Limits on issuers’ ability to manage risk represent the most substantial impact from a recent credit card regulation affecting United Kingdom card issuers and cardholders, Auriemma Consulting Group UK Ltd. concludes in a recent report. The UK Department for Business, Innovation and Skills enacted the regulation to provide consumers with more control over their credit cards.
Announced last week, the regulation includes requirements that issuers allow cardholders to pay off their highest cost of debt first and not increase credit to cardholders with financial difficulty (see story).
“Constraints on the mass market” will strongly affect risk management, Megan Bramlette, Auriemma managing associate and the report’s author, tells PaymentsSource. For example, if a consumer cannot pay his bills, UK issuers no longer will be able to re-price the account. “This means higher interest rates and fees for everyone,” she adds.
And as credit becomes more difficult to obtain, consumers will begin to switch to debit and prepaid cards at a rapid rate, while short-term lending products such as payday loans will garner mainstream interest, Bramlette says.
The credit industry, however, should be able to adapt to the changes and develop products, services and strategies reflecting the new market constraints, Bramlette says. Because of this, “issuers are going to develop products that are not going to give credit to average customers,” she says. In today’s economic climate, issuers want a ‘”sure thing,” so they “are now aiming their products at the mass-affluent community,” Bramlette says.
Stratus Rewards, for example, this summer plans to launch the invite-only Stratus Rewards Visa White Card catering to the European elite. (See story)
Another change Auriemma predicts is increased transparency of past best practices. This will include the re-introduction of charge cards, widespread annual fees, no interest-free periods and rewards issued to profitable cardholders only. Moreover, small or midsize lenders may stop issuing credit and store cards, and financial efforts focused on improving consumer financial literacy will become more mainstream.
Many systematic changes in customer service and statement language will take place, Bramlette notes. Because there are “a lot of moving parts that need to be tested, it is critical to maintain good customer service, as banks are not exactly in everyone’s good graces,” she says.
Bramlette produced the report for the UK Department for Business, Innovation and Skills and obtained the information from compiled interviews, consumer surveys and other research.
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