2008 and 2009 have been painful years for consumers with rising unemployment, high-levels of consumer debt and an increasing number of foreclosures, but the skies are clearing for consumers in 2010 as new financial protections go into effect allowing consumers easier access their credit reports and additional protections on their credit cards.
Although the year will be good for consumers, it probably won’t be a positive year in terms of revenue for some of the largest financial institutions which are heavily reliant on income from their credit card businesses, such as Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan Chase (NYSE: JPM). The new consumer protections going into effect will limit various fees that banks can charge and prevent banks from arbitrarily raising interest rates.
Of the coming changes, some of the most significant come from the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (commonly known as the Credit CARD Act). The legislation enacted wide reaching changes intended to reign in credit card fees and arbitrary interest rate increases. Credit card companies will be required to make additional disclosures and will be largely-prevented from nickel-and-diming customers on fees.
Credit card companies will also be limited as to what payments can be considered late. If your payment is due on a weekend or holiday, issuers will no longer be able to penalize you if your payment comes the following business day. Payments received by 5:00 PM must now also be credited the same day.
Finally, if you are late on your credit card for more than 60 days and have your rate increased, your issuer will be required to revert you back to the original rate if you have had 6 or more months of on-time payments.
The same legislation will also provide consumers additional protections related to gift cards. Starting in July, new rules will limit the amount of fees that companies can charge you on gift cards and stored value cards.
Although these new regulations are a breath of fresh air for consumers, credit card companies will likely take a major hit in revenue. Bank of America, JP Morgan Chase, Citigroup and others depend heavily on the revenue they earn from late-fees, over-the-limit fees and balance transfer fees. The new legislation will significantly hamper the profitability of credit card business units.
As a result, consumers will likely see significant changes in their cardholder agreements and have fewer credit cards available to them as they will be generally less lucrative to the financial industry. Consumers will likely have to pay an increasing amount of annual fees as banks attempt to make up for the losses in revenue from fees. Other banks will try to push consumers to variable rate credit cards which are largely exempt from the interest rate limitations.
The passage and enactment of the Credit CARD Act will be largely beneficial for consumers at first, but banks will almost certainly adjust to the new regulation to minimize the amount of damage that it causes to their flow of revenue.
