Payment protection plans and other credit card "add-on" products got knocked down by a regulatory roundhouse punch in 2012, but analysts expect them to bounce back -- this time with tighter marketing pitches and lower prices.
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"What I expect to see is better use of targeting," said Matt Simester, managing director at the card analyst Auriemma Consulting Group. "There is still a significant sector that would find value in these products."
In fact, two top-10 issuers have either re-launched the products or announced plans to do so, and consumers say in surveys they continue to be offered the add-on products.
Added costs, but where are benefits?
The most common add-on is payment protection, also called debt protection, which usually costs less than 1% of your monthly balance. It is an insurance-like service that typically cancels minimum payments on your card for a period -- six months to two years -- if you lose your job or hit some other calamity. Other once popular products sold to consumers include identity theft protection, which provides heightened alerts to changes in your account, and credit monitoring services, which provide access to credit scores and reports.
Banks backed away from credit add-on products beginning in 2011, when the Government Accountability Office issued a report exposing debt protection as a costly service with limited value. The GAO found that consumers received only 21 cents in benefits for each $1 spent on debt protection among the nine largest credit card issuers in 2009, with an average annual cost of about $200 per consumer. By comparison, insurers typically pay out at least 40 cents per $1 collected in premiums. Complex restrictions on benefits made it difficult for buyers of card add-ons to understand what the services would cover, the GAO said.
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Class-action lawsuits followed, and several major issuers had already suspended selling add-ons when the Consumer Financial Protection Bureau started handing out penalties for the way add-on products were marketed in mid-2012. The CFPB required Capital One and Discover to pay fines and refunds totaling $340 million for deceptive marketing.
A hesitant return
Most big card issuers are still steering clear of the products after the costly and embarrassing regulatory slap. But there are signs that add-ons are down but not out:
- Discover Card plans to resume marketing add-ons, which were suspended in 2012. The re-launch may come later this year, but the company doesn't have a timetable for its payment protection, identity theft protection, credit score tracking and lost wallet protection programs, spokeswoman Katie Henry said.
- Consumers report they are still getting pitched. In a November 2012 survey of about 400 U.S. cardholders, 31% said they had been offered credit protection and 41% got offers for identity theft or credit monitoring services, according to Auriemma research. While that is down sharply from 2008, it indicates that marketing of the products continues at a reduced pace.
- Wells Fargo offers "credit defense" payment protection and ID theft services after a shift toward in-house marketing and lower pricing. The company said it discontinued sales of the credit defense service in 2012 except through its own representatives or via the Internet. The service now costs 69 cents per $100 in monthly balance, according to terms posted on its website. That compares with a range of 85 cents to $1.35 among the major card issuers before 2012.
Add-ons never entirely withdrew. Although check-boxes to opt into credit protection on applications largely disappeared, some issuers continue to include the offers in reduced volumes, said Lisa Hronek, senior analyst at Mintel Comperemedia.
"I think the issuers are temporarily backing away," she said. "It was the marketing that got them into trouble."
A text search of the consumer protection bureau's database of card agreements indicates that smaller card issuers, particularly credit unions, are continuing to offer payment protection plans, with rates typically of about 90 cents per $100 of your monthly balance. The consumer bureau only examines banks larger than $10 billion in assets, although it can take action against others if it finds they are harming consumers.
The crackdown by regulators in the U.S. pales in comparison to the punishment meted out in the U.K., Simester of Auriemma noted. Barclays, a major player in both U.S. and U.K card markets, has set aside 2.6 billion pounds -- or nearly $4 billion -- to cover claims from payment protection customers in the U.K, according to its 2012 annual report. The amount is about 20 times the largest U.S. penalty.
In the U.S., the company stopped offering fee-based protection services in 2012, according to emailed responses from Paul Wilmore, managing director for consumer markets at Barclaycard U.S. Refunds were made to buyers who canceled within 90 days of enrolling. Current customers who have the service have opted into continuing it, "therefore we've seen very few refund requests -- which are handled on a case-by-case basis," Wilmore's written responses said.
An uneven return to add-ons
Any return to add-ons among major issuers looks to be uneven. Bank of America, which halted sales of ID theft protection in late 2011 and credit protection in August 2012, said there are no plans to return to the market. The card issuer plans to cancel remaining payment protection customers this year, spokeswoman Betty Riess said, as part of a broader effort to refocus on BofA's core businesses.
Capital One no longer offers the add-ons, a spokeswoman said, although it provides free credit monitoring as a benefit with a secured card for students. Chase Bank said only that it halted sales of payment protection in October 2011. American Express said it discontinued credit and ID protection in 2012. Citibank did not respond to requests for comment.
"It is a much better strategy to withdraw," Simester said, as opposed to trying to fix add-on products on the fly.
However, with banks always keen to generate fee income that doesn't tie up capital, major issuers are likely to find ways to return to the market. In 2009, payment protection alone generated $2.5 billion in fee revenue for the nine largest U.S. issuers, with 7% of their customer base opting in to the products, according to the GAO.
Card issuers can boost the value of credit protection by cutting the price and making terms simpler to understand, Simester said. Making the programs easier for customers to cancel and avoiding third-party salespeople -- especially ones who work on commission -- should clear up the problems that prompted the consumer bureau's fines. Under those conditions, some issuers may not see it as worthwhile to market the add-ons, Simester added, while others may see value in selling add-ons at a reduced pace from previously.
Hronek at Mintel Comperemedia expects the card issuers will take time to adapt.
"Based on what we've seen in the past few years, everything tends to come full circle," she said. "It is just a matter of the industry adjusting to the new normal."