Cashing In Q&A columns

9 predictions for credit cards in 2009


This has been a tumultuous year for credit cardholders and issuers. What does 2009 hold? We’ll take a look.

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Credit cardholders, congratulations on surviving 2008. Now brace yourself for what 2009 has in store.

As analysts and experts look into their crystal balls, they predict that next year will be another rocky one for borrowers, lenders and the economy as a whole. Here are nine of their predictions for ’09:

Prediction No. 1: Less available credit for everyone
Prediction No. 2: Seeing PR opportunity, many banks won’t wait to enact reforms
Prediction No. 3: More risk for banks, more fees for cardholders
Prediction No. 4: Consumer card usage keeps on dropping
Prediction No. 5: Rewards increasingly target high-end customers
Prediction No. 6: Secured cards may pick up the slack for credit cards
Prediction No. 7: Committing fraud gets pricier …
Prediction No. 8: … but Americans may still see an uptick in fraud
Prediction No. 9: Payments get more mobile, as do thieves

Credit cards in 2009

Prediction No. 1: Less available credit for everyone
Analysts agree it will be tougher to be a cardholder in 2009, with a resulting decline in both access to and use of credit.

“A lot of consumers are going to see their credit scores deteriorate and, to some degree, their access to credit deteriorate,” says Valparaiso University law professor Alan M. White. Credit scores could decline as economic problems — like deepening unemployment — increasingly pile up. As lenders tighten access to credit, “It will be more difficult to get a credit card, and for those who have them, it will be more difficult to spend,” says William Pittenger, senior vice president and chief economist with Seacoast National Bank.

Consumers across the credit spectrum will share the pain. “Shopping around for a credit card is going to be very difficult for many consumers,” not just those with bad credit, says Bruce Cundiff, director of payments research and consulting with Javelin Strategy & Research. Banks will be less interested in adding credit cards accounts for a simple reason — fear of hurting their bottom lines. “Card issuers might not be able to afford to expand their portfolios now,” Cundiff says.

Banks are also likely to feel the continued pinch as they are unable to sell loans. “If we don’t have secondary markets, we don’t have as much credit available,” says Susan Menke, senior financial services analyst with Mintel International in Chicago. Card issuers’ balance sheets get thrown out of whack since they can’t carry loans on their books. Banks “can’t sell them and can’t hold them,” Menke says.

Prediction No. 2: Seeing PR opportunity, many banks won’t wait to enact reforms
Banks will likely have their hands full as a result of new credit card rules approved by federal banking regulators on Dec. 18, 2008. The rules attempt to clamp down on “unfair or deceptive” credit card industry practices by limiting interest rate hikes on past purchases, requiring clearer disclosure of terms and eliminating many of the “gotcha” practices that cost consumers millions in fees and interest. Regulators gave banks and credit card issuers until July 1, 2010, to implement changes in their billing, marketing and advertising systems. Once enacted, “For the vast majority of cardholders, this will have little to no impact other than window dressing. It will eliminate ‘egregious and unfair’ practices by some issuers, but most cardholders aren’t wholly affected by such practices,” Javelin’s Cundiff says.

Despite the 18-month time line for compliance, some experts believe changes could arrive as soon as next year. Michael Rubin, author of “Beyond Paycheck to Paycheck,” says that if major institutions begin to adopt rules early, the competition could pressure some smaller lenders to do the same.

“If you start to see that those with large market shares are making these changes sooner, then some will feel compelled to. But it’s not going to be every credit card. It’s not going to be every issuer,” Rubin says. He notes that some banks will likely attempt to hold off on making changes until the last possible second.

For card issuers that comply early with the new rules by implementing consumer-friendly changes, Cundiff says it could be a good opportunity for those banks to set themselves apart and earn some positive public relations. For example, Menke adds that the card industry is not necessarily biased against disclosure. With regards to its Schumer Box, “Capital One has taken that a level further and they disclose more than they are required to,” she says. In response to Fed rules, “rather than fight it, go along with it or maybe do it better,” Menke says.

Meanwhile, there could be still more credit card regulations to come. Congress has said it plans to introduce legislation next year that aims to fill in the gaps left by the Fed card rules.

Prediction No. 3: More risk for banks, more fees for cardholders
Under the new rules, “You, by definition, have changed the dynamics between lender and borrower,” Rubin says, as the risk shifts from the borrower to the lender. If banks can no longer price card products to account for new risk (as existing borrowers fall behind on bills, for example), lenders must consider their business in a different light. That means, as a bank, “I’m going to basically have to look at my entire portfolio of credit cards and re-price them” to pre-emptively plan for various eventualities, Rubin says.

Banks also have the challenge of striking a balance between achieving the amount of disclosure required by regulators and not overdoing it. “People tend to not read stuff. So how useful is it and what is the optimal amount of disclosure?” says Menke, noting that since too much information can mean consumers ignore everything, it might be better for the industry to study how much disclosure is the right amount for consumers.

(Credit cards) are going to become fee-heavy products.

— Linda Sherry
Spokeswoman, Consumer Action

Next year could also see an increase in credit card fees. Since they are not as tightly controlled, fees could be an increasingly important source of income for banks. Credit cards “are going to become fee-heavy products in the future,” says Linda Sherry, national priorities director for consumer rights group Consumer Action. “This is still an area of tricks and traps for consumers.”

Prediction No. 4: Consumer card usage keeps on dropping
It’s not only card issuers that are expected to become more conservative next year. Recent data already shows that cardholders are attempting to put away their plastic, a trend likely to accelerate as 2009 gets under way. “People are trying to pay down debt to the extent that they can. People will, going forward, choose lower levels of overall debt, to their extent that they have a choice,” White says. At the same time, cash-strapped cardholders may need to rely on plastic to cover basic expenses during these lean times. Still, when it comes to living off credit cards, “that’s turning more problematic all the time,” Pittenger says.

Fear also plays a part in the reduction of credit usage. “The same way that they’ve been spooked about keeping money in the stock market, they’ve been spooked about debt,” White says. That could translate into shorter statements next year. For cardholders, “if they’re not spending now, what’s going to motivate them to want to spend when you get past the holidays?” asks Dennis Moroney, research director with TowerGroup, a research and advisory services firm.

What amounts to sound use of debt on an individual level could spell trouble for the broader economy. A pullback in card spending has the danger of creating a vicious circle. “I think the tentacles of this thing reach very far and very wide,” says Pittenger, noting that as credit lines are restricted and consumer spending falls further, companies will have to cut back on inventory and staff, hiking unemployment and worsening the situation. Still, Rubin says one thing is clear: “There’s no reasonable way that you can argue that the way to stimulate the economy is to continue to lend to people who do not have the ability to pay it back,” he says.

Not everyone sees the situation as entirely bleak. “Credit cards aren’t in as bad as shape as some people are expecting,” says Standard & Poor’s chief economist David Wyss. He explains that default rates may be rising in line with growing unemployment, but Wyss doesn’t consider that trend out of line with normal behavior. While problems in the housing market are off the scale, he says, credit cards issues are still “on the scale, just the high end of it.”

Credit cards are going to be less available and more expensive, but they’re still going to be there, and people are still going to be using them.

— David Wyss
Chief economist, Standard & Poor’s

That relatively moderate outlook carries over to Wyss’s predictions for next year. “Credit cards are going to be less available and more expensive, but they’re still going to be there, and people are still going to be using them,” he says.

Prediction No. 5: Rewards target “high-end customers,” encourage responsible behavior
Reward credit cards may not offer such sweet incentives next year, although the consumers who use them will be better off than most. Reward deals will be “much more confined to people with good credit ratings,” says Wyss. Meanwhile, “points aren’t going to be worth as much as they were,” he says. “Free trips are going to be harder to get.”

It all comes down to budgeting for the issuers. In a difficult environment, banks will be asking themselves where cuts can be made. “What’s one of the costs that you can reduce? The generosity of the rewards program,” says Rubin.

Still, some analysts say 2009 could see a focus on rewards products that encourage more responsible behavior. Rubin highlights the Schwab Bank Invest First Visa Credit Card, which he says offers “debt management and saving for the future in one product” by allowing cardholders to put the 2 percent cash back they earn on purchases into a Schwab One brokerage account. TowerGroup’s Moroney also sees banks introducing more products such as the Discover Motiva Card, which encourage responsible payment behavior. Cundiff agrees with those rewards predictions. “We might see more of these practical examples,” he says.

Analysts say reward programs will be used to maintain banks’ relationships with their most prized customers. “A lot didn’t work in 2008, but a lot did. One of the things that worked and will continue to work is segmentation,” Rubin says, noting that high-end, low-risk customers will become increasingly valued by banks. Therefore, analysts say it will be difficult to disappoint them. Since lessening reward points is not a way to encourage their use, Cundiff doesn’t expect a pullback in existing reward programs. “Once you give something to a cardholder you can’t take it away,” he says. Consumer Action’s Sherry puts it more bluntly: “There’s going to be a dogfight for high-end customers,” she says.

Still, Cundiff says one thing that could cause banks to let reward programs fall to the wayside would be if caps on interchange fees paid by merchants to the card issuers were imposed. That’s because “by and large, rewards programs are indirectly funded by the higher interchange that they earn,” Cundiff says.

Prediction No. 6: Secured cards ‘may pick up the slack’ for credit cards
A pullback in credit cards could allow for debit, prepaid and secured cards to fill the vacuum. Amid a tightening of credit, “This might actually be good for the prepaid card industry, or secured credit cards may pick up the slack,” says Judith Rinearson, a partner with the international law firm of Bryan Cave in New York. Those card products already appeal to consumers with limited or poor credit histories. “This is a group that is already using prepaid, and I think there will be a bigger move to that,” Rinearson says.

Banks may also introduce some new types of credit cards. “You may get banks to be a little more creative in how they structure credit cards,” Rinearson says. She highlights the possibility of short-term credit card products, which would potentially carry terms for just one year. After that set time is up, banks would then review terms associated with the card in order to price them again based on the individual cardholder’s payment behavior.

Prediction No. 7: Committing fraud gets pricier …
Credit will not only become less available to legitimate cardholders next year, but to fraudsters as well.

With fewer credit cards for criminals to hijack, those that are available will become pricier on the black market where fraudsters go to buy and sell stolen account information. “It becomes more valuable to the fraudsters to get those good card numbers,” says Debra Geister, director of Fraud Prevention & Compliance Solutions with LexisNexis’ Risk & Information Analytics Group in New London, Minn. That means consumers will have to do more to ensure their accounts stay safe. “You’re going to be have to very vigilant about protecting your information,” Geister says.

Prediction No. 8: … but Americans may still see an uptick in fraud
The U.S. itself could become more of a target for international fraudsters. That’s because smart card security standards known as EMV (from Europay, MasterCard and Visa — the companies that initially cooperated to develop the standard) have already been adopted abroad but have yet to be implemented here.

Chip-and-PIN cards come with an embedded computer chip and require cardholders to type four-digit PIN numbers into terminals in order to use them. EMV establishes a standard for chip cards to function and be accepted worldwide. “It has been very successfully implemented in places like Europe and parts of Asia. The U.S. is the last place to implement EMV standards,” says Bryan Cave’s Rinearson. That makes “it easier to steal and use a credit card in the U.S. than in other countries,” she says.

While Rinearson says the standards aren’t set to take hold in the U.S. for another two to three years, that could leave the country open to increased strikes by fraudsters looking for less-protected prey. EMV implementation elsewhere could spell trouble for U.S. cardholders. “I think already, because of pressure in Europe and elsewhere, there could be an uptick here,” Rinearson says.

Prediction No. 9: Payments get more and more mobile, as do thieves
Analysts expect a further rise in mobile payments next year. As that area matures, it could prove ripe for thieves.

A white paper produced by Online Resources, appropriately entitled “The Mobile Banking Era — 2009 Outlook,” considers the likelihood of sizable gains next year in the number of consumers using mobile banking. “About 3 million people in the United States used mobile banking in a 90-day period between March and June 2008, according to TowerGroup. This was almost triple the number of people who used it six months before, and 2009 is slated to be another year of exponential growth,” the report says. “The consulting firm estimates that the number of active mobile banking users will reach 20 million by 2010. Bank of America is the current mobile banking leader, with 1.3 million customers.”

Cell phones tied to credit cards will become more prevalent.

— Debra Geister
LexisNexis fraud expert

Geister agrees with that forecast. “Cell phones tied to credit cards will become more prevalent” in 2009, she says. Although she terms it “a rising trend,” Geister notes that mobile payment use is ultimately dependent on cardholders. “How successful that is is up in the air,” she says. “It depends on consumer adoption.”

Meanwhile, mobile payments have their challenges. “Mobile payments, like anything else, are a double-edged sword. You take the good with the bad,” Geister says. On the good side of the ledger, mobile payments offer some security upgrades from everyday credit cards. Making mobile payments via cell phone requires multifactor authentication, that is, a several-step process for verifying the identity of the cardholder. That could turn your cell phone into a payment device that’s safer than that plastic wedged in your wallet. Consumers must “get through security hoops,” to use a mobile payment device, Geister says. That’s an improvement over more traditional plastic. “If you lose a card, it’s pretty easy” for someone else to use it fraudulently, she says.

Meanwhile, the bad side of mobile payment systems includes the threat from “man in the middle” attacks, in which fraudsters intercept information as it gets transmitted wirelessly through the airwaves. Additionally, cell phone worms or malware designed to snatch the data from mobile devices such as iPhones represent a challenge. “Anytime there is a software environment, those are subject to attacks,” Geister says.

Protection from such attacks will require ongoing research and development. To protect cardholders, “We need an R&D effort as aggressive as the fraudsters have,” Geister says.

Additionally, mobile banking could offer opportunities for money launderers and terrorists to easily transmit funds. “Law enforcement is very nervous that there are cell phones that are anonymous,” Rinearson says. “If you combine this with the ability to transfer funds, this is a serious concern.” Therefore, protection may simply be a case of preventing the use of mobile payments on prepaid cell phones. “The hope is that if there is payment functionality with cell phones, it’s on cell phones with known customers,” Rinearson says. “With the majority of cellphones, the customer is known,” she says. If you make mobile banking unavailable to the minority of unknown callers, “you’ve limited the risk substantially,” Rinearson says.

See related: 2008: A year in review

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