Banks bullish? Consumers should be cautious
Consumer groups are worried that banks are finding clever ways around new regulations designed to protect credit card customers.
In the wake of banking and financial reforms, banks -- including credit card lenders -- have regained their swagger. Profits are rising and financial institutions are aggressively seeking new customers.
It may be a good reason for consumers to display a certain amount of wariness in their dealing with credit card companies.
Last year some predicted that the CARD Act, a new law curbing some of the industry's worst abuses, would lead to shrinking credit for consumers and smaller profits for banks. So far, neither of those predictions have actually occurred.
A new study by the Pew Charitable Trusts found that there has been minimal change in the number of cards that include an annual fee, actually declining one percentage point from July 2009 to March 2010. During that period, the median size of those fees increased from $50 to $59 for banks and from $15 to $25 for credit unions.
However, the report noted other problems.
"Although we applaud changes by the card industry to create a fairer and more transparent marketplace, our research shows that some challenges remain," said Nick Bourke, director of Pew's Safe Credit Cards Project and report co-author. "For the first time, we have seen credit card disclosures warning consumers that interest rates could go up as a penalty for certain actions, but not stating how high those rates could go.
"Federal regulators should pay attention to this problematic new trend," Bourke said. "When issuers withhold vital pricing information, it leaves cardholders in the dark and puts their financial security at risk, which is why federal regulations have long required issuers to disclose their rates and fees upfront."
Looking for loopholes
Other consumer groups are worried that banks are finding clever ways around new regulations designed to protect consumers. Last month three groups -- the National Consumer Law Center, Consumer Federation of America and Consumer Action -- warned federal regulators of what they called "potential violations of the CARD Act."
Meanwhile, credit card lenders are once again actively marketing to consumers. During 2009, the economy and legislative pressure caused issuers to dramatically pull back on offers, and annual mail volume from credit card issuers dropped to its lowest levels since 1993.
However, during the first quarter of 2010 U.S. households received 481.3 million credit card offers -- a 29% increase versus the 372.4 million offers mailed during the same time a year ago, according to Synovate Mail Monitor, the direct-mail tracking service from global market research firm Synovate.
"In Q4 2009 we began to see issuers release the pause button and mail more, and in Q1 2010 that trend continues. Throughout the remainder of the year we expect to see mail volume continue its slow climb upward," said Anuj Shahani, director of competitive tracking services for Synovate.
Diving into subprime
Capital One was one of the largest mailers for the quarter, second only to Chase. In its first-quarter earnings statement, Capital One announced its intention to re-enter the subprime market after an almost 100% pullback in the third quarter of 2009. True to that commitment, Capital One more than doubled its mailed card offers versus the prior quarter.
This wasn't the only surprise. HSBC, which had briefly considered leaving the U.S. credit card industry behind, doubled its mail volume in the first quarter of 2010 versus the fourth quarter of 2009 and more than tripled its mailings versus one year ago.
"This is a massive commitment in terms of expenditure for the issuers, as direct mail is one of the most expensive channels to acquire new cardholders. This tells us that the issuers are not just dipping their toes in the water, they are diving in head first," Shahani said.
This is reason for consumers to show caution when these offers arrive in the mail, consumer advocates warn. Banks do not offer deals that hurt their profits and what's good for banks is not always good for consumers.
The Wall Street Journal notes that some banks are now pushing "professional" cards. Professional cards' terms and services are very similar to consumer cards. Yet, the Journal notes that professional cards, like business cards, are not covered by the rules of the CARD Act.
Claire Braverman, senior vice president of Synovate's Financial Services, believes the industry's creativity in producing new services and offers will ultimately be good for consumers.
However, consumers should go into any new credit card relationship with their eyes wide open.
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