How The US Credit Card Legislation Affects The Industry

On Tuesday, the Senate passed legislation which will impose stricter regulations on the credit card industry. Many consumers have been infuriated with interest rate hikes on existing bills and fees for various services such as paying bills via the mail. These rate increases and fees have been hurting the consumer where it hurts, in their wallets, amid a very harsh recession. Many of the consumers who are feeling the pain are the same lower and middle class Americans who are getting hurt from delinquent mortgage payments and a lost job. The big question is how will this bill affect players in the credit card industry if it is passed by the house and signed by President Obama?

The bill was passed with an overwhelming majority of a 90-5 vote. President Obama has been behind making more stringent regulations on credit card companies even before he was in office. The White House is likely to continue to support the bill, as the bill will increase disclosure and fight interest rate increases for consumers. According to the Wall Street Journal, Senate Banking Committee Chairman Christopher Dodd stated: “Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments… This is a very important industry…. We just want it to work better.”

Among some of the regulations which will be imposed on credit card companies include not allowing issuers to retroactively change the rates on existing balances, setting a date on which bills must be sent by, and eliminating fees for payments with the exception of expedited orders. The biggest regulation is the prevention of retroactive rate increases on a consumer’s balance. Credit card companies have been using this tactic to reduce the risk of their credit exposure frequently throughout this recession. The bill will now prevent them from changing the rate until the account is 60 days delinquent.

The bill will mainly affect large credit card issuers like Bank of America (NYSE:BAC), J.P. Morgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C). Credit card companies like Discover Financial Services (NYSE:DFS) and American Express (NYSE:AXP) will also be severely impacted by this bill. These players profit from not only fees they charge consumers, but also the rates on the balances. They thrive in times when they can charge high interest rates on consumers who fall behind on their payments or people who are financially uneducated.  The legislation will mean lower profit growth in any economic recovery. In the credit card companies’ defense, many of these rate increases they have been imposing may be justified considering the increases in credit card delinquencies.

According to the Federal Reserve, approximately 6.5% of consumer credit-card loans were delinquent in the first quarter. This compares to a delinquency rate for credit-card loans of 4.8% last year. With delinquencies for these loan portfolios to increase, expect many of the issuers to significantly boost their rates on existing balances before this is officially passed by the house.

The bill, if passed, will not directly affect card payment processors like Visa (NYSE:V) and MasterCard (NYSE:MA). These companies operate as a “pay-as-you-go” service and do not have anything to do with a consumer’s balance or bill payments. These companies profit from transactions which customers make and charge the individual merchants for card usage. Generally they make a profit on every transaction, so the more credit card volume, the more profitable they are. The bill may indirectly affect these companies as card issuers may be more reluctant and wary about who they issue a new card to, which may slow down the transaction and volume growth they have witnessed and are expecting to see over the next 5 years.

This bill has received overwhelming support from politicians, and will likely be passed by the house and signed into law by President Obama very soon. Watch for some activity from the credit card industry, as many of the banks who have the largest number of cards outstanding to either reduce their exposure to the industry or find other tactics to make its division more profitable.

Disclosure:  The Fund the author is associated with is long JPM.

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