The card industry is under siege. Consumers complain that it engages in unfair and deceptive billing practices. Merchants contend that they are paying more interchange fees and incurring more fraud liability without receiving any new benefits.

This consumer and merchant frustration has spawned litigation, legislation, and regulatory initiatives that pose major threats to the industry's structure.

The card industry's natural reaction is to circle the wagons and fight every lawsuit and legislative proposal. At the same time, it has attempted to deflect criticism through symbolic changes that do not alter its underlying structure. Some issuers have removed universal cross-default clauses from their cardholder agreements but retained the right to do the equivalent through any time/any reason term changes. And the networks have lowered certain interchange fees while raising others and shifting and multiplying interchange categories.

These maneuvers are unlikely to fool Congress or the courts, and by refusing to engage in meaningful self-reform, the card industry invites catastrophic change. If Congress or the courts were forced to act, there is no guarantee that they would do it well. We could see the imposition of usury limits, legislative or judicial rate setting, or the entry of merchants into nondepositary lending.

Even nationalization of the card industry, a possibility that not even its most radical critics would have formerly considered, now gets passing mention as an option.

Some in the card industry reasonably believe that they can weather the storm, and that no fundamental changes will result. Others are willing to bid for time. It might be years before significant legislation passes, and any problems it would create would be for the next generation of industry executives.

The industry would do better, however, to acknowledge the extent of cardholder and merchant grievances and to reform itself through self-regulation. Smart players within the industry should not only be doing long-term contingency planning for litigation losses or legislative changes. They should also be thinking about how they can push ahead without an outside stimulus and thus be masters of their own fate.

The major obstacle to self-reform is a form of the prisoner's dilemma; no one is willing to move unless everyone moves together. Any single issuer or network that wishes to engage in meaningful self-reform would find itself at a competitive disadvantage.

To overcome that dilemma, the card industry needs a device for coordinating self-reform. It needs to cede some authority to an independent body that could create baseline rules and practices that would enable the industry to circumvent the competitive pressures that limit reform.

One possibility is to create a self-regulatory organization along the lines of the Financial Industry Regulation Association (until recently known as the National Association of Securities Dealers). Finra oversees brokerages' interactions with securities issuers, with each other, and with customers through rule-making, enforcement actions, an arbitration system, and education.

The advantage of creating such an organization for the card industry would be that it would be a private organization whose leadership would be appointed by the industry and thus would be more sensitive to industry concerns than a politically appointed regulator or a judge who is not even subject to political controls.

Such an idea is not without precedent. The networks themselves already play a self-regulatory role. However, they are limited in their effectiveness by the pressures of internetwork competition. Moreover, coordination among them could create antitrust problems.

The PCI Security Standards Council has some aspects of an SRO, though its powers are limited to setting data security standards; it does not have the power to make the standards binding on a network or enforce them.

For such an SRO to be effective, it would need to be truly independent, and there would assuredly be reluctance to cede authority on the part of issuers and networks. Many executives might not want to surrender on their watch, or they might just hope to pass the buck to the next generation.

As compared to continuing to doing business as usual, an SRO is not an attractive option. But business as usual may not be possible for much longer. As legislation or litigation losses loom closer, voluntary reform will look more attractive.

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