David furlonger and Stessa Cohen here…
Newswires in Canada are full of the announcement from the Federal Finance Minister Jim Flaherty about changes in the rules governing credit cards: http://www.nationalpost.com/related/topics/index.html?subject=Jim+Flaherty&type=Person
On the surface these changes reflect some of what has already been proposed by U.S. lawmakers, (http://blogs.gartner.com/kristin_moyer/2009/04/29/transparency-communication-with-proposed-credit-card-regulatory-changes/ ), but importantly are absent any limiting of interest rates and interchange fees.
The new disclosure rule is limited to cases involving new cards that come with a promotional or “teaser” interest rate; the higher rates, which usually kick in within six months, are already spelled out when consumers sign up with a new card, but banks will now have to send a reminder notice 30 days before the promotional rate expires.
These changes create a more level competitive playing field for banks, as outlined in the Time Colonist: http://www.timescolonist.com/business/Critics+credit+card+rules/1618961/story.html, especially the requirements concerning the grace period on payments – and increases competitive pressure in the market by bringing the bigger Canadian banks into line with the second tier players
However, none of the +25 million Canadian cardholders, using an estimated 68.2 million credit cards, will get a break on basic card fees and stubbornly high interest rates, commonly set at 19.5 per cent for premium cards and up to 28.8 per cent for retail credit cards.
The impact on the roughly 25 million Canadian customers who have credit cards is therefore somewhat muted and focused only on clearer communication, via the inclusion of a summary box in each statement that will spell out key features, including the interest rate and how long it will take to pay off the balance, if they only make the minimum required payment. Deeper impact to spending habits relies on consumers (a) understanding these notices; (b) presupposes this “new” transparency will influence behaviours and mitigate poor budgetary practices. On the basis that none of the banks actually have integrated comprehensive budget planning capabilities with payment mechanisms, such as online banking tools, it seems to us as if the impact on debt levels will be largely insignificant.
Why is this important? Regardless of the interest rate and fee cushion that will still be afforded to banks, the increasing numbers of consumers signing up for social networking sites and tools such as Mint, Wesabe etc (Help Bank Customers to Help Themselves and Their Banks) should signal to banks that: customers need/want to analyze their spending habits and managing their debt levels more effectively, before it ends up in the bank’s credit card collections center.
From a strategic planning perspective, in terms of meeting this competitive pressure, and in light of the increasing role of social networking in the industry (A Social Media Strategy for the Banking Industry) banks need to refocus their development resources on tools that (Social Banking: It’s All About the Money and Customer Focus) and (New Retail Banking Vendors Bring Social Computing to the Savings Account) help consumers better manage their financial health. With the cushion of high interest rates and fees the probability of this occurring is slight at best.
