With credit card horror stories every where and legislation trying to get passed against interest rate hikes and excessive fees, Bank of America gives us the reason why banks do all that.
With the overhaul of credit card issuers announcing rate changes, the credit card industry has been the main topics discussed around office water coolers as well as in public sector. The changes in the credit card industry were recently discussed during Bank of America's Global Town Hall on April 20th. The following is a discussion with Bank of America Global Card Services President Ric Struthers on Bank of America's credit card pricing and what the company is doing to help struggling consumers.
Today, you and several other credit card execs along with the American Bankers Association are going to a meeting at the White House to discuss the current state of the credit card industry. What do you expect?
Struthers: I'm looking forward to a meaningful dialogue about the current economic environment, credit card lending and the impact that the credit card regulations recently issued by the Federal Reserve will have on the industry and consumers.
There have been a number of headlines about credit card issuers increasing interest rates on credit cards. What is Bank of America doing?
Struthers: In the beginning of April, we notified a small portion of our customers that we are increasing rates on their accounts. Some accounts were repriced because their interest rate is currently 10% or lower, a rate significantly less that our cost to do business in the current market. Another group of accounts were repriced due to our business-as-usual process of adjusting account pricing based on periodic review of account risk. It's important to not that these two changes affected fewer than 10% of our total portfolio. Incidentally, there's a third business-as-usual strategy that we use to reprice accounts that we refer to as "trigger", which happens when an account falls past due or goes over limit more then two times in 12 months. We understand that in the current economic environment increased in credit card rates can be an emotional issue for many of our customers, including our family and friends. As Bank of America associates, it's important to keep in mind that in a given year, the vast majority of our customers experience no rate increase. For example, in 2008 more than 90% of our customers had the same or a lower rate at the end of the year than they did at the beginning of the year. In fact, during the first quarter alone, we brought down prices on 400,000 customer accounts.
It's also important to be aware that when we do need to make a pricing change, we make every effort to be as transparent and as clear as possible in our communications, making sure our customers are fully aware of the increase and the choices they have- one of which is choosing to reject the rate increase. If they choose to opt out of the increase, we have several processes that make it as convenient as possible for them to do so, including opting out by phone.
Why did you increase the pricing on accounts with rates less than 10%?
Struthers: It was a difficult decision for us. Our customers are our top priority, and we understand that many of them are under financial strain in this difficult economy. However, the credit card industry is also operating under difficult conditions that are resulting in significant increases in our costs of doing business. And, unfortunately, low credit card interest rates that were set in a better economic environment, such as rates lower than 10%, are just not sufficient to cover these rising costs. Therefore, on this small group of accounts, we increased the rate to 13-14% on average.
At the end of the day, it is our responsibility to do all we can to operate profitably so that we can help ensure the strength and stability of Bank of America, continue to lend in support of the economy, and provide the level of value and service that our customers need and expect.
Why are your costs rising?
Struthers: The credit card industry is facing a number of challenges that are leading to increased operating costs.
As you might expect, as the economy has worsened, losses have risen to historically high levels as customers have been unable to make payments on their loans. In Global Card Services, we saw $5.3 billion in losses during the first quarter of this year. That is on top of losses of $4.5 billion in the fourth quarter of 2008. Banks also are required to set aside reserves to guard against future losses. As you can imagine, that's continuing to grow into a pretty big number.
At the same time, we are preparing for significant changed in the way we do business because of the new federal regulations that will become effective in July 2010.
What are you doing to help customers in this environment?
Struthers: We are doing all we can to help as many customers as we can. In the first quarter, we modified more than 375,000 accounts across all our businesses. We expect to modify 1.5 million to 2 million accounts in 2009, compared to fewer than 1 million in 2008. We have many programs that can help customers even before they fall behind.
Unfortunately, there are some circumstances where we cannot modify an account. We make every effort to be as flexible as we can; however credit card workout programs are closely regulated by the Office of the Comptroller of the Currency, with strict rules and guidelines around how much we can modify accounts. We are constantly working with our regulators to improve and create new programs to better meet our customers' needs. In fact, we are working closely with the National Foundation for Credit Counseling in support of increased flexibility in workout programs across the industry. In addition, we provide financial support on an actual basis of more than $30 million to nonprofit credit counseling agencies that help people work their way out of financial distress.
The commitment to help out customers is consistent in our businesses around the globe. For instance, in the U.K. we recently partnered with the government and our industry to introduce a 60-day "breathing space" principle for customers who are working with a not-for-profit money advice organization. And in Canada, we regularly work with the nonprofit Canada Credit Counseling Services agencies across the country to help consumers who are experiencing financial difficulties.
Can you share your thoughts on the future of credit card business?
Struthers: Over the next few years the credit card business will undergo considerable change. The cumulative effect of regulatory by the Federal Reserve, pending legislation in both houses of Congress, shifting consumer behaviors and a deteriorating economy will alter the way banks think about consumer credit. While we are still working out all the details of how our operations will be transformed, we have some initial thoughts about what the new credit card environment will look like:
- As we are beginning to see today, banks are spending much more time assessing the risk of people they lend to and, in turn, consumers, are more thoughtful about their spending and borrowing habits.
-Credit card terms and conditions, including the costs of using credit cards, will be communicated in ways intended to make them clearer and easier to understand.
- Restrictions on our ability to change interest rates will likely result in a normalisation of credit card rates, we'll see fewer customers at very low or very high interest rates and a greater concentration of customers somewhere in the middle. In general, this likely will mean consumers will have a higher rate than they do today.
What won't change is the value of the credit card product to consumers around the world. And, at Bank of America, we are- and we plan to lead the way in- ensuring the delivery of exceptional products and services. No other financial product is a safer and more flexible payment tool, enabling customers to make a purchase today and pay it back over time as they choose.
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