The enactment of a credit card “Bill of Rights” by US president
Barack Obama on 22 May has given the retail banking industry its
clearest sign yet that the post-Lehman playing field will be an era
of more stringent regulation, but more significant still could be
the implications for credit provision at a time when card default
rates are continuing to spiral.
Under the new law, known as the Credit Card Accountability,
Responsibility, Disclosure (CARD) Act, customers must be notified
at least 45 days before any rate changes come into force, while
those rate hikes – as well as penalty fees and introductory
promotions – will also be subject to stricter supervision.
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Arbitrary interest rate increases will be
scrapped, as will the practices of double-cycle billing and
universal default, the latter policy involving lenders raising
rates in response to a cardholder missing a payment with another
lender.
Promotional rates must now last for at least
six months, with issuers prevented from raising rates for
cardholders in the first 12 months after account opening. Bills
must be mailed to consumers at least 21 days before they are
due.
The 45-day requirement is likely to come into
effect in the third quarter of 2009, with the majority of the other
provisions due to commence by February 2010.
Until then, the economic pressure on the
credit card industry will continue to intensify. On 18 May,
American Express announced it will cut six percent of its workforce
this year as part of a drive to reduce costs by $800 million during
the remainder of 2009. HSBC chief executive Michael Geoghegan,
meanwhile, admitted for the first time on 22 May that the bank may
“rethink” its US credit card business at the end of 2010 should the
sector’s current problems still be apparent.
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By GlobalDataWith total card losses at the top 19 US banks
forecast to reach as high as $82.4 billion under the US Treasury’s
“worst-case scenario” stress test (see RBI 612), lending
rationalisation is now in full swing – and will lead to $2.7
trillion in credit-card lines being cut by the end of 2010,
according to prominent US analyst Meredith Whitney.
That contraction could be accelerated by the
new legislation, according to some industry figures.
“This bill fundamentally changes the entire
business model of credit cards by restricting the ability to price
credit for risk,” said Edward Yingling, president and chief
executive of the American Bankers Association. “What has been a
short-term revolving unsecured loan will now become a medium-term
unsecured loan, which is significantly more risky.”
In spite of such concerns, the move will give
added impetus to other regulatory overhauls being considered across
the wider retail banking sector around the globe.
In the UK, fees and charges for current
accounts overdrafts have been reduced by banks who fear an adverse
outcome to the long-running investigation by regulator the Office
of Fair Trading. Meanwhile, UK card association APACS has said it
will monitor the latest US regulations, but noted similar
restrictions are already in force in Britain.
Elsewhere the picture is similar: in South
Africa, a report from the country’s Competition Commission ruled
that fees were too high and banks should implement reforms; in
France, new regulations over account switching and fee transparency
have come into force in 2009; and in Japan, consumer finance
lenders are paying back millions of dollars in excess interest
charges following a cap on rates (see page 15).
Such actions are likely to represent only the
start of a new wave of retail banking regulation.
|
US stress |
|
|
Credit card loss |
|
|
American Express |
20.2 |
|
Bank of America |
23.5 |
|
BB&T |
18.2 |
|
Capital One |
18.2 |
|
Citi |
23.0 |
|
FifthThird |
22.3 |
|
JPMorgan |
22.4 |
|
KeyCorp |
37.9 |
|
PNC |
22.3 |
|
SunTrust |
17.4 |
|
US Bank |
20.3 |
|
Wells Fargo |
26.0 |
|
‘More adverse scenario’ = 3.9% 2009 GDP |
|
