MARCO ISLAND, Fla. — The impending regulatory changes in the card industry could offer opportunities for small and midsize issuers, according to executives and observers.
"We will begin to see a shift in the card industry, away from the old model of national lenders with strong direct-mail programs to one in which banks drive card customer acquisition through branch networks. This could benefit smaller and regional card issuers," Tony Hayes, a partner at Marsh & McLennan Cos.' Oliver Wyman, said last week at SourceMedia Inc.'s 21st Annual Card Forum & Expo here.
Issuers are jittery about several rule changes that are set to go into effect in July of next year that would bar issuers from repricing credit cards except in certain circumstances, such as when a consumer is at least 30 days delinquent.
Another change would require issuers to apply payments first to the highest-interest tranches in the borrower's credit lines.
Lawmakers are also considering legislation that could affect issuers' ability to generate revenue from penalties and fees.
"Between the repricing and the payment allocation rules, large issuers will be forced to abandon the present model based on direct marketing of low introductory interest rates and balance transfers," Hayes said.
As a result of the new rules, "over the next few years an estimated $200 billion in debt will disappear from the credit card industry."
Ken Paterson, director of credit advisory services at Mercator Advisory Group Inc. in Maynard, Mass., said that the largest card issuers "have most to lose right now."
These issuers' profits depend heavily on high-volume direct mail campaigns that try to win new customers through promotional interest rates, Paterson said.
"Smaller issuers might potentially be in a better position than they were before," he said, because they are typically less reliant on promotional offers driven by direct mailing.
William W. Shaw, the group vice president of First Citizens BancShares Inc., a Roanoke, Va., issuer of Visa Inc. credit cards, said that the new regulations will make it easier for small and midsize issuers to compete against big ones.
"We don't have their gigantic marketing budgets, but we were always able to compete with the big guys through tighter underwriting criteria that gave our portfolio higher credit quality," Shaw said. "We can do that again when the downturn ends."
First Citizens relies heavily on its network of 350 bank branches to gather information about its customers, Shaw said. "We have solid, deep information about credit card borrowers gathered through face-to-face applications. It's a lot different than the type a national lender gets through direct mail."
The first-quarter card chargeoff rate at First Citizens jumped 150 basis points from a year earlier, to 3.8%, Shaw said, compared with the industry average rate of about 7%.
Christine Newsome, the vice president of card lending for First National Bank Alaska, said the new rules are not likely to cause many headaches for her Anchorage bank.
"We were always pretty conservative in our lending, and we won't need to make a lot of changes in our business policies to comply with the new regulations," Newsome said.
Network executives acknowledged that the credit card industry will need to make strategic changes and should try to create products that give customers more insight into how they manage their finances.
Joshua Peirez, MasterCard Inc.'s group executive for innovative platforms, said that issuers should avoid raising interest rates this year in advance of the new rules that would make it harder for them to do so.
"Issuers making pricing changes because it's more profitable in the short term are not as likely to survive," he said.
Peirez suggested that issuers and card companies should develop products that help consumers monitor their spending more closely.
Jim McCarthy, the head of North American financial institution sales for Visa, said the San Francisco payments company is developing products that "put consumers in control" and "bring the consumer into the authorization process."
Visa cardholders currently can receive one-way alerts about various financial activity, McCarthy said. That kind of interaction could be used one day to enable consumers to dictate "when, where and how they can authorize payments."
Rick Claypoole, senior vice president of consumer deposits for Compass Bank, a Birmingham, Ala., unit of Banco Bilbao Vizcaya Argentaria SA of Madrid, said his bank plans to test a Visa card product this year that would feature more interactive alerts, though he would not provide any details.
"Personalization and customization is a big theme in the consumer marketplace, and we are looking for ways to integrate that whole concept into our credit card products without spending a lot of extra money," Claypoole said.
Some issuers are worried that the cost of coping with the economic downturn and complying with the new regulations could stifle their ability to invest in new product development.
Issuers will have to spend "a lot to implement the new card regulations, just in terms of upgrading our systems," said Paul Siegfried, the vice president of bank card products at Fifth Third Bancorp, of Cincinatti.
"We definitely see an opportunity in developing more personalized consumer card products or customizing existing card products to consumers' preferences," Siegfried said. "But it is very difficult to design new products when there is no certainty of profitability ahead. At the very least, compliance with the new card industry rules is going to distract us from such innovations in the short term."
