Tue Sep 20, 2005 4:14 PM ET; By James B. Kelleher, Reuters
MEMPHIS (Reuters) - The U.S. credit-card industry is heading into a "perfect storm" as challenges loom that could trigger a radical reshaping of the business, a group of industry heavyweights told a conference on Tuesday.
Competition from mortgage lenders, lawsuits over transaction fees, growing regulatory scrutiny about consumer disclosures and the almost universal elimination of annual fees are largely to blame for the troubles.
"We're pretty much in the middle of what might be a perfect storm, which I don't think the industry quite understands," said Duncan MacDonald, a former general counsel at Citibank Cards, who now works as an industry consultant.
"You've got consumers and merchants revolting. They're the two customers of this industry ... That's not good."
Analysts said many issuers were responding inappropriately -- fighting merchant lawsuits over so-called "interchange fees" rather than settling and trying to offset stagnant growth by putting what MacDonald characterized as "sneaky pricing" and "tripwires" into credit deals to take advantage of consumers.
"They're confronting the maturation of growth ... by adopting risky strategies," said Ken Posner, an equity analyst and managing director at Morgan Stanley. "I don't see a lot of real innovation."
Not everyone took a dour view of the industry's prospects.
MORTGAGES EMERGE AS RIVALS
Alex Hart, the former chief executive at MasterCard and Advanta
"I think we're on the verge of having a lot less to worry about," he said. But even Hart acknowledged it could take "five to seven years to clear up all the outstanding litigation."
But MacDonald said that merchant lawsuits had eliminated many companies' options, backing the industry into a corner.
He predicted "all hell would break loose" if the companies tried to make up for the lost interchange revenue by raising fees on consumers, Even without the legal challenges, the industry would be facing major problems.
Credit-card use has exploded in the last decade but many consumers don't carry balances from one month to another. That's reduced interest income from receivables. In addition, most credit-card companies -- with the exception of American Express -- have all but eliminated annual fees, another once-reliable source of revenue.
"I think the reality is that this industry has largely commodified," said Posner. "And if you're going to follow a commodity strategy, you better focus on costs."
But the credit-card companies have raised, not lowered, average rates. That's made it easier for mortgage companies to "encroach" on their turf, according to Posner, helping drive the growth rate for receivables to near zero. The net effect? A product that was conceived as a lending vehicle isn't being used that way nearly enough to sustain the business model built upon it.
"At the end of the day, mortgages are just a much cheaper as a way for consumers to borrow . . . I think this industry is taking a permanent bite out of the growth prospects, at least on the receivables side, of the card industry," said Posner.