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This story appears in the June/July 2009 issue of Cards&Payments.
The credit card-reform legislation that President Obama signed into law in May was neither unexpected nor unprecedented, as it came after U.S. regulators adopted rules in December that would reform some card practices. In fact, many issuers already had increased interest rates and cut back on credit limits, new-account originations and rewards programs, both in anticipation of the new rules and in reaction to rising losses during the recession.
But the legislation, which requires issuers to comply with its reforms within nine months, goes further and faster than the federal rules. And both issuers and their industry partners say it fundamentally will alter the way they operate.
"The business has been changing, more dramatically in the last six to 12 months. … How we think about the business going forward, it's not just the credit card business, but the payment business," says
Struthers believes the credit market will become smaller and more defined, and issuers will place more focus on the fundamentals of making a credit decision: ability, stability and willingness to pay. "It's going to be a smaller market, but it still will be a very profitable market," he says.
What is less clear is specifically how issuers will remain profitable.
Asked how they will react to the new legislation, issuers mostly referred to familiar strategies: higher interest rates and tighter credit, fewer rewards programs and possibly more annual fees. But other industry players say they also expect to see issuers trying a broad array of tactics, including changing their internal systems and billing operations, introducing replacement products in lieu of credit, or even selling their card businesses altogether, to adjust to the new lending environment.
One major issuer already has hinted that it may drop out, in part, because of regulatory pressures.
"This business clearly faces financial headwinds in these difficult economic times, as well as regulatory pressures,"
A spokesperson for HSBC's U.S. card unit said by e-mail that "HSBC remains committed to the U.S."
Indeed, the card-reform law will radically affect the way credit card companies operate–how they price, how they manage for risk, how they market,
But the legislation also will affect more "mundane things" for issuers, such as how they bill, because "70% to 80% of their [information-technology] capacity is going to be just keeping up with regulation," he said. "This will change the dynamics of their business models in dramatic ways."
"There will probably be higher interest rates and tighter credit criteria," he says. "We lose the flexibility to price customers for the full life cycle. Therefore, we will have to make assumptions at the beginning, and I think that interest rates will go up."
Discover intends to have "less emphasis on promotional pricing," Talwar says, noting he could not yet speak to plans for annual fees or reduced rewards programs. "It's too early to respond in full level of detail."
All Options On Table
BofA's Struthers agrees that all options are on the table, including new product offerings. "We have such a dominant position, not just in credit cards but in debit cards, … and we're going to be designing products and services that take advantage of us having dominant positions in both product lines," he says.
BofA also is considering adding annual fees, raising interest rates and restructuring its rewards programs, although Struthers says it is too soon to discuss specific plans. But "I do believe there will always be a market for no-annual-fee cards," he says.
Many issuers may choose to focus on interest-rate hikes as the most palatable way to reprice for risk without alienating customers, says Richard Vague, cofounder of former credit card monolines First USA and Juniper Financial Corp. And "whether it happens day one or over time, lower rewards programs means that it's harder to retain or get new customers," he says.
The legislation will require reallocating some resources to reorganizing issuers' internal systems. "The big challenge here is changing all of these systems to accommodate these new rules," says Scott Wagner, executive vice president of Town North Bank's TNB card services unit. "Some of the systems that are out there that process these transactions don't have the capabilities to do what these regulations are calling for."
The new law also will ban double-cycle billing, give consumers more time to pay their bills, and significantly reduce issuers' ability to increase rates and charge over-the-limit fees. It also adds a slew of disclosures designed to caution cardholders about the consequences of making only minimum payments by highlighting how long it would take to pay off balances and showing how much interest would get tacked on.
The new disclosure requirements will require the most effort and investment on the part of both issuers and their processors, Wagner says.
Brian Shniderman, a director of the banking team at Deloitte Consulting LLP who advises issuers and other industry players, expects some issuers to introduce new, hybrid products to offer as alternatives. His clients are "looking at ways to secure unsecured items, reverse cosigning or finding ways of having an auto to secure a credit card. A lot of these haven't been tested," he says.
For example, medical students are "really in the target that card companies want to serve in the future, but they may look less attractive in the new frame," Shniderman says. Card companies "may go back to this notion of cosigning: $2,000 may be unsecured, but $15,000 may be secured by a parent or a friend," he says.
Strategy Shift?
Shniderman also expects to see some issuers sell their portfolios and choose to focus on "core" banking products. "If you're too small to use your own cards but want to have your name in your customer's pocket," a cobranding or "correspondent relationship" model "will be more attractive," he says.
And such concerns could affect even larger issuers, Shniderman says. "The mass market drove a scale model. For some of them, their pricing and their engines were based upon a certain business," he says. "What we're talking about now, is it attractive to go after the mass segment? And if not, if you're going to focus on the mass-affluent, you're no longer in a scale game."
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"If they can't find profits, they won't be in the business," he says. But "we strongly anticipate they'll stay in the business and continue to meet the needs of consumers and small businesses. It's just going to be harder."
Struthers expects some smaller competitors to drop out "for economic reasons," but "naturally it's not going to be the major players, who control most of the industry today," he says. "The card business is very competitive today. It was competitive in the past, and it will be competitive in the future." CP
(Maria Aspan is a reporter at American Banker.)
