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This Editor's Letter appears in the June/July 2009 issue of Cards&Payments.
It was interesting to read some of the reaction comments in Maria Aspan's article about the credit card-reform legislation President Obama signed into law in May (
For some time now I have wondered whether issuers, particularly banks, would find card restrictions under reform legislation so onerous that they might drop out of card issuing because the reduced profitability potential might not meet with their "core business" needs. But if they did drop out, where would their accounts go?
One thought came to mind: Why couldn't new organizations form whose sole business is credit card issuing? After all, if banks want to get out of the business, perhaps monolines could step in to fill the gap. The early monolines, which helped drive card-industry growth some 20 years ago, have disappeared, either because they bought banking companies (i.e. Capital One) or banks acquired them (i.e. Providian and MBNA).
I posed the possibility of a monoline resurgence to a monoline expert, Richard Vague, who co-founded former monolines First USA and Juniper Financial Corp. Vague agrees that the industry "definitely has moved into a new phase," but he says the climate today is not as conducive for monolines as it was when they prospered.
"In the late Eighties and early Nineties, you could get a new account through marketing efforts at a pretty low cost, less than $50 an account," Vague says. "In today's world, the cost to acquire a new account probably is $100 if not several hundred dollars. … So you might actually reduce shareholder value by acquiring a new account."
Visa and MasterCard are quick to point out the low-risk benefits their debit card products offer, Vague says, citing credit card transactors who pay off their balances each month as being equally attractive because of their relative low risk. "That's where [the card brands] see the business going," he says.
Any chance the U.S. market might see hybrid card products emerge that support both debit and credit applications, such as ones offered in some foreign markets, including Germany? Not likely, Vague says. U.S. institutions tend to treat their debit and credit operations as separate entities, and consumers tend to treat where they spend with debit and credit cards with equal polarization, he notes.
So what changes might the market expect? "I can't say what will happen several years from now," Vague says. "The business today is less about growth than it was decades ago, and the premium on expense control is at its greatest. And scale is one of the best ways to reduce expenses."
Jeffrey Green
Editor-in-Chief
Cards&Payments
