards customer (I didn't realize they had cash to burn, lol). If transactors who don't pay finance charges were as unprofitable as you think, then card issuers wouldn't be increasing their competition to gain their marketshare...

[Amerikaner83]

I disagree.

Banks (for the sake of argument let's loop ALL CC issuers in this category) make their cash off of the people who carry a balance, and thus, pay the interest. People who do NOT pay interest make ZERO money for the banks (or CC issuers). Plain and simple. People carry high balances are GOLD for CC issuers...no question. Why...? Because they pay the interest!

[Bigwoodystyl]

It's really not that simple. You have the issuers being ostensibly crammed on four fronts and then being prodded in the back about data security so as not to draw to much national attention to the issue of cyber crime.

1. Regulatory pressures from the CARD Act, which aim to cut down on allegedly "abusive" credit card practices that prolong cardholder debt.

This bill itself makes subprime credit card borrowers a liability instead of an asset. Essentially, the costs of doing business with these types of individuals, including, but not limited to collections, recovery and legal, can no longer be offset by interest and fees. Worse, it becomes harder to change the terms of the agreements on borrowers, even when the borrowers' economic situations change. Their risk portfolio is not static; however, the terms of their credit card agreement will become "stickier".

The only thing to do with these poor customers is to slash their limits, raise their APR and/or close their accounts... now! before the changes can take effect. Don't kid yourself, banks no longer want customers who don't PIF. They are not "GOLD".


2. Economic conditions driving net chargeoffs higher while at the same time reducing interchange revenues.

Economic conditions are reducing credit card issuers’ revenues from interchange as borrowers transact less on credit cards. The inability of borrowers to meet their obligations and pay their outstanding balances pushes credit card issuers to review their underwriting policies and tighten up their lending policies, weeding-out those who are considered high risk. Further, it creates even more demand for high-end transactors. Low-end transactors have all but disappeared.


3. Interchange Scrutiny

The government is also looking at regulating interchange through the Credit Card Fair Fee Act. This act seeks to give merchants the possibility to negotiate interchange fees instead of following a grid established by the card networks (Visa/MC, AMEX, Discover, Blackhawk, etc.).

Interchange is of course the fees charged to merchants when accepting a credit card transaction and paid to credit card issuers. The fees are quite high for smaller merchants and incredibly high for those merchants who don't invest in card scanners. "keyed in" transactions can cost as high as 10% of the transaction amount plus an additional $5-$10.


4. Merchant lobbying.

The largest merchants in the country have banded together in recent months and have successfully lobbied for lower interchange rates and fees directly from card networks. The next group of largest merchants is now lobbying. This is expected to take a large amount of revenue away.



Other:

These top challenges are intertwined with a plethora of other challenges that card issuers face, such as data security issues and possibility of sensitive data compromise from hackers and cyber-criminals, identity theft and in many cases, obsolete PCI Compliance protocols.




Right now, customers who don't pay interest but do use their cards frequently make a staggering amount of money for the banks in terms of interchange fees. It's a heck of a lot more than "ZERO". (In fact, it's more money per capita than banks make on interest and fees... there are just less of these high-end transactors than there are subprime borrowers).

Exploiting the interchange fees and keeping and attracting these valuable customers is the industry's only hope in the short-term, while at the same time, cutting bait with those who carry balances and pay interest... no matter how profitable you might think these customers, they simply aren't worth the risk.

In order to attract high-end customers, you may have seen increased product placement for top of the line credit card products and you may have seen more advertisements in Forbes, Money, Kiplinger's, US News for these types of products. Also, local bank branches and wealth management offices, where many high-end customers turn to for advice. These are the channels in which these products will be featured. There won't be heavy Internet promotion and there won't be massive direct mailings. They only want to pick the ripe apples this time; they don't want every apple.



In any event, my impetus in writing all of this is that it's important to note that these subprime customers have never once subsidized the accounts of those who don't pay interest or fees. That's just not how the credit card business model ever functioned. The class of transactors has always been profitable by itself and with a lower cost of doing business. Subprime borrowers only ever subsidized other subprime borrowers and later this market segment became profitable in and of itself. But, don't forget that credit cards were profitable before subprime and, depending on market factors, they can be profitable after subprime.

[jq26]

Originally Posted by Bigwoodystyl

Their risk portfolio is not static; however, the terms of their credit card agreement will become "stickier". The only thing to do with these poor customers is to slash their limits, raise their APR and/or close their accounts... now! before the changes can take effect. Don't kid yourself, banks no longer want customers who don't PIF. They are not "GOLD".......

.....In any event, my impetus in writing all of this is that it's important to note that these subprime customers have never once subsidized the accounts of those who don't pay interest or fees. That's just not how the credit card business model ever functioned.....

Excellent information on what became a great thread. The first portion of the quote above I always agreed with. Which is part of my objection to these new intrusive laws. Risk portfolios are not static but now Congress has forced bankls to treat them as such. They're going to shut down cards in large numbers imo.

The second portion about subsidizing prime borrowers- I suppose I have been brainwashed by many posters on this site (which tend to fall over themselves to be highly "anti-bank" and "pro-borrower"). I just couldn't comprehend how a borrower with a $5000 credit line with no annual fee who makes one purchase per year, pays the balance the next day, and receives a cash back check for doing so can be profitable when you factor in overhead. I suppose the truth is that this particular prime customer may not be profitable, but since the pool of prime customers don't all manage their spending and balances monolithically, this particular prime customer isn't of any concern so long as they don't poison the pool by defaulting.