Credit Card Reforms Arrive
By Tom Ryan
President Barack Obama
Friday signed a bill overhauling credit card rules, banning issuers from
suddenly raising interest rates and charging hidden fees. The new laws
mostly protect riskier borrowers –
those paying off massive monthly balances at interest rates up to 30 percent.
But banks warned that credit access to all consumers will be limited.
Among other things, the
act safeguards against:
- Interest rate increases: Generally bars card
issuers from raising rates, unless consumers are more than 60 days in
arrears; - Penalty fees: Bars imposition of fees for exceeding
a card’s limit, under most conditions; - Marketing to college
students: Bars card issuers from extending
credit cards to people under 21 years, without verifying their ability
to pay or getting their parents’ permission.
The bill also requires
a card’s terms and conditions be written in plain English as well as posted
on the card issuer’s website. The new law takes effect in February
2010.
The White House said
Americans pay some $15 billion annually in penalty fees, in part because
of credit card contracts that are unfair and deceptively complicated. Interest
rates for millions of cardholders have jumped in the past six months, making
paying off balances more difficult.
One win for banks was
that the new rules do not cap interest rates or fees. To make up for the
lost income, however, some analysts predicted that issuers may charge more
annual fees, reduce credit lines and slim down rewards programs. Younger
consumers with short credit histories or small-business owners could face
limited access to credit.
“At
the end of the day, you are still talking about a loan, and lending is
inherently a risky business,” Peter Garuccio, spokesman for the American
Bankers Association, told the Associated Press.
“What the new laws do is limit the ability of card issuers to price
for risk.”
But consumer
advocates and other observers said credit card companies will continue
to profit under the new rules, from fees charged to both consumers and
merchants. They also believe credit and incentives will be there for good
customers.
“There
will be competition among banks for good customers,” Pamela Banks,
senior counsel for the Consumers Union, told the Associated Press.
If one bank charges an annual fee, “there will probably be another
bank out there” that won’t, she said. Otherwise, people will start
using debit cards or paying cash.
The legislation “is
not going to be a hanging for banks, but I think Congress has collared
them and are bringing them in,”
Robert McKinley, founder of CardTrak.com, which consults with banks, told USA
Today. “It’s been the Wild West for the card industry for a long
time.”
Discussion Questions:
How will the credit card reform bill impact consumers? What should retailers
be doing in response?
This bill was long overdue and should be welcomed by consumers and retailers. Banks will still find ways to milk consumers who do not pay off their full balance every month. And they will threaten to reduce credit for good customers. But in the end competition will prevail. Remember, these are the same individuals and business that helped drive our economy into recession and then took billions of dollars in government bailouts.
Credit card ownership isn’t just a question of lending, it’s also the means for renting a car, making a reservation, buying items online and a host of other access points into living in society. Debit cards, which most retailers accept, may become the new credit card. Bank account overdraft protections then could become the new defacto credit card. I wonder what restrictions are placed on those?
Here the government goes again, rewarding irresponsible behavior and punishing the capitalists and risk takers. Unfortunately there are too many voters who don’t know how to use a credit card properly. The government has no business telling credit card companies how to run their business.
Who will pay? The responsible good people of this country would pay off their balances each month. We will probably no longer get those four figure kickbacks and all those airline miles. We don’t care if the interest rate is zero or 30%, we don’t have to pay it. Those interest rates are simply based on supply and demand. If cardholders could not afford them they would simply opt into another credit card with lower rates. If their credit rating is so bad that they can’t get another card, then they are receiving their well deserved punishment. Maybe they will wise up and do better next time.
It’s not fair to responsible consumers and banks to bail them out. There are rumors that credit card companies will start charging responsible members interest from day one or charge an annual fee. That I don’t think will happen (or we’ll start using debit cards). There will always be a market catering to responsible credit card users who deserved to be paid for using a card, not paying to use a card. Giving a break to irresponsible credit card users is like allowing an alcoholic a liver transplant.
Okay, the new Carholders’ Bill of Rights will help the non-prudent credit card users. But unless the fees banks charge for transactions are regulated the costs will shift back to consumers, and I presume those who always pay on time will be penalized. Imposing limitations on unreasonable fees to cardholders while leaving it possible for banks and credit card networks to raise fees to merchants to compensate for any reduced revenues from cardholders can limit the benefits of the Cardholders’ Bill of Rights. If policymakers in Washington do not address this issue, retailers can only turn to the courts to use the antitrust laws to provide relief from excessive interchange fees. In other words, merchants need a break as well. Think about it.
What should retailers do about this? COMPLAIN! True, this is a good start and worthy of some applause. But the culprit is interchange fees being smacked upon retailers in an ever increasing manner. This ‘hidden’ fee is going up so fast that its chewing away at the bottom line in a ridiculous way. Someone (and it certainly won’t be the banks) needs to get this under control quickly.
Groups like FMI have long argued that credit card companies are using interchange fees to fund more and more outrageous marketing campaigns to consumers. I wonder if this will reign in some of the outreach to consumers–or if it will encourage them to raise fees on retailers. The more interesting problem is that we appear to have reached saturation in the market for credit cards.
Critics argued in the article that the new law limits credit card companies’ ability to price for risk in the lending they make, but should they be making some of those loans in the first place? If we’re reaching through the tiers to the bottom in terms of credit-worthiness, it’s starting to sound to me a lot like the seeds of the mortgage bust–too much credit chasing too few consumers. The problem with the legislation is that it only puts bounds on one half of the issue–the consumer half. I’m just waiting to see what kind of hammer falls on retailers to make up the slack–which will end up right back on consumers through higher prices….
I think this credit card reform is long overdue, and I am a big believer in fair competitive markets for the banks. However, if, as Liz Crawford suggests, debit cards become the new credit card, and people do actually live within their means week in and week out, then we are going to be in for a long recovery period for retail sales.
My examples will be first time home buyers and college grads. Both groups are very important for retailers. If both groups stop using credit, the accumulation cycle really slows down at a lifestage buying cycle that many sectors of retail really count on. I hope that consumers do re-enter the credit markets, not to spend foolishly, but to spend against normal lifestage needs, with reassurance that the banks are working with them to learn to manage debt appropriately. The shame of it is that we have to wait until the government steps in and “whacks” the banks to get them to help consumers instead of just profit from them.
This new bill will change the retail world. First, retailers can expect even higher fees. The push this time will be on debit card transactions. They will leave credit card transaction fees as is. Second, card companies now plan to charge their best customers who pay off their bill every month. These are also the largest spenders and really don’t need credit cards. Under the current consumer mind set, these customers will move to debit, check and/or cash. Credit cards will remain only for larger purchases not every day use. Thus supermarkets can expect a decline in credit card transactions. Third, without credit, consumers will move to buy only what they need or have saved for. This could mean two or three years of negative retail year over year sales, excluding the impact of inflation.
This one is a game changer. First the credit cards companies are going to have to learn to be good corporate citizens. Their practices have been outrageous–growing more predatory every year. But retailers must realize that the banks will pull back credit on risky shoppers, because they can no longer fund these marginal accounts with late fees. What can retailers do to maintain and grow these customers that might otherwise enjoy easy credit with the banks? Nothing. Retailers are likely to lose revenue as people pay more with cash and debit cards.
Is it time for retailers to start thinking about getting back into the Accounts Receivable business? I think so. Most retailers already have in place the infrastructure to capture customer sales information and payments. The incremental costs will be manageable to offer billing services. Collection can be outsourced. Let’s say 100,000 customers buy an average of $500. That’s $50,000,000 in revenue. Assume 1/5th of it resolves at an industry competitive rate of 15%. That’s $1.5 million a year in interest rates to pay for the necessary software, staff, services, and bad debt exposure. This is not bad considering that a significant percentage of the revenue might be incremental.
Based on what I read here–admittedly the Devil usually being in the details–this seems like much ado over nothing; but to all those who have complained that “responsible” card holders will be “penalized” with reduced kickbacks or by being asked to absorb a greater share of the costs of using a cc: isn’t paying for what you get something that responsible people do?
To amplify Bill Robinson’s analysis: well-run retailers often own their banks. Frequently more profits come from lending than retailing. 84 Lumber, Cabela’s and Target all do their own lending. For decades, Sears made more money from their lending than from merchandising. Today the prime rate is 3.25%. Solvent retailers often pay less than prime. So borrow at 3.25%, lend at 18%, and assume overhead of 4%. As long as the writeoffs are less than 10.75%, the retailer makes money. Don’t have the right expertise in-house? Don’t worry, there’s a surplus of unemployed experienced lending officers just waiting to help.
We’ve seen what “nothing down, bad credit, no credit, bankruptcy okay” advertising did for the car industry. Would you like to save 10% today only to pay it all back and then some with our 21% APR store card? What about all of the growth from the illegal immigration in the country? Surely that wasn’t a mistake to afford the same rights to this underserved market as we give to legal citizens. So we can’t spend outside our means and those who do or have will be slammed with 30% interest rates by the CC companies between now and February 2010. Let’s not forget that none of the top 10 major homebuilders have gone out of business yet…not metrically possible for this to last. Oh, mid 2010 is the biggest jump in 5 year arms…bailout not enough to stop that coming tsunami. Headlines tomorrow–“Signs of a recovery around the corner…not in the next two years.”