Lenders’ New Largesse

 creditcardThe new Discover It credit card, offered this month, has a few new incentives for consumers. Its web site makes the following offer: No late fee for your first late payment; 5% cash back in categories that change each quarter; unlimited 1% cash back, not points, on all other purchases; an assurance that paying late won’t increase your APR (annual percentage rate), and a host of other things.

This more generous approach to consumers has already been adopted to varying degrees by other credit card companies, including Citigroup and Barclays, according to an article in The Wall Street Journal, which also points out that this new leniency on late payments does come with a caveat: Late payments can still show up on a consumer’s credit report, “which could make it difficult to qualify for new credit cards, mortgages and other loans.”

Still, credit card companies are most likely taking a financial hit when they give up the late payment fees which for so long had been paid by captive consumers. So what is the motivation for this new strategy?

Wharton marketing professor Stephen J. Hoch suggests that the issuers are “simply dealing overtly with a situation that they dealt with on a case by case basis before. Previously, if you were a timely payer and missed a payment, you could always call up and give the credit card company a one-time excuse, and they would usually forgive you that one time. Many consumers did not take advantage of that, either due to lack of knowledge or lack of caring.”

The lenders have now made this “one-time forgiveness explicit,” he notes. “It appears to me that if you chronically pay late, then you will get hit with fees. The other thing to remember is that when you pay late without an excuse, then you do get two months of interest charges, which can be hefty depending on the account balance. So [lenders] still make money off the credit revolvers, which is how [these lenders] pay for everything else, such as rebates and so forth.”

Hoch also suggests that if all the banks are offering these new concessions, then there is little competitive advantage to be realized. “The effect on loyalty would seem to be minimal. For people who use credit cards as a convenient payment method — no balances — it is all about rebates and other perks, such as miles. For revolvers, it is all about finding some bank willing to give them a big enough credit limit at not-too-high an interest rate.”

In 2009, with congressional passage of the CARD Act and its enactment a year later, some of the more questionable bank practices were reined in, such as charging hidden fees and offering low introductory interest rates that would suddenly and substantially increase.

Even with the CARD Act, lenders are still “quite clever in finding ways around the regulations,” Hoch says. “Credit card companies have increased merchant fees in order to make up for any lost profits from consumers. Also, if the credit card companies continue to try to make up for lost fees from consumers, then merchants may finally revolt and add surcharges which they think the new regulations may allow them to do.”

Hoch says he “can imagine that new payment mechanisms could develop that no longer conflate the availability of credit with the ease of payment.” Debit cards currently serve this function, but in the future, this may be “easier to do, like paying on your phone” — which some consumers already do — “or paying after a device reads your eyeball or thumb print.” Profits from credit cards, he adds, “are decidedly in the rear view mirror given the opportunities afforded by a more electronically connected world.”

 

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