The new federal regulations overhauling credit card industry practices seemed radical, until President Obama signed a law in May that upped the ante in terms of timing and restrictions, and then in June proposed the Consumer Financial Protection Agency. Either alone represent a sea change for card lenders, requiring them, as the American Bankers Association puts it, "to overhaul their entire business models, eliminate specific practices, and reconstruct the way they extend credit and interact with customers."
"Overhauling" and "reconstructing" have technology implications, but not always good ones. What will happen with the proposed new regulator is unknown - every bank lobby in the country opposes the idea. But the card law is a done deal, and represents such a major short-term challenge for lenders' technology operations that one banker told MasterCard Advisors that compliance could absorb as much as 70 percent of the coming year's IT resources at his institution. Everything from customer service technologies, billing and payment processing systems, disclosure processes, and pricing models must all be rewritten or replaced. Best guess is that most lenders will band-aid existing systems to meet the deadline - or face stiff fines - and overhaul down the road. "When you combine that the changes affect every part of the process, and when every part of the process involves technology, it's going to be a drastic and very burdensome thing for IT departments," says Michael Brauneis, director of regulatory risk consulting at Protiviti.
Certain provisions require entirely new processes to be added to the customer information file. Among them is the requirement that consumers opt-in to the product feature that allows them to pay a fee in order to exceed their available credit limit. For this, banks will have to build permissions functionality. Some institutions are looking at ways to comply without losing revenue. One solution: instant opt-in via a text message sent to a consumer at the point of sale. "They're looking for something that could realistically be done so that it will be legal and consumers will accept the charge for the over-the-limit transaction," says Greg Hedges, managing director at Protiviti.
The changes in how card issuers can utilize delinquency and other information to adjust credit availability will also be onerous, requiring that the links between the risk analysis and servicing side of the system be revamped. "I think it would drive even more the move towards more flexible technology where you could have three pricing tiers or have thousands," says Dennis Dixon, president of Zoot Enterprise.
The new law may also "serve to wash a lot of the innovation that's existed in the market out of the market," Hedges says. "Organizations that had very sophisticated risk-based pricing, who started to look at consumer behavior, are trying to look at how they can keep those practices in place and still stay in compliance." And for some, the rules may be too much to handle. "I strongly believe a lot of the smaller firms are just going to exit the business," Brauneis says, adding the understatement of the week, "It's already less attractive than it was a few years ago."