The 3 most important trends in the credit card industry

Declines in defaults and delinquencies and the rise of mobile payments offset losses from Dodd-Frank fee caps.

By Trefis Jan 13, 2012 3:01PM
Image: Credit card (© Corbis) The past year was an eventful one for the credit card industry. The Dodd-Frank financial reforms shook the industry with a cap on debit card interchange fees, although the decline in credit card default rates and delinquencies provided some comfort. Developments in mobile payments paved the way for growth in transaction volumes. This boosted the stocks of Visa (V), MasterCard (MA), and Discover Financial (DFS), which were up 44%, 66% and 30%, respectively, for the year.

In this article we look at the top three events for the credit card industry in 2011.


Discover Stock Break-Up

The most controversial issue last year was the government regulation of the debit card interchange fee. The Durbin Amendment to Dodd-Frank, which went into effect on Oct. 1, 2011, changed the fee from an average of 44 cents per transaction to 21 cents, with an additional amount to cover losses from fraud. The cap was intended to resolve a bitter issue for merchants who paid a significant portion for their profits to banks for transaction processing. However, it also had unintended consequences for consumers, such as banks dropping rewards for debit card purchases and proposing additional fees for debit card usage.


Credit card defaults and delinquencies declined last year. Default rates fell as issuers closed risky accounts, cut credit limits on millions of accounts, and tightened lending standards. The tighter lending environment brought excessive credit card borrowing under control. Many cardholders have diligently paid down their balances and used other forms of payment to avoid high interest rate penalties.


Smartphone users rejoiced when Google Wallet debuted last September. With mobile payments, consumers can make purchases or transfer money with their mobile phones.


Credit card companies are busy convincing retailers to invest in the equipment necessary to link cell phone to cash registers. The retailers have been reluctant to embrace this new technology as the same fees associated with cards will apply to mobile payments. As a result we see this as a trend that will play out over a couple of years.


Our price estimate for Discover stands at $26, almost same as the current market price. See our complete analysis for Discover Financial.

Tags: MA
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