Over the last few years, UK credit card issuers have been facing the challenge of shrinking revenue opportunities due to tighter regulations that capped overlimit fees and late payment fees. There has also been a continual reduction in interchange rates, with further imminent cuts.
Consumer and media perception that banks are “penalizing” people who are less able to afford fees may result in further reductions, or even complete removal of some charges that are based on poor payment performance.
Card issuers could make up this shortfall by raising interest rates. But many issuers appear to be considering annual card fees to recoup lost income. FICO has seen this done effectively, but there are pros and cons:
Pros of annual card fees
1) Stable annual revenue income
2) More active book due to consumers closing dormant cards to avoid fees
3) Higher chance of being front of wallet with increased customer loyalty, as less likely to swap or have multiple cards
Cons of annual card fees
1) Potential reduction in the number of cardholders (smaller pool to target), as having multiple cards and paying multiple fees will not appeal to cardholders
2) Increase in collections levels and costs due to unpaid annual fees on inactive accounts
3) Good customers penalised by having to subsidise the drop in income normally generated by riskier customers
1) When should you introduce the fee for existing customers? There is a potential to do a focused account activation campaign either ahead of a big bang implementation or linked to reissue of cards when they naturally expire. Reissue strategies could incorporate a “use it or lose it” approach to prevent charging large volumes of inactive and long-term inactive customers.
2) How will your collections strategies and process handle small fees assessed on inactive accounts? These fees are seen in the Irish market today, with the annual government card fee being applied every April. Taking the approach in point 1 may help to mitigate this.
3) Will non-rewards card Issuers have to rethink their offering in order to keep their good customers? After all, if you are going to have to pay anyway, customers may gravitate towards cards that offer something extra in return. Another approach would be to apply the fees only to rewards cards, or to assess higher fees on reward cards.
Many issuers will wait to see who takes the plunge first to gauge the reception, and to determine the fee levels that the market will bear, before they too take this step. Fair Isaac Advisors has worked with many clients in many markets that were implementing new fee policies — if you would like to speak with us, contact me at firstname.lastname@example.org.