Credit Economy

According to a recent National Retail Federation survey, consumers will be using more cash from their checking accounts to pay for holiday purchases this year versus their credit cards. While the change from a year ago isn’t dramatic, up to 41.5% from 40.1%, it does clearly illustrate a sign of the times. Conversely, people that plan on using credit cards to pay for holiday gifts dropped 1.2%. Consumers are starting to realize that there is a fundamental difference between having money in the bank to pay for goods and services versus “plastic money” which has led to nearly $1 Trillion in US credit card debt.

A recent article in the New York Times highlights that small business owners are lobbying for credit card transaction companies such as American Express, Mastercard and Visa to lower fees charged per transaction. Typically, these companies charge an average 1.7% "interchange fee" of the total sale price along with a flat transaction fee - around .04%.

With small businesses facing stiff competition and a difficult economy, the upcoming Holiday season could be even gloomier. People are spending less versus last year, so its more challenging to pay fees that don't change with the times.   Last year, Nilson reported a 26.7% increase in merchant fees compared to 2005. Merchants are turing to Congress to relieve credit card fees or to place a ceiling on the amounts that credit card processing companies can charge on each transaction. With fewer profits to fight fraud, credit card processors may place additional constraints on credit card issuers.

The global credit card business for Citigroup lost over $900 Million based on selling credit card debt as bonds for pennies on the dollars. Prior to Q3 of 2008, Citi had earned profits on selling its credit card debt to other companies. However, Citigroup found it cheaper to package credit card debt and sell the debt off as bonds versus trying to deploy resources toward recovering the outstanding debt among a segment of its card holders.

Firms like Sherman Financial Group purchase distressed debt from large banks and financial institutions with the intent to recover it based on their own efficient practices. When you combine the profits from Citi's normal credit card operations with the $1.44 Billion loss on the sale of credit card bonds, the net effect for the Quarter was a loss of nearly $1 Billion. Ouch.

Russian businesses have recently been reported to be refusing to accept credit cards as payment due to the global financial crisis. Among the types of merchants denying credit cards as a form of payment are restaurants, state banks and airlines such as Aeroflot. In particular, many merchants will only accept payment from specific merchant banks that are highly unlikey to fail like US banks in recent months.

The International Monetary Fund is serving in a similar way like the US government did in its recent $700 Billion bailout package - to provide liquidity and loans to support ailing countries affected by the global credit situation.  

The IMF has loaned over $16 Billion to the Ukraine, $2 Billion to Iceland and an unspecified amount to Hungary.

In an interview with Forbes.com, Dan Clements of CardCops stated that "Credit card numbers fetch only $2 or $3 each on today's market...by contrast, a decade ago, credit card information comanded as much as $20 to $30 per credit card." For an extra $8, a thief can purchase a consumer's full profile which contains a mother's maiden name, social security number and date of birth. 

Prices for credit card numbers among thieves are dropping based on ample supply in the market. Competition for selling credit information has increased, thereby placing price pressure on hackers. Its interesting to think that the law of supply & demand, and not delinquent consumer accounts, has made the cost of such information a commodity.

The Wisconsin Journal Sentinel reported this week that the number of lawsuits against consumers in Wisconsin for non payment of credit card balances has taken a sharp jump since 2007. 

Throughout the state, the number of lawsuits above $5,000 involving credit card debt is on track to increase by 16 percent. Waukesha is one county hit hardest by the lawsuits with an increase of 44% versus a year ago. According to the paper, in one week alone, 38 consumers were individually sued for an average of $12,306 in credit card debt. This is around 20% higher than the national average.  

Like other parts of the country, the major factors leading to the inability to make payment on credit card debts are declining wages, increasing unemployment and rises in living costs such as energy and food. Due to tighter lending standards, people are also less likely to be able to tap into the equity of their homes to cover short-term cash needs.  

Consumers are likely to continue to tap into multiple credit cards to stay afloat. This is likely to become a growing trend among states in the coming months as well as into 2009.

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Current estimates show that roughly 100 Million credit cards have been issued within Mainland China. Unlike automated systems in the United States, which rely on personal credit scores from credit bureaus, applicants are considered through a highly manual process in which workers verify each record of information. While slow, the system is used to make certain that credit is only issued to those who can truly afford it.

Some analysts forecast that China has the potential to issue a total of 1 Billion credit cards by 2015. Such growth comes on the heals of credit card companies in the US reducing the number card holders due to rising delinquency rates or missed monthly payments. In China, however, the government forces a credit card holder to pay a full balance off immediately if they miss two credit card payments in a row. Delinquent account holders are also slapped with steep penalties and if these aren't paid right away, the card holder is subject to public notice through newspapers or advertisements.      

American Express recently reported that Amex cards are used 3 times more than other dual currency cards. American Express credits their market penetration to being close to the Chinese market. It seems that credit cards in China could be the next major opportunity for credit card companies to offset losses here in America. Other Resources:

• Competing for China's Credit Card Market
• Chinese Credit Card Market Overview
• China Charges into Credit Cards

At the end of 2008, bank charge-offs for credit card receivables is likely to increase substantially compared to prior years, forcing some financial institutions to consider alternative payment options to credit cards. According to Innovest Strategic Value Advisors, next year looks even worse with banks writing off nearly $96 Billion in 2009 - $23 Billion higher than the $73 Billion estimate for 2008.

This shift in transaction processing could translate into significant growth for a company like MyECheck which processes electronic payments directly from checking accounts. Check writing continues to be the preferred non-cash method of payment accounting for over $40 Trillion each year. A large part of this number involves check payments made by businesses and monthly consumer payments such as utilities, cable, groceries, etc.
 
While a growing number of banks may force customers to pay for items using an electronic payment system tied to their checking account, consumers may consider switching to companies which still allow them to charge freely on their credit cards. This isn't necessarily because they need the credit, but more to do with potential security issues and the fact that they have become accustomed to earning points with every transaction. Encryption technology needs to be flawless for consumers to risk having funds in their checking accounts exposed to potential fraud activity. If all banks adopt this approach, consumers will have little choice and MyECheck investors will be very happy.

Cab drivers already have it tough with rising gas prices. Now, places like Chicago require that they accept credit cards. While this is a convenient alternative for consumers, some taxi cab drivers have to pay up to 5% for each transaction. So on a quick $10 cab ride, $.50 goes directly toward processing a credit card transaction. This can really impact profitability with the costs of higher gas, car maintenance, association fees and consumers who don't tip. With most everyone looking to hold onto more of their money, tips are likely to be one of the first things on the list.

It’s also common for cabbies to broadcast credit card information over their radio, so that the transaction can be process with the dispatcher. Obviously, this increases the likelihood for someone to get hold of your credit card information. If a taxi driver refuses to accept a credit card in Chicago, they can risk having their license revoked if the incident is reported to the Department of Consumer Services. If you have the alternative to pay with cash, I'm sure your next cabbie would really appreciate it.

Other Resources:

• Fare fight over credit cards
  

Similar to the recent fall of Washington Mutual, Wachovia announced today that it's banking operations have been purchased by Citigroup. Wachovia had invested heavliy in "adjustable rate mortgages" which allowed borrowers to obtain loans at attractive introductory rates and defer higher interest payments until later years. Unfortunately, delinquencies have risen sharply in the past 6 to 12 months, causing Wachovia like similar bank casualties, to cover large amounts of debt obligations.

With two large banks being forced to sell, it got me thinking about whether or not cardholder rewards could still be redeemed. Both Wachovia and WaMu have credit card products that offer the ability to earn rewards. While most people are concerned about whether or not they will be able to use their credit card, they should also be thinking about cashing-in on their rewards before they are locked out or receive a notice that reward programs won't be honored by the new bank.  

I'm not trying to start a "run on the bank", but given the uncertainty of the market conditions, consumers must fight to hold onto whatever assets they have in the possession with these banks. According to a Wachovia spokesperson, "As we proceed, I'm sure somewhere down the road, Citigroup and Wachovia will look at what various rewards programs are in place. Today, nothing has changed for anyone." In my opinion, this isn't much of a vote of confidence that reward programs wouldn't be considered as part of the new debt that JP Morgan Chase or Citigroup is willing to absorb. Again, from the banks' perspective were talking points and not hard consumer greenbacks.  

Wachovia will continue to operate under the Wachovia name, while Citigroup has moved to the top of list as the largest U.S. bank.