The rising pressures on credit card issuers

May 14, 2024 11:24 AM

The credit card business is especially dynamic, with many different factors that can affect costs and revenue.

Issuers have to deal with fee-cap regulation, environmental rules, credit quality, AI-fueled fraud and other concerns.

Here's what banks and others have been saying about their card operations:

Kyle Grillot/Bloomberg

Fee pressure

Card issuers are working feverishly to mitigate the effects of a Consumer Financial Protection Bureau rule that would mandate a cut in credit card late fees to $8 for all issuers, from the current maximum of $32 for the first late payment and $41 for subsequent late payments.

Synchrony Financial is hiking interest rates it charges to its customers, part of a series of steps to address the financial impact of the CFPB rule (which was originally set to take effect May 14, until a judge issued an injunction delaying the rule's effect).

The lender, which offers credit cards in partnership with retailers and other brands, has been raising annual percentage rates and adding other fees to limit the rule's impact on the company's bottom line.

"Our goal from the beginning has been to protect our partners and continue to provide credit to the customers that we do today," CEO Brian Doubles said. "And unfortunately, that's impossible to do without these offsets."

Another card issuer, Bread, told analysts during its earnings call that after deeper analysis of the final rule, plus a recent flurry of discussions with its retail credit card partners about mitigation strategies, the firm anticipates a 20% loss of revenue during the fourth quarter of this year, versus a 25% hit, which it forecast last year.

The revised forecast regarding the CFPB action "highlights the continued progress we have made since the final rule was released as a result of discussions with our brand partners regarding customer pricing actions and clarity on the timing of the actions," Perry Beberman, Bread's chief financial officer, told analysts during a conference call to discuss earnings. He said the firm may even find ways to drive the 20% hit lower, noting there is still "ongoing negotiation" with merchant partners.

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Credit losses weigh on bank earnings

Bank of America's profits dipped in the first quarter as it built a larger cushion for bad credit cards and office loans.

The Charlotte, North Carolina-based bank reported that its net charge-offs increased by more than 80% from the same period last year, from $807 million to $1.5 billion, as consumers struggled to pay off their credit card debt and turbulence in the commercial real estate sector continued. To manage the rising credit risk, Bank of America posted a $1.3 billion provision for credit losses, up from $931 million a year earlier.

"All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls," Chief Financial Officer Alastair Borthwick said Tuesday on the bank's quarterly earnings call.

Separately, first-quarter earnings fell at Regions Financial, with higher credit costs and operating expenses cutting into the Birmingham, Alabama, company's bottom line.

The $155 billion-asset Regions said its adjusted net charge-offs for the quarter totaled $121 million, or 50 basis points of average loans. That was up from 39 basis points the prior quarter. The increase was due primarily to a large restaurant credit and a commercial manufacturing loan, the bank said.

President and CEO John Turner Jr. said Regions expects further credit deterioration as "pressure remains within pockets of business lending." Weakness is largely contained to sectors the bank identified as vulnerable last year, including office, senior housing, health care and technology, he said.

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Unfair airfare?

Executives at small airlines complained to regulators this month that airline rewards credit cards — issued by big banks on behalf of large airlines — limit competition by making it harder for smaller carriers to appeal to consumers.

Eight panelists, including executives at Allegiant Air, Breeze Airways and Spirit Airlines, testified at a two-hour hearing in Washington held by the Consumer Financial Protection Bureau and the Department of Transportation. The witnesses delved into other thorny topics such as whether airlines are delivering on promised rewards, why flight attendants have to supplement their income by selling credit cards and if consumers are taking on more debt just to accrue miles and points.

Yet competition among airlines — and whether the money generated from rewards and loyalty programs has made it difficult for small entrants to compete — captured much of the attention.

"One of our concerns, of course, is what role that these programs may play in affecting the ability of other players, smaller players or newer players to compete," said Secretary of Transportation Pete Buttigieg, who co-chaired the hearing. He noted that when the Airline Deregulation Act was enacted in 1978, "it was confidently predicted that there would be at least 100 major competitive airlines by the turn of the century. Obviously things didn't work [out] that way."

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A big deal

The final outcome of the biggest bank deal since 2008, Capital One Financial's blockbuster purchase of Discover Financial Services, is anyone's guess.

It could be blocked by U.S. banking regulators. The merger-skeptical Department of Justice could sue to block the tie-up, much like it did in the failed merger of JetBlue and Spirit Airlines. Or the deal might get approved despite concerns from antitrust hawks.

Critics argue that the merger would create a massive credit card company, limit options for subprime borrowers and fail to put a meaningful dent in the market power of Visa and Mastercard.

Capital One argues that the deal does not pose anti-competitive concerns, saying that it would still face intense competition from JPMorgan Chase, American Express, Citigroup and other heavyweights.

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AI-fueled fraud

Fraudsters are using generative artificial intelligence to accelerate certain brute-force card-testing attacks, or enumeration attacks, by using scripts to run trial-and-error authorization attempts on millions of potential payment account numbers at scale until they randomly hit one with the right combination of authorization credentials.

Increasingly, they're using gen AI to do this even faster, according to Paul Fabara, Visa's chief risk and client services officer. Visa is developing ways to fight back.

After more than a year of experimenting with gen AI, the San Francisco-based card network has rolled out a new product trained on more than 15 billion annual VisaNet transactions. The technology will warn issuers in real time when a payment account number appears to have been compromised by an "enumeration" attack, a type of brute-force card testing aided by bots.

"Until now, stopping an enumeration attack has been like finding a needle in a haystack, but with gen AI we're able to spot it by rapidly combing through trillions of rows of data," Fabara said.

And Visa hopes to turn the tables on them by using its own gen AI for the first time to alert banks to certain types of this fraud, the card network announced last week.

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Competition from a new type of payment card?

Affirm is optimistic about a payment card that it describes as neither credit nor debit.

CEO Max Levchin is positioning the product as a hybrid financial tool to be used for everyday debit purchases, short-term zero-interest loans and longer-term loans with different interest rates.

"It takes a long time to invent a new type of card," Levchin said, noting that Affirm made headway during the recent quarter in helping Affirm Card users understand the best use cases for paying with the Visa card's debit mode versus financing a preplanned purchase with interest at the point of sale or deciding to split a purchase into four equal payments over six weeks, with no interest.

About 10% of Affirm Card users' spending on the card is now in the debit mode, up from 6% during the quarter that ended Dec. 31, 2023.

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Price vs. plastic

Credit card issuers face two competing demands on their business: pressure by companies such as Mastercard to eliminate first-use plastic in payment cards, and the steeper costs of nonplastic materials.

Mastercard will require all banks to use sustainable materials in any new card issued as of 2028, and it is working with multiple card manufacturers to provide alternatives.

One of the costlier options is wood, a material that's slowly taking off in Europe. GLS Bank in Germany and Viseca in Switzerland are among the first issuers of the Timbercard. GLS noted that this decision comes at a cost; its wood cards cost three times as much as cards made of polylactic acid (PLA), which is itself a costlier alternative to traditional first-use plastic.

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