Reduced revenues will drive credit card issuers to introduce cards with annual fees to consumers in the near future, according to Auriemma Consulting Group, a management consulting firm that serves the cards and payments industry. Cards without annual fees will not feature rewards and will only offer cardholders basic benefits.

This shift away from no-fee credit cards will come as a result of the changes in the ways that consumers are using credit cards, which affects the profitability of credit card issuers. Consumers are less likely to carry balances on their credit cards, reducing the amount of revenue card issuers can earn on interest. Data published by Auriemma Consulting Group in Cardbeat® shows that the percentage of consumers carrying balances on their credit cards has decreased 40% in the past year. Additionally, the number of consumers unable to pay their bills (credit cards or otherwise) has increased dramatically over the past 18 months. Since the end of 2008, the percentage of credit card accounts written off by lenders has exceeded 10%; in 2006, the percentage of credit card accounts written off was typically between 3 and 5%. These two factors have resulted in card issuers being forced to seek out alternate commercial models and income streams.

To maintain profitability, many issuers will aggressively market fee-based cards to customers. Whilst credit card companies will continue to offer no-fee cards, the rewards aspect of these cards will be greatly reduced or removed altogether. Rewards cards, including cards with premium services or benefits, will certainly feature a fee in the near future. Credit card issuers that currently offer cards with annual fees will most likely increase those fees.

Additionally, card issuers will develop new card offerings, with tiered rewards and benefits. Most likely, these offerings will have several cards under a specific brand. Cardholders can pay a higher fee for richer rewards and benefits, and a lower (or no) fee for a more basic product. There have already been examples of tiered cards in the market. In the UK, the most notable example comes from M&S Money (a subsidiary of HSBC). M&S’s basic no-fee card gives cardholders 1 point per £1 spent in the store. Cardholders enrolled in their Premium Club (with a £10 monthly fee) receive free vouchers for coffees from the in-store cafe, complimentary family travel insurance, and earn 3 loyalty points for every £1 spent in the store.

Megan Bramlette, a managing associate at Auriemma Consulting Group says, “By the end of 2010, all major credit issuers in the UK will have some sort of fee-based enhancement available to its customers, the most successful of which will offer benefits that are in line with their core value proposition like in-store benefits for a retailer co-brand card, or premium seat selection and baggage fee waivers on airline cards.”

It is expected that it will be more expensive for consumers to borrow money in the future, whether on a credit card, a mortgage, a personal loan, or any other type of financial product. As the lending industry transitions to a fee-based environment, it is likely that many British consumers will cease using credit cards, particularly the sub-prime and mass-market population. The number of credit card users in the UK will shrink, and the remaining consumers using credit cards will be the more affluent and rewards-seeking population.