Debit Cards Challenging Credit Card Revenue

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While credit card issuance has historically provided substantial revenues to financial services providers, recent changes in a variety of consumer behaviors-including a continued shift to debit cards and growing adoption of prepaid cards-are creating a more challenging revenue environment, according to research by TowerGroup.

"Credit card issuing banks have traditionally done a solid job of dealing with environmental and regulatory challenges. They now need to look more closely at consumer behavior, as American households begin to feel the squeeze of inflation and rising interest rates," said Brian Riley, the author of the TowerGroup study. "The shift of consumer spending to debit cards is forcing issuers to realize that the convenience of debit as an alternative that doesn't build up debt may outweigh the attraction of credit card reward programs. Issuers must devise a strategy that manages and secures the consumer transition to debit, while educating them on the continued benefits of a traditional credit card account."

Highlights of the research include:

* The rise in interest rates tied to the prime rate-forecasted to surge beyond 8% in July 2006 (double the prime rate of 2004)-will revert the positive movement in write-off that issuers have experienced in early 2006.

* Card issuers face a potentially more profound challenge in the evolution of consumer behavior. TowerGroup expects that the continued consumer shift to debit cards as well as rising prepaid card adoption will reduce the overall transaction volume of base credit card receivables, and therefore reduce transaction-based economies of scale.

"While cards will continue to be an important revenue channel for card issuers' holding companies, the industry as a whole will need to do careful planning as they look towards 2007," Riley suggested. "To overcome a host of new challenges, issuers will find it critical to more actively manage customers' migration to debit card-as well as more tightly control internal expenses and fraud."

For info on "Credit Card Profitability in a New World: Meeting the Challenge of Changed Consumer Behavior" call 781-292-5200 or email service-info towergroup.com or visit www.towergroup.com.

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