Certain card issuers, grappling with the fallout of new and pending regulations, are beginning to recognize that a new approach to designing payment products may be needed to cope with even more potential regulatory changes ahead.
Major initiatives that have emerged so far from Congress and federal banking agencies in recent years include the Credit Card Accountability, Responsibility and Disclosure Act, which sharply cut issuers' income from interest rate increases, penalties and fees when it went into effect last year; new rules surrounding debit overdraft fees that cut issuers' revenue by billions; and proposed Federal Reserve Board rules that would reduce issuers' debit interchange revenue by about 70%, by capping rates at 12 cents per transaction.
Certain issuers may be looking forward to a respite from reforms, but some experts believe the intervention into the payments industry is not over. As such, issuers should prepare for the possibility of more mandates from government agencies, payment networks and security providers in the next few years.
"Card issuers had many new rules imposed on them in the last few years, and while they kicked and screamed, the U.S. card industry still lags behind the rest of the world in the way payments are priced, how we are handling payment card security and the inevitable movement toward mobile payments," said Steve Mott, a principal at BetterBuyDesign in Stamford, Conn. "I wish banks would initiate these things, but I'm afraid more government mandates will be needed to turn the industry into a fair, efficient, competitive and secure digital payments system."
The details of some new regulations have yet to be finalized, such as the cap on debit interchange. But more legislation or Fed rules are likely to emerge in the next few years, such as restrictions on prepaid cards and credit card interchange, which has so far escaped government intervention, observers say.
And in July the Consumer Financial Protection Bureau, created as part of the Dodd-Frank Act, will begin investigating consumer complaints on a wide variety of banking products, including payment cards.
"With this new bureau, we are going to see a much greater focus on fair-lending issues related to credit cards," said Michael Brauneis, director of regulatory risk in the Chicago office of the consulting firm Protiviti Inc., which is based in Menlo Park, Calif.
"There will be an eye on lending patterns, pricing and underwriting to make sure products are offered fairly to everyone, and issuers need to start thinking about how their products may stand up to that kind of scrutiny," he said.
Recommended strategies include adopting customer-segmentation and marketing strategies to identify new products suitable for specific customer groups instead of taking a one-size-fits-all approach, Mott said.
For card issuers seeking to devise products to meet the marketplace's fast-changing needs, a close examination of the changing consumer landscape may be required, a group of analysts concluded in "Winning After the Storm: Global Payments 2011," a Boston Consulting Group study released in February.
The researchers said they expect the effects of the CARD Act, for example, to be "long lasting, which will intensify competition for a shrinking group of attractive [credit card] customers, [while] lower-value customers will face limited access to credit."
Some issuers may abandon the subprime credit card market altogether and begin to charge customers for debit card accounts, depending on their other relationships with an institution, according to the study.
Because the CARD Act prevents card issuers from raising cardholders' interest rates when their borrowing patterns indicated higher lender risk, issuers could offset that by offering higher-risk customers new types of products, such as a hybrid credit/charge card.
"The interchange gap, if not eventually regulated away, is sufficiently large … to warrant product innovation," the study's authors wrote, adding that the emergence of technology such as alerts and customized controls provide opportunities for developing products enabling consumers to choose to pay for specific types of purchases through various accounts or card types.
Mobile payments also present an opportunity for issuers to enhance their reach and prepare to meet new payment security requirements. To capitalize on that opportunity, issuers should think strategically in order to make the right investments and form appropriate alliances with payment networks, telecommunication companies and makers of smartphones and other devices that may be used to make mobile payments online and at the point of sale, the firm advised.
New credit card products may help issuers retain valuable customers, but sharpening existing debit card products also will be crucial to surviving new debit interchange regulations, said David Stewart, a senior expert with McKinsey & Co.
"Card issuers may earn less interchange from debit card customers, but debit users are a very important group that will continue to want to use debit," he said. "Debit is a very sticky product, and it will continue to matter in the future."
