Cards Get Pasteurized

  If present trends keep up, the card industry is going to be about as bland as canned chili. I'm referring to the stepped-up regulation of the subprime sector and moves by Visa and MasterCard to rein in X-rated Web sites.
  It is very hard to argue with the goals of either effort. (You can find more details on each in our Card Watch section starting on page 6). Issuers should have some limits on their ability to extract overlimit fees from financially struggling cardholders, right? And shouldn't the card associations be applauded for trying to reduce chargebacks by requiring the processors that aggregate credit card charges on behalf of adult-content Web sites to go through a registration process?
  Certainly. But at the risk of sounding like I'm defending the low-lifes, credit cards are on their way to becoming payment instruments available only to the middle and upper classes, who can use them only at socially approved locations.
  In the wake of Wall Street's initial, positive reaction to federal regulators' new credit card lending guidelines for bank examiners, some observers concluded that the feds caved in to the card industry. A few passages in the draft guidelines released last summer were watered down in January's final version. The fact remains, however, that the wording still gives regulatory agencies plenty of new authority to limit issuers' subprime lending practices should they so choose.
  All to the good. But I've brought this up before: overly tight subprime underwriting rules could cut hundreds of thousands or even millions of consumers off from mainstream sources of credit. If consumers with spotty credit histories can't get a Visa or MasterCard with a 24% or 25% APR, where will they go? The next stop is likely to be a payday loan shop, which will charge vastly higher rates, or the local loan shark who hasn't yet bought into the notion of soft-touch collections practices.
  Meanwhile, processor InterCept Inc. says its profits will be down because many of its X-rated Web merchants bolted after the new card-association registration rules and their attendant fees took effect in November. About 90% of the business of InterCept's iBill unit comes from such sites.
  I find it hard to believe that iBill is the only processor experiencing defections now that the new rules are in place. If these merchants are shucking card payments altogether, their clientele will have to pay by having charges billed to their phone bills or some other means. That, too, may be all to the good for merchant acquirers since X-rated sites have chargeback rates in multiples of most other merchant sectors.
  But, there is a demand for these Web sites' services. If a steamy site doesn't offer child porn or other illegal depravity, and if an acquirer can provide transaction processing while keeping chargebacks within reason, the only argument against handling the site's payments is moral.
  Visa and MasterCard haven't said they are trying to put such sites out of business, and I don't believe they are. But, in a parallel with the subprime crackdown, the net result could be fewer card transactions from sectors some people consider sinful or at least unsavory.