Credit Card Portfolios: More Pressure, Less Profitability.

Graph_debit_credit_heqPeople have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

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Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

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Low Value Payments & Stored Value Cards

In the coming year, low-value payments and prepaid cards will be increasingly mentioned in the same breath, especially in conjunction with off-line, contactless methods, says Gwenn Bezard, partner in Aite Group.

Pilots, and even some deployments of contactless payment cards, will be making a significant appearance, if only because banks are pushing them. The main sticking point from the merchant perspective, Bezard says, will be the cost of interchange, but he expects some banks to offer breaks on fees, if only to give the venue a running start. He is optimistic that big merchants will follow Starbucks’ model and offer rechargeable, merchant-specific stored-value cards as a means of gaining market share and promoting customer loyalty.

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