Certain economic factors, like unemployment and credit card default rates are intertwined. So it’s absolutely natural that in an economic climate where experts are predicting a ten plus percent unemployment rate before the end of the year, credit card companies will have to change the way they do business in order to remain safe and profitable. As we all know, most issuers have been doing this by raising interest rates on both new and existing customers.
Wells Fargo has recently joined its peers in announcing that it too will raise the rates on the credit cards it offers. According to Kevin Rhein, group head of card services at Wells Fargo, “this is something we’ve been contemplating for quite a period of time… We had just reached the point that we don’t think we can offer credit cards at the current pricing and keep credit flowing.” Rhein’s announcement is interesting because it seems to suggest that Wells Fargo waited as long as it could before instituting these new rates. He states that the impetus for this change was the bank’s recognition that the flow of credit was actually in danger, which is another way of saying that the profitability of Wells Fargo’s credit card department was at risk. This, and the fact that the rate hikes are not scheduled to go into effect until November 30, one day before Congress’ new suggested enactment date for the CARD Act, suggests that Wells Fargo really has waited until the last minute before raising rates.
Wells Fargo’s decision to remain hopeful in a rather bleak economic climate can be looked at in two different ways. For the bank’s investors, the choice to wait until the last minute for rate hikes is unreasonable. No other bank waited or is waiting now. With the unemployment rate on the rise and federal law threatening to prohibit the rate hikes as early as December 1st, Wells Fargo’s banking peers increased their rates to insure the viability of their credit card businesses. Wells Fargo chose not follow suit in the hopes that the economy would turn around — an assumption that was unsupported by the nation’s economic forecasters. From an investor’s standpoint, Rhein’s assumptions were poor on this front — so much so, that we are worried about the general decision making abilities of Wells Fargo’s credit card services department and the bank in general. What other bad assumptions are they operating under as they conduct business?
On the other hand, for Well Fargo’s customers, the choice to raise rates at the last minute is commendable. In a period where the economy is making it more and more difficult to pay bills, Wells Fargo’s credit card customers are being allowed to pay off their balances at a lower rate for as long as Wells Fargo can afford it. Wells Fargo’s decision shows that the lender potentially has more concern for its customers than it does for maintaining profitability.
In the end, it’s hard to determine how to view Wells Fargo’s credit card business practices. All in all, only time will tell whether their policy turns out to be beneficial or disastrous and reflective of a card services department that’s been asleep at the wheel until forced into action by federal deadlines.