Credit Commentary

Effect of Credit Card Act 2009 on issuers

By Zarana on Monday, July 06 2009

Credit card issuers, already scrambling to comply with the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, 2009 are facing a difficult time ahead to find a source of revenue as the bill would decrease the interest income significantly.  The annual revenue that card issuers earn from interest revenue and penalties could decline in double digits in 2010 and beyond. Some card issuers will cope by cutting costs, which means that some reward programs will be abandoned, and cash-back programs will be reconsidered.

The stream where the credit card company will lose a large source of revenue is from their fees and the end to “double cycle billing”. A credit card company makes their profit on the fees and the interest charged on the balances of their cards.  The implementation of the new requirements for the fees slows, but does not stop, one major revenue stream.  A financially astute credit card company will have to seek to make up this revenue through other means.

Credit card companies enjoyed hefty gains in recent years due to an explosion in credit, but now they are losing billions as debt-burdened Americans lose their jobs and default on credit card payments. Banks have been hit with a record number of charge-offs, or debts they give up on because the borrowers have no way of paying them back. In June, credit card losses hit a record >10%. The credit card issuers have started to build a strategy to maintain profits until the new law comes into effect. A JPMorgan executive told Bloomberg that it expects the new law will cost the bank $500 million this year.

As credit card issuers face implementation of regulations that will restrict risk pricing, some of the biggest issuers have started reacting already. As the Washington Post reported, JPMorgan Chase & Co. and Discover Financial Services both raised their top balance transfer fee to 5 percent, Bank of America hiked cash advance and balance transfer fees to 4 percent. Chase also raised the minimum payment due from 3 to 5 percent for some cardholders who carried a balance.

Additionally, Citi raised rates on up to 15 million holders of co-branded retailer cards, according to the Financial Times news report. On average, the increase was about 3 percentage points. On the other hand, Capital One is taking a different approach.  Capital One will treat current purchase and balance transfer APRs as "promotional" APRs that will be locked until a much later date, after which a higher APR will take effect.

The Credit law does limit the fees charged on subprime cards. Issuers of these cards can't use up more than 25 percent of the credit limit with non penalty fees during the first year after the account opening.  Other than that restriction, the CARD Act doesn’t constrain the miscellaneous fees structure, leaving lot of room to generate additional revenue stream. Imposing or increasing Annual Fees is one such charge that consumers could see tacked onto their accounts.

However, Annual fees are already popping up on credit card offers. Solicitations for cards with annual fees increased in volume to 27 percent during the first quarter of 2009, up 9 percent from last year, according to Mail Monitor, the direct-mail offer tracking service from global market research firm Synovate.

It is very difficult for analysts to calculate the financial impact, which is difficult because few card companies disclose how much revenue is derived from raising interest rates or imposing fees and other penalties on customers who fall behind on their bills.