This is a time of unprecedented challenges for the U.S. credit card industry. Already grappling with a highly stressed consumer credit environment, card issuers must also scramble to deal with the stringent guidelines of the Credit Card Accountability, Responsibility and Disclosure Act of 2009.
This law will fundamentally change the way a company does business, and it ushers in a stronger approach to regulators' rulemaking that will probably be extended across products and institutions.
Because of restrictions on interest rate increases and limitations on issuers' ability to reprice, companies will find it extremely difficult to be as proactively risk-sensitive as they used to be, and fee and marketing restrictions will negatively affect revenue streams. Consequently, issuers are focused on developing strategies to mitigate revenue loss from the restriction of certain fees, limitations on the ability to reprice for risk and the need to compete for well-qualified customers.
In the face of these challenges, companies must ensure that their compliance, operations and audit functions liaise with senior management within business units because the Card Act will have an impact on every part of the card life cycle — from marketing and credit policy to billing and payments. At this moment, thoughtful project management is absolutely necessary and should include such essential steps as:
- Creating an inventory. Understand the affected products, processes and practices.
- Conducting an economic impact assessment. Determine the effect on profits of prohibited practices and increased risk exposure.
- Assessing the true costs associated with current fees. Analyze the processing costs associated with negative customer behavior to rationalize and potentially defend fee levels as being "reasonable and proportional."
- Reviewing other means to limit risk for which you cannot reprice. Look at line-reduction programs and more restrictive acceptance criteria (staying mindful of equal credit opportunity obligations and appearances).
- Exploring strategies to replace lost revenue. Consider what works best given an institution's client base.
- Devising a project plan. In order to meet accelerated deadlines, it is crucial that the time line for changes in technology, policies, procedures, disclosures and marketing be clearly and carefully specified and tested.
- Implementing and testing. Allow adequate time to rigorously test and refine changes. This may include doing a final diagnostic test to assess risks and identify gaps in processes and controls.
- Considering the broader implications of the new law and regulations. In anticipation of the law's required reports to Congress on enforcement and other issues, and the potential further extension of regulations, an assessment of additional products and practices as well as regulatory and reputational exposures is mandatory to stay ahead of the curve.
Other aspects of the new guidelines are also important. For example, penalty fees must be "reasonable and proportional," with allowance for a deterrence component. The Federal Reserve will soon issue rules that specify a level of credit card penalty fees under which card companies will have safe harbor from challenge — issuers are now deciding whether certain fees, such as "over the limit" fees, generate sufficient revenue to compensate for the cost of compliance.
For other fees, such as late fees, institutions should prepare for regulatory discussions by studying the direct and allocated costs underlying their calculations and understand the interplay between fee levels and deterrence.
Given the changes now confronting credit card companies, forward-looking firms are focused on developing strategies for the future of the card business while establishing specific action plans to meet compliance deadlines.