This past summer, investors felt the market woes of sub-prime lending. Consumer credit has continued to raise concerns as it has in the past with borrowers of all demographic categories. However, tales of caution accompany the growth in card transaction volume and you can be darned sure that House and Senate members know it.
Consumers are showing an increasing preference for non-cash payments, regardless of transaction size, according to research sponsored by Visa. They found that debit cards are the world’s fastest-growing payment method, with consumer purchase volume using debit cards up 19 percent from the year prior. Visa notes that 33 percent of consumer purchases in the United States are now card-based, with that trend growing every year.
However, both debit and credit transactions are rising, rising, rising. In addition, when things rise and rise, well, there is an opportunity for them to fall. The volume of transactions will not fall, but our confidence in electronic transactions as a safe and sensible way to do business may. The electronic transactions industry needs to keep a watchful eye on the confidence that consumers and regulators have of this growing industry.
No matter how much the industry has seen there just seems to be a continuous account of cases where consumers somewhere become busted flat from the dangers of compound interest when applied to debt. Much of this stems from the ease of transactions.
More demographic groups are falling prey to card lending practices that can be harmful to those who use the wonderful convenience of electronic transactions. As politicians get wind of predatory practices, they hold hearings and investigate any practice that provides gain to companies on the backs of their constituents.
An increased surveillance of the card industry will add cost for vendors along the chain of supply. From the merchant, to the issuer, someone is going to have absorbed the cost of mandates requiring greater consumer protection.
So what is with the concern for consumers?
In 2001, the General Accountability Office studied the effects of Credit Cards on College students. In 2006, they studied the hidden fees and terms of credit card issuers on all Americans. Recently, however, the topic of a House Financial Services Committee hearing centered on credit cards and older Americans. The Subcommittee on Financial Institutions and Consumer Credit held a hearing on “Credit Cards and Older Americans” in August of 2007.
“Credit cards are an important money management tool for consumers of all ages,” said Subcommittee Chairwoman Carolyn B. Maloney.
Bob O’Connell, an Executive Council Member for the AARP in New York, testified before the subcommittee. He highlighted the growing trend of those over 65 who are being buried in credit card debt.
He cited the case of Ruth Owens, who stopped using her credit card in 1997. Owens did not make further purchases or take cash advances, and tried to pay off her debt to Discover Bank.
When she began to pay off her debt, she owed $1,963. Over the next six years, Ms. Owens made $3,492 in payments to Discover Bank.
According to O’Connell, “One might assume this was enough to pay off her debt. After all, if Ms. Owens had made the same payments on a $2,000 loan with interest at 21 percent annual percentage rate, her debt would be paid off. From May 1997 until her account was sent for collection in May 2003, not one penny of Ms. Owens’ $3,492 in payments went to reduce her debt. During this time, Discover Bank charged Ms. Owens fees that consumed all of her payments and caused her debt to grow even larger.”
Owens subsequently incurred over-limit fees of $1,518.00, late fees of $1,160.00, credit insurance $ 369.62, and interest and other fees $6,008.66 for a total of $9,056.28.
O’Connell also cited an example of a 79-year-old man when he lost his part-time security guard job in the Albuquerque, N.M. mobile home park where he lives.
According to the testimony, he had been taking in about $600 monthly for the work, enough to allow him and his wife to stay current with payments on the nine credit cards they had. His wife had been sick and they used their credit cards primarily to pay for prescriptions, doctor visits, and emergency room charges.
They both used their $1,600 in monthly Social Security to cover their living expenses, including the mortgage they still were paying on their 27-year-old mobile home. The nine credit cards – six from one issuer – had about $15,000 total in charges on them when the husband lost his security guard job in November 2004, he immediately sent a letter to all the lenders saying he couldn’t pay and asking for some relief. His letter was not recognized.
When he was unable to make the payments, the interest rate on the outstanding balance skyrocketed – in one case from 14 percent to 25 percent in a single month. Added to that were monthly late fees. By January 2006, the original $15,000 debt had ballooned to nearly $30,000.
The AARP is a very strong lobby in Washington; however, it is not hard to shake up legislators up to the point where they impose measures of caution.
“Older Americans face unique challenges with their credit cards,” said Subcommittee Chairwoman Maloney. “They are going deeper into credit card debt than ever before, and they are more likely to be victimized by identity theft and predatory lending. This field hearing will provide us with an opportunity to better understand the challenges facing older credit card consumers.”
Recently, according to Reuters news and the Federal Trade Commission, a federal court put a halt to companies that sell prepaid Visa and MasterCard prepaid cards because the companies that sell these cards were debiting money from consumer accounts without their permission.
Speed and Security
Remember the proliferation of transactions we talked about earlier?
Well, with a higher volume of transactions, card technology vendors are providing ways to keep up with the volume and speed up the speed of processing.
Nevertheless, with more transaction volume, and a higher speed, it is not just the interest rates that are damaging card users, but the security breaches they experience despite increased technology to close those breaches.
“Credit card processing technology has a lot of room for advancement,” says Eric Linxwiler, Executive Vice President of Encryptakey. “Most would argue that the industry is primarily focused on increasing processing speed and therefore encouraging consumers to purchase all goods and services no matter how inexpensive their card.
“Credit card processing technology has a lot of room for advancement,” says Eric Linxwiler, Executive Vice President of Encryptakey. “Most would argue that the industry is primarily focused on increasing processing speed and therefore encouraging consumers to purchase all goods and services no matter how inexpensive their card.
“With the increase in contact-less payments, and further development of biotechnology, along with the growing use of smart cards, the opportunity for account information theft and fraudulent purchases actually may see a rise due to additional alternatives for breach,” says Linxwiler. “It is vitally important that card processors not forego every effort to protect consumers while they also strive to increase processing time.”
“Credit card processing technology has a lot of room for advancement,” says Eric Linxwiler, Executive Vice President of Encryptakey. “Most would argue that the industry is primarily focused on increasing processing speed and therefore encouraging consumers to purchase all goods and services no matter how inexpensive their card.
“I believe regulation in the payment industry will genuinely be a ‘good’ thing,” says Mario Parisi, Director of Operations for MSI Merchant Services Inc. in New Providence, New Jersey. “While I am sure there will be some changes and policies to conform to, the positives that should come from regulation will more than outweigh the disadvantages. I believe the elements of our industry that are not already conforming to Visa/MC regulations, PCI security standards and in general “good business practices” have the most to be concerned about.”
Hasty, Unilateral Decisions?
“If government regulators take the lead from the Electronic Transaction Association, our industries leading association, they will arrive at some important conclusions in the right manner,” adds Parisi. “My only concern with government intervention or regulation in our industry is a hasty, unilateral decision without understanding the impact and consequences it will have on one of our countries most important industries.”
Call it hasty or unilateral, but Congresswoman Carolyn B. Maloney (D-NY) does not support a system where consumers are not protected. She recently released four principles that will serve as pillars of the credit card reform legislation she intends to introduce and guide industry self-regulation.
One of her pillars that could affect those vendors who are involved in card transactions stated that “Issuers Should Clearly Explain Account Features, Terms, and Pricing at Relevant Times.”
According to a statement outlining these four pillars, Maloney’s plan stated that credit card issuers should provide clear and easily understandable explanation of account terms before a card is accepted or used, and throughout the customer’s relationship. Although the new Regulations Z addresses disclosure, her outline states that issuers can and should take steps on their own to improve transparency.
Furthermore, Maloney’s “four pillars” advocate that card information should provide customers clear information in their statement on how to get a loan payoff balance unless the balance displayed on the statement is a loan payoff balance. This particular “pillar” even included a provision to “provide calculators and other assistance to enable cardholders to have a personalized analysis of the time it will take to pay off their balance making minimum payments.”
Maloney is simple, but curt, in dealing with the issue. Do not mess with consumers, and the system will work just fine.
“These are solid, common sense principles that will help guide the shape and scope of our credit card reform legislation and self- regulation,” said the Congresswoman. “These principles recognize that the modern risk-based pricing credit card system requires shared responsibility between credit card issuers and their customers.”
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