The Era of Responsible Credit Card Borrowing Begins Today
Chase Blueprint brings new transparency and consumer control to credit cards
Although they often try to refute it, for more than 25 years US credit card issuers have marched steadfastly in the direction of making it harder and harder for their consumers to understand and control the terms of their credit relationships. While the freedom and flexibility that credit cards bring consumers is to be celebrated, it has been clear for some time that some card features had a toxic effect on many consumers, particularly when combined with complex contractual terms and other practices that it made woefully difficult for ordinary citizens to understand how much they were actually borrowing, at what interest rate, and how long it would actually take them to repay the debt.
Putting aside the debate on the need for stepped-up regulation and whether consumers share responsibility for many of the problems that have ensued, this has simply been bad business. For issuers, it may have been great while it lasted – but “the times, they are a changin’!”
The innovations Chase is introducing will likely usher in a new period of “responsible borrowing,” where consumers are evolving from a mindset of “revolve everything and make the minimum payment” to one where the convenience of card payment for everyday spending is logically segregated from the occasional need to finance purchases of more expensive goods and services.
Today, Chase is introducing a new set of features under the “Blueprint” banner designed to create a far more transparent and controllable relationship with its 20 million credit card customers. Through the Chase.com website and its call centers, cardholders will be able to access four important new features that Chase calls: (1) Full Pay, (2) Split, (3) Finish It, and (4) Track It. Lets take a look at what each one offers.
Full Pay allows cardholders to designate certain categories of card spending that they wish to repay in full each month and automatically makes these purchases part of the minimum balance to be paid each month. It seems likely that many consumers would opt for full payment of everyday purchases (groceries, gasoline) and recurring expenditures (phone bills, utilities, subscriptions), while reserving their revolving credit facilities for major purchases. This capability not only facilitates more prudent financial management by consumers but might also bolster the credit card’s faltering position as a convenient payment tool.
I am amazed when otherwise intelligent card payment professionals still tell me they don’t understand the overwhelming popularity of debit. “Why would someone choose to pay now when they could pay in 45 days?” they will typically inquire.
Well, the inability of credit card executives to answer their own question has helped shift dramatic amounts of spending from credit to debit cards, dragging millions of dollars in interchange revenue along with it. At last, with Full Pay, Chase is telling its customers that just because they are revolving a balance, they don’t automatically have to incur finance charges from day one on subsequent purchases when paying with their credit cards. Simple but important.
Split is the logical counterpart to Full Pay, allowing the consumer to designate a certain portion of his balance (presumably those corresponding to a durable purchase like a major household appliance or a vacation bill) and arrange a set of structured payments to repay it. The consumer can either designate a certain specific monthly payment or a period of time over which he wants to repay the balance. Chase.com does the calculations and highlights the payment on future statements and online.
In effect, Chase is taking a piece of the credit card’s revolving balance and converting it to what used to be called an “installment loan” (an old and completely under-nourished banking product that was shunted aside years ago in favor of the greater flexibility – and profitability — of revolving credit cards). No lender would ever grant you a car loan that revolved forever with no repayment schedule (and where minimum monthly payments barely contributed to principal repayment), but credit card issuers have done exactly that for years on all kinds of other large purchases (plasma TVs, airline tickets, medical bills, etc.).
A similar installment payment feature was introduced some years ago by Bank of Ireland in the MasterCard product it co-brands with the U.K. Post. I’m told (anecdotally) that uptake of that product has not been significant, perhaps because of limited marketing efforts. Hopefully Chase will put greater focus on its version of this very sensible feature. I also note that the UK Post card offers a greatly reduced interest rate on the amortizing portion of the credit facility, something Chase might also offer given that credit losses should be far lower on this portion of the consumer’s credit line.
Finish It is a feature very similar to Split. It allows the consumer to designate all or a portion of an existing revolving balance for movement to a structured repayment schedule that allows the consumer to determine when they will be out of debt. Easy, simple, transparent, consumer-friendly. Enough said.
Track It is Chase’s term for the set of enhanced statements and website reporting tools designed to help consumers understand their historical spending patterns and where they stand against any structured repayment plans they have established. We have certainly noted with interest the growing popularity of online financial management services (Mint.com, Wesabe, etc.), which are in part manifestations of the “tricks and traps” mentality of some card issuers. Maybe Chase’s new Track It feature and, indeed, Blueprint overall tells us that the folks up at headquarters are beginning to get the message about the value of online financial management.
There‘s a high likelihood that other credit card issuers will take note of these features and feel some competitive pressure to provide similar features, if not more innovative ones to demonstrate their sensitivity to some pretty clear customer needs.
Debit card issuers (including those in the same bank!) should also be pondering their response. Selective credit extension – particularly in the installment loan category – seems like an obvious early opportunity.
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Chase says that credit card products have not substantially changed in 20 years. Perhaps that is not entirely fair or accurate, and it certainly overlooks such dubious innovations as double-cycle billing and universal default. However, I was struck in the past week by the contrast between the relatively slow rate of innovation in the credit card business and the relentless schedule of major upgrades maintained by Apple across its product lines.
As I sit here today, I have every confidence that next summer Apple will release a new iPhone that significantly outperforms the one that I just bought six weeks ago. I’ll likely be delighted to upgrade to it! On the other hand, I don’t even want to think about the sort of “upgrades” my credit card issuers will be sending me over the next few months.
Wouldn’t it great if we could look back in a few years on Chase’s Blueprint introduction as the start of a new era during which card products actually got better every year?