Monday, after nine months of intense and sometimes-frantic preparation, credit card issuers must be in compliance with most provisions of a law that fundamentally changed some industry practices.
Whether it will fundamentally change the industry itself depends on whom you ask. Ironically, credit card executives, who have long complained about the effects of the new restrictions, have finished the heavy lifting of compliance and are now pragmatic, even optimistic. And now some consumer advocates, while applauding the Credit Card Accountability, Responsibility and Disclosure Act, aren't satisfied it goes far enough.
For their part, credit card executives have tallied hundreds of thousands of man-hours, and hundreds of millions of dollars, as they assessed the law's near-term impact on their businesses, not to mention the restrictions on their future ability to lend to the same broad swath of consumers.
"The compliance requirements are what they are," said Ric Struthers, Bank of America Corp.'s president of global card services. "We could go back and wish that they were something different … but you move forward, you make changes, you do the best thing you can do for your customers."
Focusing on customers has its benefits, Struthers said. In the end, "this transparency is probably better than ever" for the industry's long-term reputation. "People say, 'Credit card companies want me to get in debt so I can't pay it back.' That's not what we're in business to do."
The CARD Act, which President Obama signed last May, has three major compliance deadlines, of which the second — today, Feb. 22 — is the most significant. (The third and final deadline will be Aug. 22.)
As of today issuers generally cannot raise interest rates on existing balances unless a cardholder is 60 days late or a promotional rate expires. They can no longer use double-cycle billing. And they cannot charge overlimit fees, which were once common, unless their cardholders opt in.
Issuers also had to revamp their cardholder statements to clearly illustrate how much in interest and fees a cardholder has paid during the current year, and to show the monthly payment required to pay off a balance within three years.
Compliance with the law has been costly and time-consuming for most issuers, especially in terms of the revised disclosures and billing practices. (Most issuers have managed at least to control postage costs and minimize the environmental impact of their revamped statements. Doug Miller, a senior analyst for the market research firm Corporate Insight, said most issuers have managed to introduce the new disclosure information on statements that are about the same number of pages as those they previously mailed.)
But the most lasting issue will be the law's restrictions on interest rate increases and issuers' ability to charge certain types of fees.
B of A executives last month estimated the law's impact to be "some $800 million after tax" on the company's card income this year. Struthers said it invested "over 1 million hours of programming" in overhauling its systems to be compliant. "It'll be in our run-rates. That affects this year and the future," he said.
Capital One Financial Corp.'s chief executive, Richard Fairbank, in July estimated the costs of compliance with the law as "about 200,000 IT hours" and "many tens of millions" of dollars for Capital One.
"From an operational perspective, it was significant but manageable," Andy Navarrete, a senior vice president of cards at Capital One, said last week, stressing that there was "no mad scrambling" for the company to comply by today's deadline. "A lot of that had to do with anticipating where the rules were going. … We built an implementation program in-house in January of last year," before the law was signed, but after federal regulators released new rules similar to the eventual legislation.
Roger Hochschild, the president and chief operating officer of Discover Financial Services, said that in the big picture, "for the industry as a whole, it truly will prove to be transformative. Certainly in the years I've been in the business, and probably across Discover's close-to-25-year history, it's by far the biggest change that we've seen," he said. "It really ended the era of a lot of fine-tuning and sophisticated repricing."
Hochschild forecast a new round of adverse effects for the industry after today. For example, several issuers, including Discover, will no longer assess overlimit fees. "You see the impact right away, and your overlimit fee can turn negative, because you'll still be charging off accounts" without gathering as much fee income from maxed-out accounts that are hovering near delinquency and eventual chargeoff, he said.
Even if Hochschild is proven right, some industry observers, especially consumer advocates, have questioned how effective the law will be in preventing future abuses, as issuers adapt to the law's restrictions and introduce fees and pricing policies the law does not specifically address.
"I'm very supportive of the CARD Act, but credit card companies are already working to get around the CARD Act," Elizabeth Warren, the Harvard professor who oversees the Troubled Asset Relief Program's Congressional Oversight Panel, told reporters Thursday. "We need an agency, a cop on the beat that is flexible and responsive."
The financial services industry strongly opposes the creation of such an independent consumer financial protection agency, and right now the prospects for its creation seem dim.
Still, to the consumer advocates' point, some issuers, including B of A and Citigroup Inc., have already tried to offset the law's fee restrictions, by testing annual fees on small portions of accounts.
Both companies met a consumer backlash over the tests, but neither has discontinued the practice, and Citi has now reportedly started applying the fees more broadly. Citi representatives, who said in an e-mailed statement that its goal in implementing the CARD Act "is to communicate credit card terms and changes in a clear way and provide customers with greater choice and more control," did not respond to queries about the fees by press time.
Struthers said B of A's tests were continuing, without any specific plans to apply the fees more broadly. "You always have to keep testing things to understand what people are willing to pay," he said. "When you test annual fees, you're not going to learn something in a month or two months or three months. … We'll watch how those accounts continue to perform, and we'll see over time."
(American Express Co. would not provide an executive to discuss the CARD Act, and JPMorgan Chase & Co. did not respond to requests for comment.)
Ultimately, observers predicted, the industry will adapt to life under the new law.
"The law was not a silver bullet, but it was a game-changer, and in a way it was a resetting of the market," said Nick Bourke, the manager of Pew Charitable Trusts' Safe Credit Cards Project. "The ball's back in the banking industry's court to decide how they're going to evolve their products."
And by now, at least some card executives have made their peace with that state of affairs.
"It was quite proscriptive. It was a comprehensive, sweeping piece of legislation, and I do think it addressed a number of industry practices at a detailed level," Navarrete said. "Issuers will have to think about the spirit of the law and the letter of the law. … The regulators have a renewed focus on consumer protection issues, as does the industry."