(London): The FCA is conducting research on consumer repayment behaviour to alleviate persistent debt in anticipation of a new package of remedies. The additional research follows the Credit Card Market Study Final Findings released in July.

Everything from behavioural cues to statement presentation could potentially influence payment behaviour, an FCA representative said during a Q&A session at Auriemma’s Card Finance Roundtable in October. While at the meeting of card issuers, the regulator detailed some of the hypotheses it is testing, including how different consumer segments react to behavioural nudges around suggested repayment amounts, the impact of minimum payment “anchoring,” and how the presentation of amortisation can stimulate repayment habits.

Six months of data will be used in the analysis to assess the study’s impact on consumer behaviour and monitor for unintended consequences.

The FCA also detailed an additional study in collaboration with The UK Cards Association, focussed on further conceptualising early intervention and establishing a set of escalation tools firms will follow to encourage consumers out of persistent debt.

“The FCA has acknowledged that behavioural nudges may not work for all customers, as some may be in financial difficulty,” said Matt Bethell, Senior Associate of Auriemma’s UK Industry Roundtables. “The output of these additional studies will be remedies that incentivise firms to escalate intervention around persistent debt, without damaging customer service.”

The follow-up studies directly respond to some of the FCA’s more significant conclusions from the July study, including the identification of two consumer groups requiring attention:  those carrying debt for longer than three years (most likely due to habitual minimum payments) and those moving rapidly from acquisition to problem debt within one year. To identify these groups, the FCA requested significant data sets from issuers and ran analysis across the product lifecycle. The FCA compared the returns of credit card products for both low- and high-risk consumer segments and found that, between 2010 and 2014, returns were typically six percentage points greater on high-risk segment products. One quarter of accounts taken out in 2013 by consumers within the high-risk segment were in severe or serious arrears by 2014.

“While the FCA concluded that the market is working well for the majority of consumers, and that product cross-subsidisation was not materially impacting competition, it also believes firms have fewer incentives to address consumers with persistent levels of debt and should be intervening earlier,” Bethell said.

While the full implications of the results of these studies are not yet known, issuers are anticipating changes to their portfolio economics and, potentially, value propositions. These developments will be key agenda items at the Card Finance Roundtable in the year ahead.

About Auriemma Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, please contact Matt Bethell at +44 (0) 207 629 0075.

(London):  Supranational regulations such as the European Payment Services Directive 2 (PSD2) will burden credit card portfolio profitability and create new risks and opportunities, Auriemma Group said today.

The impact of PSD2 on credit cards and issuers more broadly was at the forefront of the agenda at Auriemma’s first UK Card Finance Roundtable meeting of 2016. The executive group, which convenes Finance Directors, CFOs, & SVPs of Finance and Accounting for leading issuers, meets regularly to discuss key financial management and compliance-related topics. The wide reaching implications of the directive ensures it features across all of Auriemma’s UK roundtables, from our UK Collections and Recoveries Roundtable to UK Customer Service, and is also a focus of discussion at our Fraud Operations Roundtable next month.

PSD2 is set to be one of the most disruptive payment directives ever implemented in the UK, when it is adopted by member states in 2018. While the first iteration of PSD in 2007 aimed to make payments simpler and more efficient across Europe through the creation of the Single Euro Payments Area (SEPA), the implications of PSD2 are far more potent for issuers and payment providers more broadly.

PSD2 will open the payments infrastructure and allow access to consumer account information to market players through the use of Application Programming Interface (API). By facilitating this direct access, API will establish two new roles in the EU payment landscape: Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).

“Opening the payment landscape presents a unique set of challenges for issuers and card schemes, while presenting retailers and information aggregators such as comparison websites with previously inaccessible data,” said Carina Da Cruz, Director of UK Industry Roundtables at Auriemma.

Practically speaking, a PISP will have the right to initiate payments on behalf of the consumer by establishing a direct connection with the consumer’s bank upon authentication. Consumers will grant a PISP, such as an online retailer, permission to perform a payment transaction directly, thus bypassing multiple traditional payment participants including, most obviously, the merchant acquirer and card scheme. Significantly, this relationship will stay active to facilitate future payments until the consumer removes permission.

Second, AISPs will for the first time provide consumers with an aggregate view of their financial situation by combining multi-institution account information into a single portal. AISPs will have a direct connection with each financial institution and aggregate this information through a single authentication portal. More significantly, with this information AISPs will have the ability to cross-sell consumers more relevant, tailored propositions based on usage data.

The introduction of new players with direct access to consumer data will undoubtedly present significant challenges to issuers by way of lost revenue and increased competition. However, there are significant opportunities for issuers; members of Auriemma’s UK Card Collections and Recoveries Roundtable meeting in February discussed the challenges of obtaining reliable consumer financial information to complete accurate affordability assessments. API could allow issuers to assess debt affordability to a previously unattainable level of accuracy.

“API opens up a host of new opportunities to produce better customer outcomes, and issuers should rightfully be asking the European Commission for greater clarity regarding their ability to access cross institution account information to facilitate this,” said Da Cruz.

At the Auriemma UK Card Fraud Operations Roundtable in April, members will discuss the technical details of implementing new authentication processes mandated by PSD2. Opening the payment landscape to new players will require next generation multi-factor authentication technology to ensure consumers are protected and liability is shared fairly.

“PSD2 will remain front of mind for members across all of our UK roundtables as adoption looms,” said Da Cruz.  “Our model provides the ideal opportunity for market players to discuss the technical detail of the directive and assess the impact on individual portfolios.”

About Auriemma Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.  For more information, please contact Tom LaMagna at +44 (0) 207 629 0075.

Ever since former Federal Reserve Chairman Ben Bernanke took extraordinary measures to resuscitate the economy, the capital markets have been awaiting a return to “normalcy.” It’s been a long wait.

As the markets anticipate the September FOMC meeting, everyone is wondering whether Janet Yellen will continue the current Fed Funds interest rate stance or catalyze a long- awaited interest rate increase cycle.  Either move would be controversial.

Financial luminaries such as former Treasury Secretary Larry Summers and New York Fed President William Dudley have strongly urged the Fed to hold off on increasing rates, at least for the September meeting if not for the remainder of 2015, fearing that a rate increase may cause an economic contraction.  Yet the strengthening US economy, as well as some other global factors, may argue for commencing the long delayed rate increase.

With its historic mandate, the Fed must balance the twin objectives of “full employment” as well as “price stability.”  Since the end of the last recession, the Fed has been continually seeking to stimulate economic growth while keeping to its goal of a 2% inflation rate.  With inflation well below its target, and only limited signs of pressure on wage growth, the Fed certainly has had plenty of leeway to continue its historic monetary accommodation.

In addition to the tepid economic expansion in the US, the Fed board members are also weighing the impact of other external events in their rate deliberations.  The recent devaluation of the Chinese currency, as well as the massive correction in the Chinese stock market, may further support a delay in the increase of the Fed Funds rate.  While the US economy may not have to worry about a “contagion” effect from China (equity volatility notwithstanding), a slowing Chinese economy further reduces the demand for global energy.  With oil already trading at much lower levels, a significant further reduction in demand will cause even further price softening.  This reduces inflationary pressure, giving the Fed additional latitude to forbear a rate increase.

In the current environment, the cards seem to be stacked against a Fed rate increase. An increase would likely harm U.S. exports, due to an appreciation of the dollar against most world currencies.  And while any Fed Rate increase would be modest and gradual, the increasing rate cycle would reallocate capital from the US equities markets to the risk-free fixed income markets.  Both trends would weaken economic expansion, and increase the odds of a recession.

The Fed isn’t facing a red-hot U.S. economy. Inflation is below target. The U.S. economy is performing better than its counterparts in China and the Eurozone. So why bother with a rate increase at all?  The U.S. stock market volatility last week offers a clue.  In some cases, a delay (or a “relent” in the current vernacular) of an expected rate increase can trigger an overreaction by the market. Panicked investors would be asking, what does the Fed see that we don’t see?  Things must be worse than we thought!

The case for and against a rate increase will be argued right up until the September FOMC meeting.  Intervening events, such as a new round of volatility or, conversely, significant gains in employment and wage growth, make this a real cliffhanger.  Moreover, the Fed hasn’t forgotten the market gyrations that ensued when the gradual elimination of Quantitative Easing was first discussed (remember the “taper tantrum”?). To avoid a similar market reaction they will be reluctant to back away from their signaled rate increase.

Our view is that the Fed will not increase rates in September, but will characterize the decision as a short delay with an October increase all but certain.  This allows the Fed to take the safer route of delaying a rate increase, betting that a bout of inflation is not in the offing, while maintaining its credibility.  In times of volatility the markets appreciates the Fed’s discretion.

–John Costa, Managing Director, Auriemma Finance

John Costa, Managing Director of Auriemma Finance, has published an article in American Banker’s BankThink section. The piece focuses on how Basel III rules have magnified the importance of regulatory capital in the decision-making process to buy or to sell a credit card portfolio.

You can read the full story here: Basel III Makes Credit Card Portfolios a Buyer’s and Seller’s Market

For more information, contact John Costa at john.costa@auriemma.group or 212-323-7000.

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