Playing the Hand You're Dealt: Changes in Policy, Laws, and the Market Reshape Banks' Relationships with Plastic

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As the economy forces change on consumers, and new laws force change on banks, the card market is evolving, with mixed results. Credit-card defaults are down, but so are revolving balances that yield interest income. Debit cards are increasingly popular, yet have become less profitable for many banks due to the Durbin amendment. Prepaid cards help reach the disenfranchised, but that market is still largely untapped, though growing rapidly.

Trends in credit-card usage are evident in research conducted by MasterCard Advisors. "Consumers have changed their payments behaviors--if not permanently, at least for the near future," notes Ben Colvin, global practice leader for MasterCard's Retail Banking/Debit Knowledge Center. Debit has replaced credit and cash for many purchases, with its use growing among every demographic, except 25- to 29-year-olds (because they're already dedicated debit-card users).

The rate of credit-card delinquencies, charge-offs, and outstanding debt has fallen. Total indebtedness is down $1.2 trillion, or about 10%, from its highest level in 2008. The percentage of credit-card debt in arrears by 30 days or more is 1.8%, or half the rate it was at year-end 2009. Credit-card issuance is up 10% this year from last, "but that is not necessarily an indication that consumers are beginning to turn back to their old habits," Colvin says.

Consumers' newfound prudence means less bank profit. Increasingly, credit cards are used mostly by the affluent, who charge purchases to accrue reward-program benefits, but pay off balances every month.

With debit cards, of course, the big issue is the restrictions on interchange fees.

"Interchange has helped support low-cost access to products," says Kenneth Clayton, executive vice-president of legislative affairs and chief counsel at ABA. "One of the direct consequences of Durbin has been the elimination of free checking, because debit and interchange [fees] underwrote the costs of basic banking services."

Merchants' opposition to the fees is unfounded, banks maintain, considering they not only benefit from the system but, in some cases, demand it. Laurie Hannigan, director of product management and database marketing for Boston-based Eastern Bank, points to the example of airlines requiring credit or debit cards for in-flight purchases. "All they accept is plastic," she says, "yet they'll argue they shouldn't have to pay for that."

In addition to pushing for the Durbin amendment, retailers had a long-standing lawsuit against Visa and MasterCard and large card-issuing banks alleging price fixing in credit-card swipe fees. In July, the card companies proposed a $7.25 billion settlement of the suit, which, if it is ratified, should put the issue to rest, though at a steep cost.

ABA President Frank Keating, in a statement at the time of the announcement, said: "We are hopeful that today's settlement marks the final chapter in what has always been nothing more than a legal battle between two industries over who should pay to support our nation's incredibly efficient payment system.... Let's be clear," he added, "retailers, not consumers, benefit from today's resolution."

Keating acknowledged that banks may not like all the results in this case, but he felt the industry was ready to move on. That may not happen. Last month, Sen. Richard Durbin (D., Ill.) wrote in a letter to Keating that, "Adoption of this proposed settlement would almost certainly guarantee that future congressional intervention will be necessary...."

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Durban's debit impact

Sen. Durbin's letter was a response to an earlier letter sent by ABA, the Independent Community Bankers of America, and two credit union associations to congressional leaders. That letter urged Congress to reject calls from some retail groups to impose even more government price controls. …