The Consumer Financial Protection Board released their biennial report on the Consumer Credit Card Market.  It’s 297 pages long so I will just focus on the most interesting insights from it.  The Executive Summary from pages 7-19 is well worth the read in providing the current credit card landscape.

Always on the lookout for gotchas, here are the three areas of concern that CFPB identified with the current state of the credit card market:

• Deferred interest products (Editor’s Note: 0% APR for 18 months is an example) are popular and provide many consumers with valuable interest-free loans on larger purchases, but they remain the most glaring exception to the general post-CARD Act trend towards upfront credit card pricing. Consumers with worse credit scores generally pay more for these products than consumers with higher scores. But they do so at the “back-end” of the transaction, and not pursuant to upfront transparent pricing differences. As we describe, moreover, there are significant indications that the lack of transparency in this market contributes to avoidable consumer costs. These costs can be substantial—and may have longer-term consequences;
  • Check out the NGPF Blog post: What’s The Catch with 0% APR Card Offers?

• Subprime specialist credit card issuers offer products significantly more expensive than their mass market counterparts. Fees and interest assessed to their consumers exceeded 40% of those consumers’ year-end balances in 2013 and 2014. In addition, given that these issuers place much greater reliance on origination and maintenance fees, and that these fees are charged against relatively small lines, their products create the risk that a significant share of consumer monthly payments go to cover fees and interest on fees— and not to paying off the principal balance created by spending on the card. These issuers tend to solicit applications using targeted direct mail. Despite offering longer and more complex credit card terms than mass market issuers, they send those mailings disproportionally to consumers with lower levels of formal education; and

• Most credit cards now have variable interest rates. These credit card rates will rise—even on existing balances—when background interest rates in the economy increase. This is not an argument against variable rate pricing. Such pricing is the norm for open-end products where the consumer can continue to draw on a credit line and borrow for an indefinite period of time so long as the account remains open and the full line has not been utilized. The concern here is that, in the wake of a historical long period of stable and low interest rates, consumers may be accumulating and revolving balances without an understanding that the price of doing so—even on existing balances—may well increase in the future. Given CARD Act restrictions on most other retroactive rate increases, consumers may not be expecting any increase on the rates they pay to borrow on credit cards.

CFPB also took the card companies to task for making it extremely difficult to understand their reward programs (check out our three posts on reward programs here, here and here), which have become standard across the industry:

There are also areas for potential concern in this market. It is not always clear when, where, and from whom consumers can expect to find or receive key program terms and conditions. Seemingly simple programs may have caveats or complexities glossed over by marketing materials. Consumers may not understand when and why rewards might expire or be forfeited, or what their options are when they do. Many rewards cards are based on partnerships between issuers and other companies, such as airlines and hotels, and it may not always be clear to consumers which institutions determine and control certain aspects of the product that they are using. The less that consumers can evaluate the value proposition associated with different rewards programs, the less able they are to select between cards on a rational basis—especially if they are likely to carry a balance on the card at some point in the future.

Skimming through the innovation section, the report highlights the ubiquitousness of credit scores being offered by credit card companies as the #1 innovation in the last two years:

From the consumer perspective, the innovation with perhaps the most impact over the last few years is issuer provision of regular, updated, and free credit score information to their credit cardholders. Because that has gone from pilot projects to being an established industry norm, however, we have covered it under “Issuer Practices,” as noted above. With this core exception, credit card products, features, pricing structures, and functionality remain largely unchanged since our prior report.

They also note the increased focus on security and how digital adoption rates are opening up the credit card companies to new competition:

As a result, therefore, we examine innovations that are designed to improve security and prevent fraud. These innovations—including the adoption of Europay, MasterCard, and Visa (“EMV”) ‘chip’ cards and the tokenization of payment card credentials on digital platforms—may entail substantial change for the credit card market, as well as other consumer financial markets. In addition, they are not simply “back-room” innovations with little or no practical meaning for consumers. They are impacting—or have the potential to impact—consumer experience in the credit card market. For example, we review consumer adoption of mobile payments applications for credit cards—which in part have been enabled by innovations in payments security.

Digital technology is also opening up certain aspects of the credit card market to competition from non-traditional market players. Some of these innovations are not limited in their reach to the credit card market. Some affect payments or credit markets much more generally. But because they have potential significance for credit card use, we include them in the scope of our review of market innovations.

I will be creating more bite-size posts over the next week to tease out additional insights from the report.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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