Five years after its implementation, the CARD Act has had a major impact on the financial services market — but the credit union story is different.
Or it was.
Perhaps the biggest impact the CARD Act has had on credit unions is that it has eroded their ability to highlight "banks behaving badly" and then demonstrate the credit union difference.
That's because the CARD Act's mission was to protect consumers against practices that credit unions largely were not guilty of, according to credit union professionals and industry analysts.
"Banks can no longer do those things that credit unions used to be able to point to and explain how credit unions are different," said Tim Kolk, principal at TRK Advisors. "The willy-nilly risk-based pricing, rate increases and junk fees that banks used to be able to do were largely eliminated by the CARD Act. So credit unions can no longer say 'See, we're different!' The CARD Act made banks act more like credit unions, so the ability to differentiate the basic values and culture of how credit unions differ from banks kind of disappeared."
But Kolk noted that despite that shift, credit unions still gained market share compared to banks in the years since the CARD Act, "but that also happened during the recession, when banks really retreated from the card space and charged off 30% of all of their assets."
Payment Order An Issue
According to Gregory Smith, CEO at $4.2 billion Pennsylvania State Employees CU, the act outlawed eight specific practices, only two of which were relevant to credit unions. One of those, said Smith, resulted in a change to the order of payment applications — a process which included sweeping changes to core banking systems — while the other mandated additional disclosure language in monthly statements, including clarifying for cardholders how long it will take to pay off a balance if only the minimum payment is made.
Because CUs weren't engaging in most of the anti-consumer behaviors the act was aimed at stopping, credit unions were generally exempt from the bulk of the rule. Fortunately, they were also largely exempt from many of the costs associated with it.
"I certainly will tell you the CARD Act took billions of dollars away from the credit card industry," he told Credit Union Journal. "I know if I did some research I could go back and find industry studies that were predicting the loss of $5 billion annually in revenue because of those practices.... I think largely the card industry has found other ways to replace that revenue. I don't think that credit unions were in quite the same situation because most credit unions didn't engage in those practices, so they weren't looking to replace that revenue. It wasn't lost."
Jennifer Kerry, VP of credit card services at CO-OP Financial Services, disagreed, noting that the act's impact "extended beyond cards and took a bite out of [credit unions'] fee income for fees such as overlimit fees. In part, credit unions just quit charging those fees because of the requirement to calculate based on payment amounts and so on," she said. "From a systems perspective it was so complex that they pretty much quit completely across the board the overlimit on fee income."
Fortunately, she added, because credit unions are so fee averse, "it wasn't a huge impact — it probably killed the banks."
Kerry added that credit card accounts continue to be among the most profitable products in CUs' portfolios, even after having to cover up-front costs with changing core systems and notifications as a result of the CARD Act.
But Mike Coleman, director of regulatory affairs at NAFCU, said that while CUs have adjusted to the new rules, even five years later, many institutions are still struggling to put some of the regulations into place.
"There are ongoing problems in terms of implementation," he said, pointing, for example, to significant changes in terms. "The CARD Act requires that you have to send a change-in-terms notice when there's a significant change in terms, and there's not a lot of leeway for positive change in terms. If it qualifies as a change, you have to send that notice."
That jibes with Kerry's position that many credit unions viewed the act as "an inconvenience when it didn't need to be an inconvenience. We're responsible lenders with a goal to helping members be financially literate, so this doesn't really apply to us. But over time I think credit unions, like everybody else, just became more accepting of it. I think it helped their market, because the banks pulled back."
Apples & Apples?
Just because credit unions eventually adjusted to the CARD Act doesn't mean that the adjustment process will be equally rosy for other new regs, sources said.
NAFCU's Coleman said it's hard to compare the CARD Act with other rules because the individualized impact of each rule will vary from credit union to credit union — not every CU that has a card program has a mortgage program, for example.
"I don't know that you could make a really generalized comparison that the CARD Act is an outlier or the mortgage act is much more burdensome," he said. "It's like comparing an apple to a different type of apple. I wouldn't say one is significantly more burdensome than the other."
Similarly, Tim Kolk said that it's hard to find parallels with other reg changes just because the CARD Act was so fast-paced. "The rules were coming out almost past the deadlines required to implement them, so it was a very chaotic and unmanageable environment."
Kolk also warned that the act's biggest impact may be yet to come.
He noted that card rates have essentially moved from prime plus six when the act went into effect to prime plus 10 today, to the point that credit cards are "at historic levels of profitability." That's leading to an increasingly competitive rewards market now, but could also place credit unions at a disadvantage once rates rise.
