Card Act's Collateral Damage: Networks
The effects of the new credit card law are beginning to spill over from the issuers to payments networks like Visa Inc. and MasterCard Inc.
In the latest example of an issuer cutting rewards in order to conserve profits, Citigroup Inc. is slashing some travel insurance benefits on its high-end credit cards. But while rewards programs are usually the province of card issuers, these insurance perks are required by the networks, to help distinguish their elite products.
Hence Citi's cutback risks denting the reputations of high-end network brands like Visa Signature and World MasterCard. The issuer will continue to provide the insurance, but at a level closer to the minimum required by the networks.
Visa and MasterCard "would like the shared benefits on these products to be as high as possible. Anything that's going to make my brand more premium is good, and this is going in the other direction," said Eric Grover, a former Visa executive and the principal of the consulting firm Intrepid Ventures.
High-end network brands "are intended to convey a level of benefits," he said, and now, "cardholder perception will be, 'Citi is doing it, but they're doing it on my Visa Signature.'"
Most major issuers have already cut their rewards programs as a result of the recession, deteriorating credit quality, and, especially this summer, in anticipation of the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama signed in May.
That law, parts of which went into effect this month, has started squeezing issuers' profits. Many have reacted by raising interest rates and fees on existing cards; Citi said this month that it was adding annual fees to certain existing accounts.
Until now MasterCard and Visa, which do not issue cards, have been largely unaffected by the law. But Citi's new cutback shows that the networks' fortunes are intertwined with those of their issuer customers.
"The Credit Card Act has changed the economics of the industry and so therefore the type of offering, on everything from price to various services, including this one, is going to have to be re-rationalized," said Leigh Allen, a former Citi investment banker and the principal of the consulting firm Global Consumer Finance Advisory LLC.
Features like travel accident insurance have historically added "value to the relationship between the issuers and the card associations. Now one little chunk of it is going to fall by the wayside and maybe other pieces could follow," Allen said. "It's not a disaster in and of itself, but what else is going to happen as the industry reconfigures and re-rationalizes itself?"
Citi said last week that it is reducing the amount of "travel accident insurance" it offers on several elite cards, in some cases to a quarter of the former coverage levels, effective Oct. 1. It started informing cardholders of the change in July.
Such insurance is one of a handful of perks that networks require issuers to provide on high-end card brands, like World MasterCard and Visa Signature, as well as on cards that run on American Express Co.'s network. Other such perks include extended warranties on retail goods and car rental insurance.
Travel coverage on Citi's Platinum Select, Diamond, MasterCard World, Visa Signature, American Express and Professional cards is falling by 75%, from $1 million to $250,000. On its American Airlines AAdvantage World and Signature cards and its Amex Chairman card, coverage will be halved, to $500,000.
"In this difficult market environment Citi must make changes to its travel accident insurance coverage levels on certain Citi credit card products," Samuel Wang, a company spokesman, wrote in an email. "Based on our research the new coverage levels remain competitive with those in the industry."
Betty Riess, a spokeswoman for Bank of America Corp., said Friday that its coverage levels vary; on its Visa Signature products, travel accident insurance ranges from $250,000 to $1 million, and on its Amex-branded Accolades cards, the level is $1 million. She reported no recent changes in coverage.
A spokeswoman for Capital One Financial Corp. said by email, "We have not altered these benefits and have no plans to do so," but did not provide the amount of coverage it offers.
Discover Financial Services also reported no change in coverage. "Select consumer and business credit cardholders receive up to $100,000 in travel accident insurance and the issuer may choose to provide additional coverage through Discover Network."
JPMorgan Chase & Co. did not respond to queries.
Visa requires a minimum insurance level of $250,000 on its Signature cards; MasterCard requires a minimum level of $200,000 for its World brand, according to spokeswoman Joanne Trout. "In terms of brand impact, Citi's proposed change of $250,000 is still competitive in the marketplace and, therefore, we don't anticipate it will impact the World brand," Trout said.
But Jennifer Doidge, a Visa spokeswoman, sounded a different note: "Some enhancements are required to meet minimum levels; however, many issuers offer these benefits at a level above and beyond what's required, in order to provide their cardholders with an optimal experience."
Citi, of course, is MasterCard's largest issuer, and most of its portfolio is MasterCard branded, although it also issues cards on the Visa and Amex networks.
"Anything Citi does cutting back benefits has to be more worrisome to MasterCard, because they're more exposed," Grover said.
But for both MasterCard and Visa, which developed their World and Signature products in part to win some of Amex's traditional elite, high-spending business, any issuer pullback is cause for concern.
"These brands are trying to be competitive with Amex, and if we've got major issuers pulling back on benefits, that has an effect," Grover said.
An Amex spokeswoman said its network business "works in partnership with all of its issuers to construct products that meet the needs of our bank partners' customers," but would not provide specifics about its level of required travel coverage. Amex's cards business did not respond to queries.
Most observers agreed that the immediate impact on Visa and MasterCard was likely to be "mildly negative … but not overwhelming," in Grover's words.
Even though travel insurance is a network-guaranteed perk, most cardholders tend to blame their issuer, not their network, for cuts in rewards, according to Rick Ferguson, the editorial director of the loyalty marketing publication Colloquy, which is owned by Alliance Data Systems.
"Visa Signature is a nice brand in and of itself, but for the most part I think folks are still thinking of those cards as Citi cards," he said. The damage to the network brands is likely to be limited "if it's not a move made across the board by every Visa Signature issuer."
Nor are the networks likely to lose much fee revenue from the decision, according to Scott Strumello of Auriemma Consulting Group. "The issuer is obliged merely to supply those benefits. They don't have to get them through MasterCard, and if they can get a better deal on their own, many do," he said. The networks "certainly don't lose money on it, but it's certainly not a big revenue generator for MasterCard or Visa."