Card add-on products stage a comeback
Payment protections survives an expensive smackdown
Payment protection plans and other credit card
"add-on" products got knocked down by a regulatory roundhouse punch
in 2012, but analysts expect them to bounce back -- this time with tighter
marketing pitches and lower prices.
"What I expect to see is better use of targeting,"
said Matt Simester, managing director at the card analyst Auriemma Consulting
Group. "There is still a significant sector that would find value in these
In fact, two top-10 issuers have either
re-launched the products or announced plans to do so, and consumers say in surveys they continue to be offered the add-on products.
Added costs, but where
The most common add-on is payment protection, also called
debt protection, which usually costs less than 1 percent of your monthly balance.
It is an insurance-like service that typically cancels minimum payments on your
card for a period -- six months to two years -- if you lose your job or hit
some other calamity. Other once popular
products sold to consumers include identity theft protection, which provides heightened alerts to changes
in your account, and credit monitoring services, which provide access to credit
scores and reports.
Banks backed away from credit add-on products beginning in 2011, when the Government Accountability Office issued a report
exposing debt protection as a costly service with limited value. The GAO found
that consumers received only 21 cents in benefits for each $1 spent on
debt protection among the nine largest credit card issuers in 2009, with an
average annual cost of about $200 per consumer. By comparison, insurers typically pay out at least 40 cents per $1
collected in premiums. Complex restrictions on benefits made it difficult for
buyers of card add-ons to understand what the services would cover, the GAO said.
Class-action lawsuits followed, and several major issuers
had already suspended selling add-ons when the Consumer Financial Protection
Bureau started handing out penalties for the way add-on products were marketed in
mid-2012. The CFPB required Capital One and Discover to pay fines and refunds totaling $340 million for deceptive marketing.
A hesitant return
Most big card issuers are still steering clear of the products
after the costly and embarrassing regulatory slap. But there are signs that add-ons are down but
Discover Card plans to resume marketing add-ons, which were suspended in 2012. The
re-launch may come later this year, but the company doesn't have a timetable
for its payment protection, identity theft protection, credit score tracking
and lost wallet protection programs, spokeswoman Katie Henry said.
- Consumers report they are still getting pitched.
In a November 2012 survey of about 400 U.S. cardholders, 31 percent said they
had been offered credit protection and 41 percent got offers for identity theft
or credit monitoring services, according to Auriemma research. While that is
down sharply from 2008, it indicates that marketing of the products continues
at a reduced pace.
Wells Fargo offers
"credit defense" payment protection and ID theft services after a
shift toward in-house marketing and lower pricing. The company said it
discontinued sales of the credit defense service in 2012 except through its own
representatives or via the Internet. The
service now costs 69 cents per $100 in monthly balance, according to terms
posted on its website. That compares with a range of 85 cents to $1.35 among
the major card issuers before 2012.
Add-ons never entirely withdrew. Although check-boxes to opt into credit
protection on applications largely disappeared, some issuers continue to
include the offers in reduced volumes, said Lisa Hronek, senior analyst at
"I think the issuers are temporarily backing
away," she said. "It was the marketing that got them into
A text search of the consumer protection bureau's database
of card agreements indicates that smaller card issuers, particularly credit
unions, are continuing to offer payment protection plans, with rates typically
of about 90 cents per $100 of your monthly balance. The consumer bureau only examines banks larger than $10 billion in assets, although it can take action against others if it finds they are harming consumers.
The crackdown by regulators in the U.S. pales in comparison
to the punishment meted out in the U.K., Simester of Auriemma noted. Barclays, a major player in both U.S. and U.K
card markets, has set aside 2.6 billion pounds -- or nearly $4 billion -- to
cover claims from payment protection customers in the U.K, according to its
2012 annual report. The amount is about 20 times the largest U.S. penalty.
In the U.S., the company stopped offering fee-based protection
services in 2012, according to emailed responses from Paul Wilmore, managing
director for consumer markets at Barclaycard U.S. Refunds were made to buyers
who canceled within 90 days of enrolling. Current customers who have the
service have opted into continuing it, "therefore we've seen very few
refund requests -- which are handled on a case-by-case basis," Wilmore's
written responses said.
An uneven return to add-ons
Any return to add-ons among major issuers looks to be
uneven. Bank of America, which halted sales of ID theft protection in late 2011
and credit protection in August 2012, said there are no plans to return to the
market. The card issuer plans to cancel remaining payment protection customers
this year, spokeswoman Betty Riess said, as part of a broader effort to refocus
on BofA's core businesses.
Capital One no longer offers the add-ons, a spokeswoman
said, although it provides free credit monitoring as a benefit with its secured
card and its Journey credit card for students.* Chase Bank said only that it halted sales of payment
protection in October 2011. American Express said it discontinued credit and ID
protection in 2012. Citibank did not respond to requests for comment.
"It is a much better strategy to withdraw,"
Simester said, as opposed to trying to fix add-on products on the fly.
Based on what we've seen in the past few years, everything
tends to come full circle. It is just a matter of the
industry adjusting to the new normal.
|-- Lisa Hronek
However, with banks always keen to generate fee income that
doesn't tie up capital, major issuers are likely to
find ways to return to the market. In
2009, payment protection alone generated $2.5 billion in fee revenue for the nine
largest U.S. issuers, with 7 percent of their customer base opting in to the
products, according to the GAO.
Card issuers can boost the value of credit protection by
cutting the price and making terms simpler to understand, Simester said. Making
the programs easier for customers to cancel and avoiding third-party
salespeople -- especially ones who work on commission -- should clear up the
problems that prompted the consumer bureau's fines. Under those
conditions, some issuers may not see it as worthwhile to market the add-ons,
Simester added, while others may see value in selling add-ons at a reduced pace
Hronek at Mintel Comperemedia expects the card issuers will
take time to adapt.
"Based on what we've seen in the past few years, everything
tends to come full circle," she said. "It is just a matter of the
industry adjusting to the new normal."
*Correction: As originally published, this article mischaracterized Capital One's free credit monitoring services as applying to a secured card for students. The credit monitoring comes with the company's secured card and its Journey credit card for students. See the CreditCards.com corrections policy.
Earlier stories: Capital One to refund $150 million to credit card customers, Credit card protection plans draw state lawsuits, federal scrutiny
Published: April 29, 2013