How Will Commitment Technology Affect the Credit Card Market?

Includes: AXP, MA, V
by: Cheep Talk

by Sandeep Baliga

Mastercard (NYSE:MA) inControl allows a credit card user to set up a monthly budget so charges are rejected once the user’s expenditures per month reach the budget. Useless for the fully rational consumer and a godsend for the accidentally-profligate and the constantly-tempted shopper.

Citibank (NYSE:C) is set to introduce this product in the U.S. in partnership with Mastercard, Visa (NYSE:V) and Amex (NYSE:AXP) do not have similar products. The Mastercard network and Citi are in a great position to capture consumers from their competitors. The segment that is creditworthy and lives beyond its means is the most profitable for the credit card companies. It is precisely this segment that will value the inControl feature to limit their consumption. They may be willing to pay for the feature and there is also the possibility that they will spend a lot on their cards, so there are plenty of fees to be collected from merchants who accept the cards.

Sounds good for credit card companies. But what’s good for one firm is not good for the industry. If Citi/MC capture consumers from competitors, the competitors will adopt similar practices and adopt the same technology to retain existing user or entice new adopters. Just the sort of competition that is good for consumers and bad for firms.

Perhaps new consumers will get credit cards because of the inControl feature. There must be some consumers who do not even have a credit card as they have gone overboard using them in the past. If they get one, the additional purchases will generate more merchant fees.

Isn’t that good for the credit card companies? Even that is not clear. More purchases will generate more merchant fees. The fees are set by Mastercard and Visa and accrue mainly to them. The banks may not see much of this additional revenue.

All in all, inControl will be good for the networks but bad for banks who will lose the interest fees they generate from the 'outofControl' credit card user. The mystery is why MC or Visa did not introduce a similar product earlier. There are good reasons for banks to oppose them….maybe that’s why?