Credit cards help you save!!

Credit cards helping you save-that sounds like a oxymoron! Are banks trying to become more customer centric! 

Debit & credit cards are different silos within banks-Credit cards operates as a separate P&L and often the Debit card reports into the Liability business head. And of course it is rare for the silos to talk to each other in any business! So how on earth can these businesses become more Customer centric!

Credit card companies in the US that once were a vehicle for out-of-control spending are now helping consumers stay out of debt. Citi and MasterCard Worldwide announced that Citi will implement the consumer application in the U.S. of MasterCard inControl – a service that gives cardholders the ability to set spending controls and receive real-time information about their accounts. By itself this is nothing new, Quicken & others have been pushing this service for a while now.

Interestingly, MasterCard’s announcement comes days before the final provisions of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the most comprehensive overhaul of the credit card industry in history, goes into effect today, August 22.

Dan Ariely the Behavioural economist has spoken about a “self control” credit card.

But is it practical to expect a financial institution to gustily embrace such a concept especially when they earn billion in “interest charges”. Is there an opportunity out there for a bank to be truly “customer centric” without “breaking the bank”!!

Here, from Dan Ariely’s Predictably Irrational is the idea of a” self-control” credit card:

A FEW YEARS ago I was so convinced that a “self-control” credit card was a good idea that I asked for a meeting with one of the major banks. To my delight, this venerable bank responded, and suggested that I come to its corporate headquarters in New York.

I arrived in New York a few weeks later, and after a brief delay at the reception desk, was led into a modern conference room. I began by describing how procrastination causes everyone problems. In the realm of personal finance, I said, it causes us to neglect our savings-while the temptation of easy credit fills our closets with goods that we really don’t need. It didn’t take long before I saw that I was striking a very personal chord with each of them.

Then I began to describe how Americans have fallen into a terrible dependence on credit cards, how the debt is eating them alive, and how they are struggling to find their way out of this predicament. America’s seniors are one of the hardest-hit groups. In fact, from 1992 to 2004 the rate of debt of Americans age 55 and over rose faster than that of any other group. Some of them were even using credit cards to fill the gaps in their Medicare. Others were at risk of losing their homes.

Now the ground was ready and I started describing the self-control credit card idea as a way to help consumers spend less and save more. At first I think the bankers were a bit stunned. I was suggesting that they help consumers control of their spending. Did I realize that the bankers and credit card companies made $17 billion a year in interest from these cards? Hello? They should give that up?

Well, I wasn’t that naive. I explained to the bankers that there was a great business proposition behind the idea of a self-control card. “Look,” I said, “the credit card business is cutthroat. You send out six billion direct-mail pieces a year, and all the card offers are about the same.” Reluctantly, they agreed. “But suppose one credit card company stepped out of the pack,” I continued, “and identified itself as a good guy--as an advocate for the credit-crunched consumer? Suppose one company had the guts to offer a card that would actually help consumers control their credit, and better still, divert some of their money into long-term savings?” I glanced around the room. “My bet is that thousands of consumers would cut up their other credit cards-and sign up with you!”

A wave of excitement crossed the room. The bankers nodded their heads and chatted to one another. It was revolutionary! Soon thereafter we all departed. They shook my hand warmly and assured me that we would be talking again, soon.

Well, they never called me back. (It might have been that they were worried about losing the $17 billion in interest charges, or maybe it was just good old procrastination.) But the idea is still there-a self-control credit card-and maybe one day someone will take the next step.

Debit cards-How profitable are they for banks?

Visa made headlines in May 2009 with reports that its branded debit cards had beaten its credit cards for the first time in terms of total dollars spent on purchases.

Banks earn more money from debit card fees than credit card fees and they often manipulate usage patterns to maximize their profit – and our pain, says a front page story in NY Times.

http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html?_r=2&hp

“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. Debit has essentially changed into a stealth form of credit, according to critics like him

The problem is that banks charge you an overdraft fee when you spend more than what is in your account, instead of denying the purchase. Three-quarters of the largest American banks automatically give consumers overdraft coverage, excepting Citigroup and INGDirect.

By calling this service overdraft “protection,” banks emphasize the benefit to consumers (being able to spend more than you have), while de-emphasizing their gain (charging outrageous fees for lending you what you the moolah).

The Indian situation is still in its early days with regard to Debit card penetration and usage! Though smart banks would be making a neat packet of other income with fees, interchange & off us charges kicking in.

In India we have over 1464 lakh (as of June 2009) debit cards issued by banks (excluding those withdrawn/blocked). By March 2008 end, the number of ATMs deployed in India was 34,789 with the then annual rate of increase in the number of ATMs being 28.4%. Thus considering a figure of 44000 ATMs deployed currently by the banks, on an average each ATM caters to about 3300 debit cards.

The Reserve Bank of India reported that debit card transactions increased by 48% in the financial year of 2009 which is against 12.7% increase recorded for credit cards. Furthermore, debit card volumes also rose 44.6% while credit card volume increased by 13.7%.

Analytics can play a strategic role for banks who are looking to positively impact their P&L with the Debit card & ATM business. Here are some thoughts:

1.    Driving the channel migration advantage: How do you start to identify customers who could be prospects to migrate from the branch to an ATM/Debit card/Internet channel. The cost of a bank transaction on manual mode is estimated to be in the range of Rs. 45 to Rs. 50 while it is around Rs. 15 on ATM and Rs. 4 on e-banking. Creating analytical models that help you identify customers who are great prospects for migration would be a starting step.

2.    Creating an ATM location strategy and driving Off us income. Are there competing bank customers who are great prospects for your ATMs and if not what are the catchments where such customers are more likely to be? 

Here are some interesting thoughts from Ashish Das a Professor at IIT Mumbai : http://www.math.iitb.ac.in/~ashish/workshop/ATMfees.pdf

Let us consider the practical situation wherein a bank X does not have an ATM located where it should have one (assuming a number of their own customers would have used it, had there been one). Bank X customers, in that location, may then look for a location where bank X has an ATM or a bank branch. In other words, bank X induces inconvenience to their customers and also carry a risk of incurring more expenditure (through a customer’s branch visit) because of its inability to have placed an ATM at the location. Thus, keeping in mind the role of technology in enhancing quality of customer service in banks, RBI came up with an innovative idea of making third party ATM same as customer’s own bank ATM thereby considerably reducing the cost (of opening more branches or installing more ATMs) to banks. This way, while increasing efficiency and better utilization of resources, bank X customers can use bank Y ATM while bank Y customers can use bank X ATM with cost saving and convenience to banks and bank customers. The expenditure and income incurred by each of banks X and Y balance out and in fact there is a tremendous gain for banks even after paying Rs. 17-20 by profiting almost Rs. 30 on each ATM cash withdrawal as against carrying out the transaction on manual mode over the branch counters.

RBI had freed unlimited usage of all ATMs by account holder from 1st April 2009. Though the ATM usage was made free for customers, the bank is required to pay a charge of Rs 18-20 per transaction to bank that owns the ATM.

The IBA proposed RBI to cap third party ATM usage at Rs. 10,000 per Day, limiting such transactions to five per month. Now the RBI has approved this proposal, it would be applied after October 2009. It will be optional on banks to levy such charges on customers.

As per RBI, international experience indicates that in countries such as UK, Germany and France, bank customers have access to all ATMs in the country, free of charge except when cash is withdrawn from white label ATMs or from ATMs managed by non-bank entities.