Like government, the bank card industry needs to be responsive to its constituencies.
In Washington, the deficit has finally become a major concern. But the groups responsible for attending to that issue have been there all the time.
Did they ignore it? Were they asleep at the switch? Were they distracted?
There is plenty of blame to go around.
The political scene has been preoccupied with so-called deficit reduction. In actuality, all the congressional actions have been devoted to deficit-growth reduction. The politicians don't have the strength to give their actions the right name. The public is still not smart enough to know the difference.
Plastic bank cards are in a very similar situation.
An Area of Strength
While leading bank executives have not been paying close attention, or if anything have been looking only at credit cards, something very positive has occurred on the debit-card side.
The proprietary automated teller machine card has become associated with most major strategic advances in bank branching.
Consider the moves to self-service banking, high-productivity branches, interchange, sharing, off-premises banking, bank-at-work, regionalization, acquisitions and mergers, and, most recently, the move of ATM cards to point of sale and prepaid cash applications.
The proprietary ATM-debit card has been a catalyst for change. Why? The key purpose of the bank card has always been 95% marketing, and the bank ATM card has effectively used that characteristic for positive change.
Meanwhile, deficitlike problems have developed in the credit card arena.
Just as national deficits produce moments of deceptive euphoria -- about expensive, high-technology military systems, for example -- so does the bank credit card business.
Interest rates still provide reasonable returns to card issuers. Sales volume continues to grow modestly well, as does the number of issued credit cards.
Bank credit cards represent the greatest unsatisfied demand in the banking industry. Losses are growing, but not at peak rates. The industry is introducing credit card security features.
It all sounds nice. But don't be confused by the good news. Bank-issued credit cards are in serious trouble.
Consider the symptoms.
More than half of the credit cards issued last year were not issued by the major commercial banks.
The proportion of U.S. adults who have or will get a bank credit card if they request one is a bit over 40%. And that percentage has not changed appreciably in a decade.
The security of the cards' magnetic stripe is, at best, partial, and does nothing to fight the significant cause of loss -- bad debt -- or the slowdown in market penetration.
Good Advice Ignored
Consultants have told the two major bank card associations that they can cut computer and communications expenses by reducing bad debt and fraud losses to lower levels than have been achieved using existing on-line systems.
This requires a switch to the next generation of plastic transaction card.
The smart card is a fully controllable credit card. Every bank retail customer could carry and use one.
Reductions in losses and operating expense would more than cover the cost of shifting to these cards.
There are also new card-based marketing opportunities, offering higher revenues and better loss protection than available from the current 30-year-old solutions.
Back in 1987, MasterCard and Visa paid $400,000 to Booz, Allen & Hamilton. for an evaluation of smart card technology. Booz Allen spelled out the opportunities in that technology for profit and for loss reduction.
MasterCard and Visa have virtually ignored that report. They and the large credit card issuers are not presenting this opportunity for consideration by retail bankers.
As with the deficit, the public -- that is, in this case. the majority of the card associations' members -- has misplaced its trust.
The card associations are dominated by big banks. And big banks are naturally more interested in their own market positions than in helping other banks to do better.
Smart cards minimize the need for online transactions, while lowering losses. But the card associations' income comes mostly from handling online transactions, and the big banks want to maintain a high cost of entry into the credit card authorization business.
Time to Act
How do you respond to deficiencies, whether in government or in credit card servicing? You articulate your views and, if appropriate, take action. You vote the scoundrel out of office, or take action within your industry association.
Isn't it time the card associations were held accountable? Bankers should demand specific loss-reduction targets and more revenue-enhancing projects.
And if these aren't forthcoming, they should call for changes in key personnel.