By Jeff Horwitz
Columbia Journalism School, C’09
The credit card industry has faced huge challenges since the financial crisis. It has been targeted by federal reform legislation, incurred significant fines from the new Consumer Financial Protection Bureau, settled a multi-billion antitrust case brought by merchants, and faced down more class actions than anyone can count.
At each turn, the card industry had an answer or a new strategy to survive. Today, it remains a profitable intermediary of American commerce – and a rich beat for any reporter willing to follow it.
Card issuers make money in three basic ways. The most obvious is by charging their customers interest on their debt. They also collect interchange fees from merchants who accept cards. There’s also consumer fee income from late charges, identify theft protection products and payment protection plans.
All three elements of the business can make for great stories. And because most people carry cards around in their wallet, a good article on the industry can generate a lot of attention. Here are some tips on how to cover cards.
Keep an eye on interchange
Banks can afford to offer affluent consumers cash back and other rewards because they charge merchants to process their credit card transactions. Those fees are high relative to those in many other countries, according to Federal Reserve research. Merchants have long feuded with banks over these costs, and the battle has grown more heated since the 2010 cap on debit card transaction fees. In a 2012 antitrust settlement, banks agreed to allow merchants to charge different prices for cash and credit transactions. So far, merchants have been afraid to add surcharges.
Follow marketing tactics
If you want to observe banks’ credit card strategies, the best place to look is their marketing. Banks report their spending on credit card advertising in quarterly filings with their Securities and Exchange Commission, allowing you to see how much they spent trying to poach their rivals’ customers. Separately, advertising research outfits like Mintel release estimates of credit card mail solicitations, which can help you gauge the competition in the industry. In 2012, for instance, the volume of Chase solicitations surged massively. Looking at the types of credit card offers being made can also tell you a lot about the industry. Has a lender started offering zero-interest balance transfers for 12 months? If so, they’re looking to pull in a lot of new customers in a hurry.
Monitor credit quality
Credit cards loans are unsecured debt, making them more risky than mortgages or car loans. That means the industry is subject to a very pronounced boom and bust cycle. Lenders willing to lower their credit standards make a killing in good years and then get killed in downturns. You can identify how much risk an issuer has taken on by searching through its SEC filings for data on borrower credit scores, delinquencies and write offs. You can also check to see whether borrowers are paying down their debt or struggling to stay afloat.
Understand add-on products
Some issuers have made a substantial side business out of services like payment protection (the ability to defer or cancel debt in case of emergencies like job loss or hospitalization) and identity theft protection. Consumer advocates pan these products because they cost a lot compared to how much value they provide to consumers. Federal regulators have begun to take notice. Recently, Capitol One reached a $210 million settlement with the Consumer Financial Protection Bureau over such services. If the industry starts to tweak these add-on products to dodge regulatory attention, that could make for an interesting line of stories.
The Consumer Financial Protection Bureau ruffled feathers in the industry when it made its database of consumer complaints public, but it lost no friends in journalism. Want to know what products are leaving consumers feeling like they didn’t get a fair deal? You can find the answer and create visualizations of the data. However, keep in mind that these complaints are unsubstantiated allegations.
Don’t forget defaulted debts
Even in good times, credit card companies will have charge offs, which they report in quarterly SEC filings. All of the major banks have significant collection operations and pursue debtors in local court. Most of them also sell bad loans to private buyers who then try to collect the money on their own behalf. There’s not a tremendous amount of comprehensive data on this portion of the industry, but a recent Federal Trade Commission report offers a good start.
Jeff Horwitz covers the financial services industry at The American Banker.