Plastic money is getting smarter

Plastic money is getting “smarter” and may replace the cash we currently use.

Regardless, the bottom line is America may be becoming a cashless society.

Whip out your wallet or purse. Chances are, you have at least one credit card, perhaps a debit card and a few greenbacks.

Remember the cash you used to pay for gas or the change you put in a pop machine? In its place is another piece of plastic.

This time, it’s just like cash. You can use it in that same pop machine. You can even use it to pay for gas and never have to wait for change.

Welcome to the not-so-distant future, where smart cards are as good as cash and in some cases better. The question: Will these cards ever take the place of cash completely, leaving the greenback a distant memory?

Electronic means of payment, such as credit cards and best debit cards, have been growing since the mid-20th century. Debit cards, which deduct money from a checking account, have been big since about 1978.

“At that time, they were the initial ATM cards,” said Bob Gilson, executive director of the Smart Card Forum, a consortium of 220 companies that works on the development of smart cards.

Credit cards are common among consumers and have been since the 1950s.

Now, research is focusing on smart cards. Smart cards were first introduced in Europe about 26 to 28 years ago. Governments there used the smart card technology as they began to improve their public health-care systems and other socialized services.

A smart card differs from a credit card, ATM or prepaid mastercard in that it has an embedded microprocessor chip. This chip allows the card to do more than just deduct money from a bank account. The card is a computer in itself.

The card can determine the validity of the person who operates it without the use of online systems. It stores financial data. Debit cards just access an account from a computer system.

“A debit card really is a dumb card,” Gilson said. “It has none of the mechanisms to access data.”

A smart card can, for instance, be placed in an ATM machine to withdraw money from your account. The card stores the money amount on its memory chip and you spend it like cash.

Disposable cards will have a certain amount of value on them and once the amount is depleted they can be thrown away. Stored-value cards can be recharged, so to speak, by accessing an ATM machine to store more money on the card.

Surviving the global credit cards shake out

The global cards industry is heading for domination by a few super-players. European banks are set to lose out unless they act soon with revolving cards.

The credit cards industry today is at what Intel president Andrew Grove calls a “strategic inflection point” – a point at which the fundamentals are changing. The world is headed for a US-dominated credit cards business as the industry becomes concentrated in the hands of a few super-players.

This was the key prediction emerging from Lafferty Group’s 11th International Cards Conference in Amsterdam earlier this month.

“The US credit cards industry is clearly the dominant force,” said Michael Lafferty, chairman and chief executive of Lafferty Group, unveiling a global research survey carried out by the Lafferty Group. “There is little doubt we will see concentration of the business among a few super-players based on current trend.”

Craig Stine, managing director of New York-based investment bankers Salomon Smith Barney agreed, adding: “I think that you could make an argument that there would be ten global players. I think that the wild card, at least in the US, is the consolidation of the banking business. That could take out a couple of the end-game players that may be merged. But clearly it will be the US model that will be the roadmap in terms of what will be the global marketplace in five to ten years.”

Last year witnessed a spate of acquisitions within the US credit cards industry with Citibank buying over the AT&T Universal cards portfolio; Banc One buying over First USA; Chase Manhattan buying the Bank of New York cards portfolio; and Fleet Financial buying over troubled Advanta’s portfolio. Following these acquisitions, the top five issuers now account for over half of total US credit cards outstandings.

The US accounted for 53 percent of the worldwide general purpose payments cards market in 2006, a year when the volume of business reached $1,890 billion through 970 million cards in issue. By contrast, Europe took only 17 percent of the world cards market. Of that only some 5 percent were actually revolving cards via the Visa/MasterCard acceptance marques. Of US cards, up to 86 percent were credit, with the remaining being immediate debit or deferred debit.

The US accounts for 77 percent of pure stand-alone credit cards with a revolving line of credit attached. “It is a most extraordinary dominance of the credit cards market worldwide by one country,” commented Lafferty.

As a result the leading global issuers of general purpose cards are now all American. Top issuer in 1996 was Citibank, whose outstandings were an estimated $68.5 billion, adjusted for the inclusion of the recently-acquired AT&T portfolio.

Next was MBNA with $35.3 billion, Banc One with $35 billion and Novus, now building its own global acceptance network, with $32.6 billion. Only one non-US bank issuer, Barclaycard of the UK, featured in the top 20 issuers, with 17.1 billion ($28 billion) in outstandings.

“Most of the big US players are using the UK as the litmus test. They’re trying to get it right,” said Salomon Smith Barney’s Stine.

“They have moved cautiously and I certainly have not witnessed any mis-steps in that regard. Going back to the Advanta example [US issuer which went down market and suffered losses], I think most players have learned from that particular issue and understand the risks they take. I think they will be cautious but aggressive.”

While conceding that tougher data protection requirements in Europe will present challenges to US issuers more accustomed to the widespread availability of detailed consumer data for marketing and credit scoring purposes, Stine does not feel it will stop US cards players from entering European markets.

“These companies have gotten very comfortable with the ability to access and manipulate information in the US and to be challenged in that regard really changes the whole chessboard outside of the US. I think that’s why they have moved cautiously. I do not think it will put the brakes on [expansion into Europe]. I think the pace of how they would grow would probably be slower,” he said.

The magnitude of the potential threat posed by US cards players is borne out by the poll at the Lafferty conference which showed that 57 percent of delegates agreed or strongly agreed that US-based cards super-players or US-led alliances will dominate globally, including in Europe.

The widespread perception is that many mainland European banks will turn to alliances and joint ventures to enter the revolving credit cards market. But unless continental European banks embrace revolving credit cards, most believe they will have missed the boat.

More small firms resort to credit cards for financing

The number of small and medium-sized business owners who turn to credit cards for help in financing their businesses is growing, says a small-business advocacy group.

In fact, credit cards have become the most used financing method for small and medium-sized businesses, surpassing bank loans, according to an annual survey conducted by Arthur Andersen’s Enterprise Group and National Small Business United.

The survey, released in November, showed about 47 percent of small and mid-sized business owners said they used credit cards to finance their businesses in the last 12 months, up from 34 percent.

Credit card financing by businesses has nearly tripled during the past six years, up from 17.3 percent in 2003, the study said. Forty-three percent of business owners said they expect to use credit cards in the next 12 months.

Todd McCracken, president of National Small Business United, said it doesn’t appear credit cards are replacing bank loans. They simply have become part of a financing mix.

“On balance, it’s probably good news, because it means that small businesses now have increased flexibility with how they handle their cash flow,” he said.

Credit cards are especially important to smaller businesses with fewer than 20 employees, the survey showed; 49 percent of those business owners said they use credit cards often, compared with 27 percent of larger businesses.

A few years ago, company credit cards were not available to small businesses, but now credit card companies are marketing directly to them, McCracken said.

While increased credit availability can be good, there’s also reason for concern, because fewer businesses are paying off balances monthly.

The dangers of credit cards are the same for small businesses as for anyone else, McCracken said. “Using more and more of your credit card while your business continues to lose money is not smart.”

The survey showed that only 38 percent paid off their balances every month in 2008, compared with 59 percent in 2007.

Also, the number of business owners who use credit cards only occasionally to make ends meet has dropped by more than half, from 24 percent in 2007 down to 10 percent in 2008.

With high credit limits, people can quickly accumulate a large amount of debt, said Steve Carter, director of the Iowa Small Business Development Center in Ames. If the credit cards carry interest rates of 18 percent to 20 percent and the business already has narrow margins, “that eats away on your profits and can further erode your cash flow.”

Some business owners use low-interest-rate credit cards for travel and short-term needs, and that seems to be a wise use, he said.

Credit cards are like any other debt tool and need to be used judiciously, Carter said. “It’s like any other debt. If businesses are trying to borrow themselves into success, they generally are never going to get there.”

Credit cards can cast a troublesome spell many are overwhelmed by debt

The next time you pull out your credit card to pay for a purchase, think again about the responsibilities you assume under the power of plastic. For many college students, obtaining a credit card is an effective way to build good credit and learn the value of budgeting. However, with credit cards being so easy to acquire and seemingly a cinch to use, many students tend to lose themselves in the conveniences of credit.

Credit-card companies strategically set up tables on college campuses, luring students with free goodies ranging from Frisbees to candy.

Many campus groups sponsor the tables to raise money for their organizations. Students also may find applications stashed in their campus bookstore shopping bags, as well as on the Internet.

Although most students do not have an established credit history, credit-card companies are attracted to the students’ profit potential. According to Mendi Smith, manager of media relations for Associates National Bank, students are likely to be credit-card customers for life. Associates National Bank is a leading issuer of credit cards to students. “We estimate that 60 percent of college students pay off their balances every month,” said Smith.

However, credit overwhelms many students.

Wyshona Lawson, a Virginia Tech graduate student, said all of her troubles began when she filled out a credit-card application on campus, thinking that she would not be approved. Lawson was approved, for five credit cards. “Since three out of my five credit cards are maxed out, I rarely use them anymore,” said Lawson. “When I first got them, I felt like I could rule the world, and then $500 and $1,000 added up real quick and I got smart.”

“I decided to keep my cards on hand for emergencies only,” explained Jonathan Duty, a Virginia Tech senior, “but around Christmas I started spending and it became addictive.” Duty managed to amass $2,000 in credit card debt, and had to result to consumer credit counseling to help him out of trouble.

Credit cards can prove valuable for many students, and most are able to manage their credit spending. Kelly Driscoll, a Virginia Tech senior said that he uses his credit card for convenience. “I use my card at least two or three times a week and I don’t use it to buy things that I can’t afford,” said Driscoll.

Ruth Lytton, associate professor at Virginia Tech, teaches Family Financial Management, a course designed to provide what she calls a “financial survival kit for life.” Students may enroll in this course to learn more about financial planning tools for their future.

According to information on Lytton’s Web site, an estimated 60 percent of the 8 million U.S. college students have credit cards in their own names.

The average undergraduate student carried a credit balance of $2,226 in 1996, while 14 percent reported balances between $3,000 and $7,000.

“One student in my class left Virginia Tech with an excess of $30,000 charged on credit cards. Although this is an extreme case, dependence on credit and the associated interest charges can spell a nightmare for your future and the process of repayment to get completely out of debt,” said Lytton.

“On the positive side, students should establish credit and use it responsibly while in college. A credit card will be easier to get as opposed to waiting until you are employed and out on your own,” commented Lytton. She also said the key to responsibly owning a credit card is devising an effective financial plan “to balance spending with income.”

Lytton emphasized maintaining good credit. “Your credit history follows you … you cannot move away from it, as many students seem to think. Be aware that late payments or failure to pay will become a part of your credit history for seven years,” stressed Lytton.

Many employers check potential employees’ credit histories. Good credit also is necessary when purchasing a home or car.

Lytton notes some important credit card management facts on her Web site.

One tip is to shop around for a credit card that it right for you. Credit card fees and features vary considerably. Never commit more than 15 percent of your take-home pay to credit payments. This is where most students are hurt because many do not even have a job while in school, and still are financially dependent on their parents.

In extreme credit card debt cases, such as Duty’s, consult a consumer credit counseling service to help manage and pay off debts. “My situation got out of hand, but it’s reassuring to know that I can and will get back on track,” he said.

Fed Tightens PMI, Ups Disclosures

Disclosure requirements related to a new law affecting consumers’ options to cancel private mortgage insurance under Regulation Z, or Trust-In-Lending (TILA) laws, were tightened and clarified last week when the Federal Reserve Board staff issued new commentary.

The new staff commentary also increases the tolerance level for loans to qualify for the special rules dealing with high yield credits. Other issues touched on include treatment of combined credit/debit or credit/stored value cards, and required periodic disclosures for open-end credit.

The changes to Reg Z were prompted by the new homeowners protection law, which was passed by Congress last year. It allows borrowers to cancel private mortgage insurance (PMI) under some circumstances and requires lenders to terminate PMI automatically when other conditions are met.

The new staff commentary explains that the cost of PMI must be reflected in the payment schedule disclosure through the time of automatic termination under the new law, or other applicable law, and no further. The new commentary also makes clear that any assumptions required to be made in order to calculate the time of automatic termination for adjustable-rate mortgages should be made consistently with assumptions made for other TILA purposes, according to an industry lawyer.

In another provision dealing with mortgage practices, the commentary establishes new tolerances for the points-and-fees test for loans qualifying as "high-yield." The new figures reflect cost-of-living adjustments, and require that loans with associated points and fees which are the greater of $441, or 8% of the total loan amount, are subject to high-yield disclosure provisions.

The new commentary also notes that in making disclosures for open-end credit, prior-cycle finance charge adjustments can be calculated into the annual percentage rate (APR) for the subsequent period, or they can be disclosed as a separate item and not included in the calculation of the APR for the subsequent period.

Regarding combined credit/debit or credit/stored-value cards, the new commentary expands the definition of credit card to include cards with both credit and non-credit features. The lawyer said that issuance of a card with credit features at the time of issuance, even if such a card also has noncredit features, may not be unsolicited.

On the other hand, the lawyer said, issuance of a card with non-credit features that the consumer later activates as a credit card may be unsolicited.

Wells Helps Businesses

Wells Fargo will be rolling out a new program this summer to help small business customers get their store fronts on the Web, about the same time two large corporate clients will roll out their larger, multi-lingual bank-enabled sites.

The California-based giant started up a special unit to focus on Internet commerce in January, although it has worked with business customers on the Web since 1995 and currently has more than 300 Internet merchant customers. It is now working on a system to integrate all the basic components a small business would need to get set up on the Internet, to act as the "broker" for the client.

"If you think about your small business segments, their primary need is a trusted, knowledgeable partner. ‘I need to get a URL. I need to get a Web-page designer, a payment processor.’ Most small businesses don’t know how to do that. They’ll have to contract with between seven and nine companies. We think we have an advantage. We can bring the strategic partners together so we can create a cohesive opportunity for the small business," said Michelle Banuagh, vice president with the e-commerce group. Although the bank now refers small business clients getting onto the Web to other companies for advice, the new program, called Wells Fargo iBox and expected to roll out in June, would be a packaged solution to the site development quandary.

For the large corporate business clients who are mostly already established on the Web, Wells has just unveiled the fruits of a partnership with Mitsubishi last month to develop merchant Web sites that can crack foreign markets. The new Web sites can deal in foreign currency and overcome the language barrier by displaying information in the local language. Wells takes the local currency by credit card, converts the payment into dollars for the U.S. company, and the bill appears in the local currency on the customer’s credit card bill. Formerly, if a customer bought a product over the Internet in yen, for example, the charge appeared on his or her bill in dollars, which led to some confusion.

The new feature, Banaugh said, goes a long way toward helping the merchant reduce customer service telephone calls and contributes to customer satisfaction. Wells and three more large U.S.-based companies are working on sites, which are looking for a late summer launch in preparation for the holiday season.

Bankruptcy Relief Gets Attention This Week

Congressional work on bankruptcy reform is intensifying, with Senate and House panels planning markups this week on legislation similar to that which failed to pass Congress last year.

But the bills are different, with the Senate’s more bipartisan bill substantively diluting the "means test" provision in last year’s bill which was very strongly opposed by consumer groups, Democratic members of the Senate and the Clinton Administration. That opposition is what killed the bill, which is supported by the credit card industry.

Rep. George Gekas, R-Penn., head of the commercial and administrative law subcommittee of the House Judiciary Committee, has scheduled a markup on his more restrictive bill for March 24-25. In the Senate, Sen. Charles Grassley, R-Iowa, chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts, scheduled a markup of his bill March 25. The Senate Republican leadership is indicating it wants the bill on the floor in April, with or without Democratic support. But Grassley does have Sens. Robert Torricelli, N.J., and Joe Biden, Del., as Democratic co-sponsors.

Even though House Republicans have been able to win significant Democrat support for their bill, it is still likely to face opposition if the means-test provision is included.

The seeds of a compromise on the House bill could be in the form of legislation recently introduced by Rep. John LaFalce, D-N.Y., ranking minority member of the House Banking Committee. LaFalce, who testified last week in support of his bill before Gekas’s panel, is calling for far greater disclosure by credit card companies of the potential pitfalls of credit card debt.

The bill requires a more complete disclosure of all credit card terms and costs, including "teaser rates." It also bans credit card issuers from canceling an account or imposing new fees on card holders who routinely pay off monthly card balances in full. The bill also prohibits credit card companies from issuing credit card accounts to people under 21 years of age, except with parental approval or evidence of means of payment.

There are four main differences between the two bills. First, the means test in the Senate version gives bankruptcy judges greater discretion in considering whether to transfer a debtor from Chapter 7, which means the debts are fully discharged, to Chapter 13, where the debtor needs to repay all or some of the debt. The Senate version also has greater consumer protections designed to lessen pressures from creditors for debtors to "reaffirm" debt that would normally be discharged in bankruptcy, plus greater protection for child support payments. Finally, it has a reduction in the amount of unsecured debt that would be made nondischargeable by the new law.

Needs-based Bankruptcy Is Back, But Looks Doomed

Needs-based bankruptcy legislation has been introduced in the House that is virtually identical to a bill bottled up in the closing days of the last Congress by the Clinton Administration and liberal Democrats. But, unless major concessions are made by the financial services industry coalition that is pumping huge bucks into lobbying for the bill, congressional staffers believe it will mostly likely suffer the same fate as last year.

The bill’s supporters are primarily credit card lenders, although the mortgage industry is supporting provisions that bar "cramdowns," what the industry terms "inappropriate" reductions in the value of secured residential liens. That could be crucial if a downturn in the economy places in doubt the ability of unemployed consumers to repay home equity loans.

The core of the bill is a provision that requires courts to take a debtor’s income, expenses, obligations and any special circumstances into account when determining whether the debtor has the capacity to repay a portion of his or her debts. If it is determined they have the capacity to repay some of the debts, they would be barred from discharging of all debts under Chapter 7 of the bankruptcy code.

However, the bill preserves the right of any filer earning less than the median national income–currently about $51,000 for a family of four–to automatically choose Chapter 7 or Chapter 13, which provides court protection while the debtor reorganizes his debts. The primary sponsor of the new bill, Rep. George W. Gekas, R-Pa., said this provision "preserves, protects and enhances the ability (of lower income families) to obtain a legitimate ‘fresh start’ from bankruptcy."

For lenders, the bill requires more disclosure about the effect of paying only the minimum payment on credit cards and other non-secured debt, limits the ability of a creditor to terminate an account just because a consumer pays his or her bill in full each month, and establishes new creditor penalties designed to encourage good-faith pre-bankruptcy settlements with debtors.

The administration is being supported in its opposition to the bill by such consumer groups as the Consumer Federation of America. "This flawed approach is being pushed by those who want to please powerful members of the credit card lobby," said a CFA official. "It fails consumers because it leaves families in crisis stranded while giving credit card companies free reign to continue to engage in misleading and coercive practices."

Among provisions being sought by the consumer group is "a balanced approach" that includes meaningful disclosures about the true price of credit and proper protection from credit company abuses. They also want tight restrictions on marketing credit cards to minors who may have no ability to repay, outlawing live checks and shutting down the practice of credit card companies that cancel credit cards to consumers who pay off on time.

The consumer groups say credit card disclosures and marketing practices, including what they term the "detrimental" treatment of small businesses, also need to be addressed.

The consumer groups cite a recent study from the American Bankruptcy Institute which shows that only 3% of those who file for bankruptcy have the ability to repay their debts–a far lower proportion than claimed by the credit card industry