Emerging from what is most likely the worst financial climate in recent history, the card industry remains in a state of troubled waters and at the center of extreme public controversy heading into the New Year.  In 2009, a year of regulation and change, critical forces in the form of new legislation and economic downturn converged to create a “perfect storm”.  Challenges, change, and continued uncertainty will remain key factors during 2010 as card issuers struggle to balance compliance and customer good will with profitability and shareholder return.

To say that 2009 was a challenging year would be an understatement.  It was one of the most frightful years in U.S. financial history.  Restrictive legislation couldn’t have come at a worse time.  As credit losses mounted, issuers “hunkered down”, trying to stem the flow of red ink.  Then, on top of the economic challenges, the Administration imposed a whole new set of guidelines restricting flows in important income channels.  Exacerbating the problem was the high level of consumer backlash, in large part due to the public’s overall dissatisfaction with the Administration’s expensive bailout.

Issuers have countered in a number of expected ways.  The rate structure on many products has been changed ahead of the regulatory deadlines, in most cases moving customers from fixed to variable rates.  More significantly, nominal card rates for broad groups of customers have been increased as issuers recognize that, after the new rules take effect, they will no longer quickly be able to price to risk, and as they scramble to reassess their customers’ long term ability to repay their loans.  In many cases, credit lines have been reduced, required payment amounts have increased, and large populations of potential customers are simply unable to obtain credit.  As predicted by industry analysts during legislative discussions, these expected consequences of legislation have now come to pass, with the results often infuriating the public as indicated by daily reports in the press.  As issuers have tried to respond in a responsible manner, the consumer outcry has been deafening.

Clearly, the industry is currently in the throes of a major change in the way lending products are priced and delivered.  The next 12 months will continue to be a period of uncertainty, with lenders adjusting rates and restructuring products to meet the needs of their customers while attempting to retain profitability in this murky environment.  One of the greatest risks to issuers as they trod through this minefield of uncertainty will be to retain the good will of their customers, and the resulting revenue streams and profitability that important objective implies.  Clarity and transparency will be key ingredients in retaining customer trust.  At least one major issuer has announced this as a major objective, and others are following suit.

Product innovation also will be a key factor for success, as recently witnessed by the large number of new product offerings, most in their infancy or currently being tested.  Other previously predicted impacts, such as restructuring of rewards programs and increased use of charge cards in place of credit cards have not been as pronounced, but are still in various stages of discussion, planning and experimentation.

Customer segmentation and effective retention strategies will be critical keys to profitability in the months ahead.  Issuers who successfully predict creditworthiness, potential profitability, and how to best serve their customers’ needs will be ahead of the pack in the race to retain profitable customers and to add loan balances.

Still on the horizon looms legislation aimed at possibly providing similar restrictions for small business credit card customers (businesses employing less than 50 workers).  A report is due from the Fed to Congress on May, 22, 2010.

If all this weren’t enough, the industry is also facing the possibility of changes in interchange legislation.  As required by the Credit Card Act of 2009, the GAO released a report in November outlining possible mechanisms for limiting or capping interchange fees.  There are currently three major interchange-related pieces of legislation in Congress, each of which will affect profitability in various ways.  Although passage of restrictive legislation will likely take time to work through the legislative process, it represents an additional risk to future profitability, and the industry would be well advised to keep a close ear to the ground for any new developments.  

Throughout this period of change, Profit Technologies will continue to provide solutions to support your business objectives.  Working as your partner, we will bring new innovative products to market, ensure you are leveraging the rules, optimizing your systems settings, and targeting the right customers.  Additionally, we will make sure you are tailoring your approach to utilize the best channels, communication strategy, and offering the right products, features, and pricing to the right customers - ultimately increasing the profitability of your portfolio.

Give us a call.  We can help ensure that you make the right strategic and tactical changes during this period of transition to provide the best solutions for long term growth and profitability.