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This article appears in the December 2009 issue of Cards&Payments.
Many consumers perceive credit and debit card issuers as experts at burying crucial information about interest-rate increases and fees in the fine print that accompanies most card disclosures and monthly statements. But card networks and issuers hope to reverse that perception in the coming months as consumer financial literacy and education becomes more serious business.
After years of seemingly perfunctory efforts to educate consumers about the true cost of credit card debt and shrouding account information in dense legal language, card issuers now are rushing to improve their consumer-education materials and to illuminate certain pitfalls associated with using credit cards and revolving card balances.
The movement to beef up credit card consumer education coincides with new legislation going into effect early next year that requires issuers to more clearly spell out the cost of cardholders' credit card debt with each monthly bill. Beginning in February, issuers for the first time must provide a chart on the first page of each monthly statement revealing how long it would take a borrower to pay off the balance making only minimum payments. Issuers also must note on each statement the monthly payment required to pay off the balance owed within 36 months.
But many payments organizations are going well beyond those requirements. Visa Inc., MasterCard Worldwide, American Express Co., Discover Financial Services, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. are among the companies that in recent months have developed new financial-literacy tools and materials to enable cardholders to better analyze credit card spending and debt management. The newest offerings primarily are interactive and Web-based, and cardholders can download many of them to their personal computers or mobile handsets.
And as financial literacy takes on more importance, issuers are getting more competitive with their offerings. Online informational videos and interactive quizzes are accompanied by videogames and sophisticated spending-analysis tools that enable users to plan how they will liquidate debt and manage their present and future spending (
Observers say one reason these changes are occurring is because, as issuers wallow this year in record-high financial losses and spiraling negative consumer perceptions, many realize educating consumers about responsible card use has become an economic necessity. By teaching consumers how to avoid being caught in debt traps, issuers hope to stem further losses and enhance customer loyalty.
"This has been an unusual year in terms of card losses, and it is causing more card issuers to realize that financial literacy is more than just a feel-good thing," says Jason Alderman, Visa senior director of financial education.
Since 1997, Visa has offered a diverse range of financial-literacy materials to issuers and to the general public through schools, local events, its Financial Football and Financial Soccer educational videogames, and other programs offered through its Practical Money Skills for Life program. But this year Visa has noted a definite increase in issuer demand for its financial-literacy materials. "Issuers are starting to see a real bottom-line connection to meaningful financial-literacy efforts," Alderman says.
Issuers ought to respond to consumers' need for better credit card education by putting the same amount of energy into financial-literacy efforts as they do into general marketing campaigns, recommends Susan Keating, president and CEO of the National Foundation for Credit Counseling, a U.S.-based nonprofit. "Card issuers should integrate credit card financial education into the core of the credit card industry by making a connection between financial literacy and credit availability," she says.
Some observers, however, remain skeptical about just how far card issuers are willing to go to protect borrowers in an industry where interest rates and fees contribute significantly to profitability.
"With their endless fees and sharp interest-rate hikes, the credit industry in recent years has developed a reputation for using marketing methods that felt to a lot of consumers like bait-and-switch tactics," says Ginna Green, a spokesperson for the U.S.-based Center for Responsible Lending. "Typically card issuers have pushed the details about finance charges and interest-rate increases into fine print in language nobody really understands, so most people have no idea what they are getting into. Issuers may say they want to improve financial literacy and help people avoid falling into traps, but we have a long way to go before card issuers are providing more clear print than fine print."
Bad Blood
The bad blood between consumers and card issuers took a turn for the worse last year. Issuers for years have disclosed their interest-rate and fee policies in card agreements and disclosures, with the often-repeated theme that they could change terms at any time and for any reason. But many customers never bothered to decipher the fine print and did not understand how those policies might affect them in a serious economic downturn.
The crash in real-estate values and widespread job losses caused many consumers to borrow more heavily on their credit cards and miss payments, which in turn prompted issuers to offset higher borrower risks by sharply increasing interest rates on strapped consumers' outstanding balances. The skyrocketing interest rates, combined with a blizzard of seemingly unfair late and other penalty fees, stung consumers when they could least afford it.
The resulting consumer outrage helped lead to passage last May of the Credit Card Accountability, Responsibility and Disclosure Act, which will go into effect on Feb. 22. The law bans most penalty-based interest-rate increases on outstanding balances and requires issuers to apply monthly payments first to borrowers' highest interest rates. Cardholders already are getting an extra week to pay their monthly card bills and 45 days' warning plus the opportunity to decline any interest-rate increase, in accordance with certain provisions going into effect this year.
Gripe Relief
The new rules may help relieve some of credit card industry practices that caused the most griping from consumers. But research suggests that issuers indeed have a serious image problem with consumers, and improving financial-literacy efforts could help rebuild lost ground.
In an online survey of 2,000 U.S. adults last May, U.S.-based market-research firm GfK Financial Services found that 77% of respondents said they "do not like to be in debt at any time." Doug Cottings, GfK managing director, says the survey's results suggest card issuers should take remedial action in their customer communications.
"Card issuers should take a proactive approach to communicating with their customers, providing useful advice and explanations for all of their actions," he says. "In the absence of such information, our research shows that consumers are going to assume the worst," which could lead to loss of issuer market share.
Research suggests plenty of room for improvement exists in card issuers' traditional consumer-education offerings.
Corporate Insight Inc., a U.S.-based marketing and consulting firm, says the U.S. credit card industry's online consumer financial-education tools lack the depth and quality of those stock-brokerage, mutual-fund and investment firms provide. The firm reached its conclusions after reviewing the online financial-education materials and tools that 11 major U.S. credit card issuers offered last July.
Several firms' online offerings were "more promotional than educational," says James McGovern, Corporate Insight vice president of consulting services. Though card issuers typically offered rudimentary educational materials about using credit responsibly and some provided online calculators to estimate the cost of carrying debt, "most fail to integrated online calculators and quizzes into other educational materials, so there is no sense of a lesson learned and no feeling of which product would be most appropriate for a certain customer," he says.
Chase and Citigroup stood out among their card-issuing peers for offering the richest mix of financial-education materials targeted to specific customer groups, McGovern says. But those kudos aside, the card industry has a lot of catching up to do, he says.
"Most card issuers have not been particularly proactive about teaching their customers how to manage debt," McGovern says. "How they go about educating consumers in the future could play a big role in their success."
Card issuers are moving at different speeds to enrich their cardholder-education resources.
Chase in 2007 was one of the first issuers to enrich its credit card consumer financial education with its Chase Clear & Simple program, which clearly defined general Chase credit card practices and aimed to keep customers informed of their rates and fees, including explaining how customers may have their card interest rates reset to a lower rate after incurring a penalty-rate increase.
Through the Clear & Simple Web site, customers also can set their own payment due dates, credit limits and over-limit options. Chase includes a payment calculator that enables cardholders to calculate how long it would take to pay down a balance under various minimum-payment scenarios. In addition, the issuer provides a variety of tips and information on responsible spending and budgeting on the Clear & Simple Web site; information is general and is tailored to different customers based on activities and life stages.
In September, Chase introduced Chase Blueprint, an online spending-analysis and budgeting tool. Four separate features called Full Pay, Split, Finish It and Track It enable cardholders to allocate payments on Chase cards toward specific purchases, which they can adjust at any time. Cardholders also may opt to pay down a balance by a specific date, and they can analyze routine spending across categories.
Spreading Rapidly
Indeed, tools that more broadly help cardholders track and analyze their credit and debit card spending within the last year have spread rapidly among credit card online financial-education offerings, and consumers seem receptive to them.
In a poll of 2,000 U.S. consumers conducted in August and September, Javelin Strategy & Research found that, though 59% of respondents used online banking to track their finances, half relied on paper-and-pen techniques to calculate savings and expenditures.
"People are welcoming technology, but most are still using a hodgepodge of different systems to manage their finances" says Javelin President James Van Dyke. "There is a huge opportunity for card issuers to come up with better systems for tracking and analyzing card and other spending online."
The caveat, he says, is that mushrooming online financial-analysis tools soon may overwhelm consumers.
"Just as nobody wants seven different remotes for one TV, that's what a lot of people got with the newest generation of home-entertainment systems," Van Dyke says. "So while people say they want more tools to analyze their finances, they don't want to receive a dozen different streams of financial information from different banks, card issuers and investment companies. What people really want is a single, simplified way of looking at all their spending through different channels in one place.
"The first card issuer that figures out how to do this best will win big. It will be something that combines the best of all features and manages to draw and keep consumers with the right balance of security, convenience and wealth maximization."
Most card-related Web tools enable users to track credit card spending in various ways, including across merchandise categories, with different degrees of customization. Many such tools enable users to analyze the data through easy-to-create pie charts, bar charts and graphs, and also enable users to download spending activity to spreadsheets and money-management software such as Microsoft Corp.'s Microsoft Money and Intuit Inc.'s Quicken.
Tools Vary
The variable among card networks' and issuers' online financial-management offerings is the range of customization, flexibility and the ability to aggregate financial data from multiple sources. Mint.com, a personal financial management Web site that launched in 2007, was a pioneer in aggregating data from diverse financial sources—including credit and debit card spending on different cards and payment networks—in a single Web location. Intuit last month purchased Mint.com.
American Express took that broad-aggregation route with the introduction in October of Money Manager, a free online service that enables its charge card customers to manage multiple bank accounts, credit cards, investment accounts, mortgages, car loans and student loans through a single Web site. Users can aggregate information about spending, saving and investment accounts from more than 11,000 U.S. financial institutions.
The company has not said whether it will offer the service to its credit card customers, an AmEx spokesperson says. AmEx offers credit card customers an online card-spending analysis tool for AmEx purchases only; users can download their AmEx spending data for broader analysis using financial-management software.
Discover Financial Services in November 2008 introduced Spend Analyzer, a free online tool that tracks cardholders' spending on Discover cards. Cardholders may download their transaction activity to financial-management software. Steve Furman, Discover director of e-business, says Spend Analzyer has become "extremely popular" with cardholders, exceeding demand for its other spending-management tools introduced last year. Those include Paydown Planner, an online tool that shows cardholders how long it would take to pay down card balances over a specific time frame, and the Purchase Planner, an online tool illustrating how a particular purchase could affect a monthly credit card payment. "We are constantly refining these financial-literacy tools based on what customers tell us they want," Furman says.
One customer said Spend Analyzer helped her quit smoking when she flagged all her cigarette purchases and compared them with other spending, Furman says, noting Discover is planning to further enhance Spend Analyzer in 2010.
MasterCard in October introduced MasterCard Money Manager, an online tool that enables consumers to track and analyze their debit MasterCard spending; customers can also opt to add their credit spending to the program.
U.S.-based Security Service Federal Credit Union is the first financial institution to offer the service to its customers. Other institutions are planning to offer it next year, notes Patricia Preston, MasterCard senior vice president, debit product management and development.
While cardholders cannot combine transactions from different card networks using MasterCard's tool, "our vision is that cardholders want to centralize their everyday spending (from their primary card issuer) in one location," Preston says.
MasterCard last month also enhanced its general online consumer financial-education tools on its core Web site under the heading of Priceless Pointers. The new tools include a savings calculator, a payoff calculator and an ATM finder. Most of the tools are designed as "widgets" customers can download to a laptop or mobile device, says a MasterCard spokesperson.
Capital One Financial Corp. last year created MoneyWi$e Online, a financial-education tool available on its Web site in English and Spanish with information about responsible credit and debit card usage, says Shelley Solheim, Cap One director of financial education.
Bank of America last summer also overhauled its online financial-education offerings. "Because of the tough economic times we're in, we've recast our financial-literacy offerings so everything is based on content cardholders can react to online," says Martha Tschantz, BofA card product marketing executive.
Within its core Web site, BofA created a "Learn" section that cuts across various banking services, with a large portion devoted to responsible credit and debit card spending. The zone provides calculators that enable users to forecast when they will pay off outstanding card balances and offers a quiz and videos explaining how to manage everyday spending and debt.
BofA also is active on Facebook and Twitter, providing live responses to consumers with questions or comments about BofA card products, Tschantz says. "By measuring their activity and absorbing their feedback, we can further shape financial-literacy content to our customers' needs," she says.
Card issuers have a lot of work to do to regain consumers' trust. While new card regulations are forcing certain reforms, voluntary financial-literacy efforts and the offering of new consumer-controlled spending tools can help lead issuers to greater stability and, possibly, profitability. CP
