Those in the US pushing for reforms in the credit card
industry are celebrating after President Obama passed legislation
that will curtail the ability of issuers to charge fees and change
pricing. But, amid the clamour to uphold consumer rights, could
there be adverse consequences for both issuers and consumers?
Charles Davis reports.

Only time will tell whether the legislation President Obama
famously signed on 22 May overhauling the credit card industry,
will usher in an era of issuer responsibility and increased
consumer power, as its proponents predict, or cut off access to
credit and further slow the anemic US economy, as many issuers
warn.

In at least one important measure, the warnings of issuers about
reduced credit seem a self-fulfilling prophecy, as US credit card
companies have been restricting credit for nine months or more
already, and consumers slowed way down on credit usage as the
economy began to sputter last year.

Credit card reform or not, macroeconomic forces, including weak
demand for consumer durables and the ongoing housing slump, will
mask any real effects of the reform legislation for the foreseeable
future.

Most of the card standards will go into effect in nine months, but
one that will go into effect in 90 days requires issuers to give
customers 45 days’ notice before increasing rates, giving consumers
time to close the account and pay off balances at the current
rate.

Dramatic change to industry practices

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The law – the Credit Card Accountability, Responsibility and
Disclosure Act – allows card issuers to increase rates on existing
balances only when a payment is 60 days or more late, a promotional
rate expires, the rate is tied to a variable rate or the cardholder
has entered a workout agreement.

It also requires consumers to opt in for over-the-limit fee
protection, and it limits the number of over-the-limit fees issuers
can charge for a single event of exceeding a credit limit.

The law also requires promotional rates to be in place for at least
six months, and it requires payments to apply to highest-rate
balances first.

It bans double-cycle billing and clamps down significantly on the
ability of card companies to raise interest rates. The law also
requires bankers to consider borrowers’ ability to repay, and it
adds additional protections for borrowers under 21.

These changes are dramatic and doubtless will change many current
industry practices, in ways that are hard to predict
immediately.

The American Bankers’ Association (ABA) wasted no time in
denouncing the law, arguing that the new regulations will change
the very nature of credit cards and who will be able to use
them.

“It means that there will be less credit available,” said Edward
Yingling, the ABA’s president. “That means some people will not be
able to get a credit card who got it in the past, and those who get
the credit card, in some instances, will have a smaller line of
credit.”

While the new rules should “help rein in” many abusive credit card
practices, Credit Union National Association president and CEO Dan
Mica said that some portions of the bill could “have the unintended
consequence of raising compliance costs and making credit more
expensive and less available to consumers.”

Could cash-strapped issuers exit the
business?

Most immediately, observers expect actions to range from the simple
pricing changes that everyone is expecting (interest rate changes
at the outset of a customer relationship, a return to broader
annual fees, and potentially issuers charging more for rewards or
raising the bar on rewards redemption), all the way to the most
drastic action being considered by some – exiting the business
altogether.

Rewards programmes will be in the crosshairs. Card companies have
long used reward programmes to retain customers’ loyalty, giving
them cashback rewards, frequent flier miles, and other perks. Now
they won’t be able to subsidise those programmes when they are not
making as much from finance charges and penalty fees under the new
regulations. Issuers will be loathe to relinquish the loyalty
engendered by rewards altogether, but a new era of rewards
micromanaged to maximise impact seems likely.

Bruce Cundiff of US payment consultancy Javelin Strategy &
Research predicts “there will be some culling going on.”

“Some issuers will look at the business moving forward and not be
able to justify their presence based on the paradigm they’ve had
all these many years,” Cundiff said. “Most issuers, however, will
find the equilibrium and move forward with a new paradigm. In fact,
as with any market disruption – economic, regulatory, legislative,
or otherwise – it is those that can do so best that will
thrive.”

Reform advocates vow to fight on

Reform advocates didn’t get everything on their reform wish list
either, and vowed to return to Congress for more changes. Among
them is the notable absence of caps on interest rates or on fees
for transfers, late payments or going over a spending limit.

Consumer advocates also criticised the lack of any way to ensure
on-time payment. New rules mandate that payments be due at least 21
days after a statement is mailed, but consumer groups said it would
be fairer to adopt a postmark standard, whereby payments are deemed
on time if mailed by the date specified.

There is also no curb on credit line reductions or capricious
closing of accounts, and the law contains no mention of what
consumer advocates call “behavioural profiling” – automatic changes
to consumer credit lines triggered by non-card-related events like
shopping patterns.

The biggest fear for US issuers is that the US Congress, emboldened
by the bipartisan ease with which the credit card reforms enjoyed
in both houses, could begin to move on the volatile issue of
interchange rate regulation.

Although the law does not mandate any changes in interchange fees,
it directs the Government Accountability Office (GAO) to complete a
study on this issue in six months. Congress has instructed the GAO
to look at nine areas, including “the extent to which interchange
fees allow smaller financial institutions and credit unions to
offer payment cards and compete against larger financial
institutions.”

Senator Christopher Dodd, a Democrat from Connecticut, who led the
effort to enact reforms in the US Senate, already has said that
there are still two major issues that remain unfinished business: a
cap on interest rates and limits on fees that merchants pay when a
customer uses a credit card for a purchase.

Both issues were part of the debate that led to the wide-ranging
reforms signed into law by President Obama, but never made it into
the final Senate bill.