It is a noble goal to throw a flag on the field about credit card comparison sites, a topic Javelin covered last year, in an Impact Noted titled, Third-Party Comparison Websites: A Tried-and-True Method for Digital Marketing. In short, the process works for credit card issuers to add application volume, but sometimes the consumer-facing scoring can be less than optimal. Credit card issuers cannot ignore the trend because these sites have a broad reach. We found these sites are used by 16% of the population.
The revenue generated by the eight firms we looked at exceeded $4 billion and we found that the largest provider had more than 44 million monthly active users. The smallest firm we looked at had an estimated one million monthly users.
What We Like and Don’t Like About Credit Card Aggregator Sites
The concept of an independent source to grade credit card offerings sounds good on paper, but when firms generate revenue from sourcing accounts, the sales-bounty offered can vary among issuers. The bounty is driven by the revenue derived from the credit card account, fees generated, other business needs.
Another question is on pricing itself. Would the consumer receive the same pricing they would have received if they went directly to the lender? As a result, the integrity of the account selection process is subject to bias. As we see it, that is akin to the fox watching the hen house.
More importantly, from the credit card issuer perspective, the introduction of a broker creates an unnecessary alliance that can weaken the bank marketing mission. We’ve seen this hundreds of times in retail banking, where credit unions and community banks have indirect lending programs. The process is flawed. Instead of having loan officers knocking on local business doors, the indirect lending process can source new loans that feed the financial institution’s revenue line, but for a firm based in Sioux City, Iowa, the loan may come from a consumer in Tucson, Arizona. The potential of a future relationship is limited. The FI books a loan, but the borrower lives far away, or does not meet the mission of the lender. Community bankers should be out on the streets meeting prospective clients, and credit unions need to build their membership base. Don’t be lazy—serve the market.
Rankings Might Help Consumers, if CFPB Can Harness the Data
Javelin understands the complexity of harnessing the data, which is what Javelin Card Bench does for top tier users. But the question is whether the CFPB tool will be relevant to consumers. We will watch the developments and cheer them on. Will they be able to rank the benefits of fee-based rewards-rich card to the net customer impact? How will the ranking affect users when a small community bank might offer a low rate, but then only open a card with a small credit line?
The objective remains noble, although the execution may be bumpy. Where we’d like to see the process go is to require issuers to show a distribution curve on credit card rates. For instance, if a tiered rate is presented at 19.99% to 32.99%, how does underwriting allocate those rates? Are there few with the rate at 19.99%, and many at the 32.99% range, for example? That is certainly within the CFPB remit. And how do FICO scores look a year or two into the cardholder relationship? Also, what value do cardholders derive when comparing a risk-tolerant issuer offering a $10,000 credit line versus one offering $1,000?
Furthermore, why not include every issuer? Rules on stress testing apply only to top tier banks, but why not extend this to all financial institutions? These days, liquidity poses a concern in the mid-banking market. Additionally, imposing Exempt and Covered transaction limits on $10 billion in asset banks raises questions. Does it really help smaller debit issuers to outprice smaller banks?
What Worries Us About the CFPB Approach
While it is CFPB’s prerogative to address the pricing model of credit cards, we worry about the long-term potential of smaller issuers. The performance gap between large and small issuers is pronounced. While CFPB focuses on the nuances of consumers and lenders, the fact of the matter is that smaller issuer are undergoing a pronounced performance issue with their credit quality and charge-offs.
Forget about interest rates for a moment. Look at the problem from the angle of CFPB’s regulatory brethren who focus on safety and soundness. As recently noted in PaymentsJournal, nearly one out of every ten dollars that small credit card issuers lend ends up in charge-off. We said:
- The great divide between the top 100 credit card and smaller issuers hit a milestone, based on information published by the Federal Reserve. In Q4 2023, credit card issuers not among the top 100 banks rose to 9.50%, the third-highest level reported in the Federal Reserve’s tracking history. The extraordinary loss rate has been on the rise since Q3 2021.
- Larger banks also experienced deterioration, but to a lesser extent. At top 100 banks, the charge-off rate rose to 3.96%. This represents more than double the low metric reported for larger banks in Q1 2022, which was 1.59%.
In short, knowing which card is best from a pricing perspective is one thing, but if the lender does not offer a sufficient line, or the credit card business loses money, how does that figure in?
Javelin Card Bench Serves Top Tier Lenders
Javelin Card Bench takes a practical, lender view of the market. It drills down which top issuer is doing what, and the moment a rate change occurs, Card Bench triggers an update. If Bank X does something, Card Bench pushes out a flash report to the Card Bench subscriber. In 2023, Card Bench identified 1,778 changes on 210 cards issued by the top 12 card issuing banks. Card Bench is a professional tool that has industrial strength content on credit card pricing, and not a consumer tool. Something Card Bench has that the CFPB will not likely offer is a Business Intelligence engine to analyze the data.
For the consumer, we say give the CFPB process a shot. You can be certain I will try it. But for top issuers to build their terms and conditions from, look at Javelin Card Bench.
