Expert Q&A

A chat with John Grund: A look at the future of cards


Credit card expert John Grund analyzes what consumers can expect to pay for credit in the near future and whether the days of easy credit are over.

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The past 12 months have been tumultuous for credit card users and issuers.

For cardholders, a deteriorating economy has led to lower credit lines, tightened credit standards and an increase in credit card fees. For issuers, public anger over their practices culminated in a one-two punch: sweeping new reforms from banking regulators and the passage of the Credit CARD Act of 2009, both of which will squeeze their profits.

John Grund
John Grund
John Grund, a partner with credit card consulting firm First Annapolis.

In short, the credit card industry faces unprecedented change during a once-in-a-lifetime economic meltdown. How will it react? And how will those changes impact consumers?

To answer those questions and more, turned to John Grund, an industry expert, who, as a partner with Linthicum, Md.-based First Annapolis Consulting, advises banks and retailers on their credit card offerings.

Here’s Grund’s take on who the legislation helps and hurts, what consumers can expect to pay for credit and whether the days of easy credit are over. Now that the legislation has passed, what do you see could be the biggest change for credit cardholders?
John Grund: The days of intense price competition for cardholders is moderating. You will not see as many teaser rates and promotional offers. You will see higher base APRs. You’ll probably have less subprime options available on the credit card side and, in some instances, more fees — whether they’re annual fees or other behavior or service-based fees.  What do you think the average credit card interest rate will be in the near future? What are the forces that are in play that would tend to make rates either rise or fall?
Grund:  The biggest force in play right now is the impact of the card legislation. It’s clearly removing some pricing leaders from the credit card industry and placing restrictions on price increases and the like. That’s probably the predominant force that would drive APRs upward, and I think that overwhelms any force that would allow credit card interest rates to be lower.

You will not see as many teaser rates and promotional offers. You will see higher base APRs.

— John Grund
First Annapolis Consulting

The days of 9.9 percent APRs are going to be the exception, not the rule. Private label or store-based credit right now is in the low 20s, and you’ll probably see it creep to the mid 20s. The biggest impact on bank cards  — Visa, MasterCard, Discover, American Express — will be less promotional offers and more standard in-the-teens, what-you-see-is-what-you-get pricing.  Do you see the days of “easy credit” as over?
Grund: I’d be hard-pressed to use the term “easy credit” or characterize it that way for the foreseeable future. I think banks and consumers have learned very valuable lessons. I think we’re in the early stages of consumers deleveraging either on their own or as a result of less access to credit. But never say never. History has a way of repeating itself.  The new law prevents people under 21 from getting a credit card without parental authorization or proof of income. Some say that the law went too far here. Do you agree?
Grund: I think you have to be extra cautious in marketing to minors and the intensity and the location in which you market to minors. But at the same time, we have to recognize that we give them driver’s licenses and we allow them to seek employment. Credit cards and payment vehicles are part of mainstream society. These are consumer products that have to be marketed and used responsibly. So I do think a broad brush was painted against that demographic segment that could prove to be restrictive and, frankly, be a matter of inconvenience for customers. I would have rather just seen guardrails put in place on how it’s marketed.  Do you think credit will be harder to come by now for certain demographic groups? If so, who do you think will be most affected?
Grund:  By definition, the legislation is an effort to protect young folks under 21. When you’ve taken off some of the ability to re-price accounts, you’re not going to be able to target the underserved population as well. There will be restricted credit because of this legislation. Whether that’s temporary or permanent, we shall see. How do you think people who can’t get credit cards anymore will cope? Do you think they’ll turn to more expensive, more predatory lending practices?
Grund:  If you restrict credit options, one of the unintended consequences is you could have customers seeking even higher-cost alternatives. One of the biggest beneficiaries could be open-loop prepaid cards. They’re not a credit vehicle, but you could absolutely see these open-loop prepaid cards serve as a bridge for those who are building credit records or those who are credit-needy to demonstrate behaviors by which they eventually get a credit card.  Do you think, as a result of tightened credit, that credit scores will have more or less impact on determining creditworthiness in the future?
Grund:  Credit scores are still very fundamental, so I think credit scoring is here to stay. I don’t think credit scores will be used any less, but the industry has evolved to the point where there are other attributes. Sophisticated issuers don’t just rely on the credit scores. They’re always looking for other attributes that they factor into a credit decision.  If the majority of consumers’ credit scores have suffered, will lending only be offered to the select few? And if only the select few are offered credit, how will the financial institutions make the money they’ve been used to making?
Grund:  Well, regulation, on average, is not working in [card issuers’] favor. They’re going to need to market more heavily to the creditworthy. If you’re going to add annual fees to cards, you’d better have benefits. While the pressure’s on sub-prime credit and, clearly, the approval rate is down, it’s not going to just evaporate. There may be different product features or lower credit lines or something along those lines.

If you restrict credit options, one of the unintended consequences is you could have customers seeking even higher-cost alternatives.

— John Grund
First Annapolis Consulting  One of the proposed rules that didn’t get in the final act was to cap interest rates. Do you think that would have been a good move or bad?
Grund:  A very bad move. I think it would have restricted access to credit because if your APR is fixed, by definition, you’re only going to be able to target certain customers who can make the economics work. And regulating the credit card industry just isn’t as easy as putting a price control in place. It’s an unfair burden on a product that’s risk-based by definition. If you’re lending money, you’re taking risks and I have a fundamental opposition to just capping interest rates.  Do you think credit cards were misused by consumers or mismarketed by credit card issuers?
Grund:  There’s plenty of blame to go around. This has some corollaries to the mortgage market. It wasn’t just the banks; there were actually consumers on the other side trying to flip houses and do a bunch of other stuff. So the product growth and the proliferation of credit was very widespread, and by definition, when it’s widespread, you would have consumers in segments of the population that just didn’t fully understand the product and it was so widely available that it was pretty easy to get yourself in trouble.  Do you blame credit cards for the dramatic drop in the personal savings rate that only recently reversed itself? What other factors contributed to the fall in savings?
Grund:  Credit cards may play a part in that, but consumers over-stretched themselves in many ways, most predominantly the home purchases or the second-home purchases. They certainly supersized themselves on cars, clothes, vacations and luxury goods, so there are plenty of factors that play into what was actually a long-term trend of declining personal savings rate.  A lot of credit card debt is amassed to cover medical bill payments. How big a problem is it for individuals and for society?
Grund:  When you start talking about medical, you quickly get into items that are not really optional for the consumer. It’s a matter of survival. And in this instance, can the credit card companies be blamed for actually trying to lend a service to the consumer? So I really think that’s more a reflection of the health care system and the access to health care than it is a weakness associated with credit cards.  In your opinion, and knowing human nature, what would be the best kind of credit card?
Grund:  Something that is incredibly simple that gives the consumer a high degree of transparency and a fair amount of control. So it’s a choice-based model. The best credit card to me is one in which the customer can self-select into the product and it fits their constraints and it’s got enough guardrails on it that it doesn’t have any undue risk taken or place undue restrictions much like many other consumer products that you buy.  What do you see could be the biggest change for card issuers?
Grund:  The industry has gone through many different phases of cardholder pricing. In the ’80s, this was largely a one-size-fits-all pricing regime for cardholders. Then in the ’90s, you had monoline issuers like Capital One and Providian, and they were probably the first wave of competitors to break down uniform, one-size-fits-all pricing. That was the promotional period that the APRs or cardholder pricing went into. Recently, we’ve been in behavior-based pricing, so you’ve seen risk-based pricing and the like. I think the biggest transition for card issuers is the pricing regime is going to be more uniform, less behavior-based relative to APRs and less promotional.  There will be certain benefits to cardholders that will come at a cost, such as an annual fee. Do you think the credit card legislation came too late?
Grund:  There were certainly opportunities for cleaning up some of the more aggressive practices — such as double-cycle billing and universal default — that probably should have been done a long time ago. But I’m a believer in the free market and there are trade-offs. So I don’t believe it came too late. We should have had some practices cleaned up prior to this legislation, but by and large, I think access to credit is critically important, and there are certain practices that the current legislation restricts. The downside is [the legislation] could restrict credit.

See related:A comprehensive guide to the Credit CARD Act of 2009, Credit score formulas not changing as credit limits slashed, Fed report: Banks tighten lending standards even more, Research: Credit card mail offers with annual fees return

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