US issuers have slowly but surely
reintroduced balance transfer fees as profitability in the cards
market has tightened, but with interest rate competitiveness a more
important factor, consumers aren’t biting like they used to.
Charles Davis reports.

The number of consumers conducting balance transfers is
declining fairly steadily, according to new research from Auriemma
Consulting Group. In a survey of 399 credit cardholders, 15 percent
of respondents said they conducted a balance transfer in April, the
lowest percentage since Auriemma began conducting the monthly
survey in 1994. In April 2006, 17 percent of respondents conducted
a balance transfer.

Megan Bramlette, an associate at Auriemma’s London office who
conducted the survey, said the data shows that US consumers have
grown more aware of what she calls “activity-based fees” – as
opposed to penalty fees, such as late fees or over-limit

“The research shows us that people are extremely opposed to
these sorts of non-punitive fees,” she said. “As issuers have tried
to reintroduce balance transfer fees or remove fee caps, consumers
at the beginning of 2006 began to really push back.”

Happy where they are

Besides not carrying credit card balances in the first place –
and therefore not having anything to transfer – the most frequently
cited reason respondents gave for not moving the amount they owed
from one credit card to another was satisfaction with their current
interest rate.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

“Interest rate competitiveness among credit card companies is
reducing the incidence of balance transfers. The average balance
carried on cards continues to increase, but consumers are not being
enticed to move those balances to alternative lines of credit,”
said Bramlette. “Cardholders are extending the life of their
relationships with credit card companies rather than transferring
their outstanding balances to different cards.”

Threat to profitability

Bramlette said that the decline in balance transfer activity
threatens the profitability of issuers, and may come down to simple
mathematics. Take, for example, a $75 fee for an average $2,500
balance transfer. With interest rates averaging above 13 percent,
the fee eliminates any savings realised on the balance

Respondents seem more educated about balance transfers,
Bramlette said, thanks at least in part to the widespread
proliferation of balance transfer offers in their mailboxes. The
current survey found that only 3 percent of respondents are unaware
of balance transfers.

In the survey, 27 percent of respondents said they have made a
balance transfer in the past. The average amount last transferred
among those respondents was $4,300, though 43 percent of those
respondents reported that their last balance transfer was for
$2,000 or less.

“Obviously, the incidence of balance transfers is declining, and
balances remain pretty flat, but the reappearance of fees is what
has really changed,” Bramlette said. “Consumers are maintaining
their existing credit card relationships rather than rolling
outstanding balances over to other cards, and that is a reflection
of the fees.”

Opportunities are there

Bramlette said that the overall drop in balance transfers
presents real opportunities for issuers. “If a bank wanted to make
a huge splash in the market right now, they should consider
introducing low promotional rates good for one to six months or
even the life of the loan, or offer rewards on balance transfers,”
she said. “In a rising rate environment and with people nervous
about subprime, if I can lock in a rate for a set period and get
free balance transfers, I am paying attention.”

The nervousness over the subprime fallout could very well be
spilling over to the broader credit markets, Bramlette said, but US
issuers also give far too much credence to the idea that
cardholders are gaming the system, bouncing from card to card in
search of free balance transfers.

“The whole industry seems to buy into the notion that there are
all of these rate hoppers,” she said. “The research shows that most
people definitely plan to pay off their balance transfers slowly
over time, and only a small fraction of all cardholders are hopping
around from card to card. So if a fee is really causing this shift
in behaviour, then they need to really look at them again.”

Overall, respondents said it would take them just over two years
to pay off their most recently transferred balance, at an average
monthly payment, excluding interest, of $172. Such timed payoffs
are the norm, as consumers organise their credit activity around
the transfers, the study said.

Not surprisingly, nine in ten respondents used a promotional
rate the last time they transferred a balance. In the current
study, just under one-half of balance transfers were prompted by a
promotional rate good for the life of the loan, with the rest set
to expire anywhere between six and 12 months from the transfer.
Couple the weakening of promotional ‘teaser’ rates with the shorter
duration of those rates, and the reintroduction of fees may well be
the last straw for many US consumers.

Not worth the bother

In essence, the data suggests that balance transfers appear to
be more hassle than they’re worth for most borrowers, and that
doesn’t bode well for what has been one of the US cards industry’s
most consistent competitive weapons. And it’s worth remembering
that a recent study of consumer-payment preferences found that, for
the first time, debit cards beat credit cards as the payment method
of choice, 29 to 26 percent, according to consumer credit reporting
agency TransUnion and global financial services consultancy Edgar,
Dunn & Co.

“Balance transfers are such a part of the competitive mix that
issuers must balance profitability with the long-term value of
attracting new cardholders,” Bramlette said. “It’s a huge weapon
issuers have, but in times of financial uncertainty, the consumer
is going to question why they should transfer a balance if it saves
them no money.”

It won’t be easy for issuers to take back those balance transfer
fees any time soon, though, with receivables growth flat and with
US consumers paying higher monthly minimums under the new Federal
Reserve rules announced earlier this year. The irony is that while
issuers struggle for growth, one of their best tools for account
swiping is alienating the customer base.