In reaction to legislation enacted last week, credit card issuers are expected to retool their operations in a host of ways not all of them obvious.
Industry participants said they expect issuers to change their internal systems and billing operations, introduce replacement products or even sell their card businesses.
Issuers said last week that they will also adjust to the new reality with more of the by-now familiar strategies: higher interest rates, tighter credit, fewer reward programs and possibly more annual fees.
But clearly the legislation shook the industry's foundations, and issuers now must find some way to make up for the revenue they will no longer be collecting.
"The credit market will be smaller, more defined," Ric Struthers, Bank of America Corp.'s president of global card services, said in an interview Friday. "The fundamentals of making a credit decision ability, stability and willingness to pay there will be a lot more focus across the industry on those attributes and making the right choices of which customers you extend credit to. It's going to be a smaller market, but it still will be a very profitable market."
One major issuer has already hinted that it may drop out, in part because of regulatory pressures.
"This business clearly faces financial headwinds in these difficult economic times, as well as regulatory pressures," HSBC Holdings' chief executive, Michael Geoghegan, told shareholders Friday. "If these become too strong, and we are not able to leverage this business more fully on a group basis, we may have to rethink" keeping the London company's U.S. credit card operation. Nevertheless, "in the meantime, we believe that unless there is further significant deterioration, the assets in this business can ride out the storm."
A spokeswoman for HSBC's U.S. card unit said by email Friday, "HSBC remains committed to the U.S."
Chris McWilton, the president of U.S. markets for MasterCard, told analysts last week that the legislation will "radically impact the way credit card companies operate, how they price, how they manage for risk, how they market."
It will also affect more "mundane things" for issuers, like "how they bill," he said. "Seventy to 80% of their IT capacity is going to be just keeping up with regulation. This will change the dynamics of their business models in dramatic ways."
Issuers agreed that the law will require realloting some resources to reorganizing their internal systems.
"The big challenge here is changing all of these systems to accommodate these new rules," said Scott Wagner, the executive vice president of Town North Bank's card services unit. "Some of the systems that are out there that process these transactions don't have the capabilities to do what these regulations are calling for."
Among other things, the law will add a slew of disclosures designed to caution cardholders about the consequences of making only minimum payments by highlighting how long it would take to pay off balances and showing how much interest would get tacked on.
Wagner said those disclosures will require the most effort and investment on the part of both issuers and their processors. Town North Bank, which is selling its issuing business but would continue to process transactions for 400 credit unions, has more than 10 people "that are working on this project, just understanding the changes and the systems that have to be modified."
Struthers agreed that "naturally, to make these changes, there's a significant investment that we're making in technology to make this happen over the next nine months." (He would not provide the specific amount of the investment.)
Harit Talwar, the executive vice president of cards and chief marketing officer at Discover Financial Services, said in an interview last week that it is rethinking everything but looking mainly at rates.
"There will probably be higher interest rates and tighter credit criteria," he said. "We lose the flexibility to price customers for the full life cycle. Therefore, we will have to make assumptions at the beginning."
Talwar also said Discover intends to put "less emphasis on promotional pricing," though that it cannot speak to plans for annual fees or reduced rewards. "It's too early to respond in full level of detail. But we have to review everything."
Similarly, Struthers said all options are on the table at BofA, including new products. "We're going to be designing products and services that take advantage of us having dominant positions in both" credit and debit, he said.
BofA is also considering adding annual fees, raising rates and restructuring its reward programs. Struthers said it was too soon to discuss specific plans, but "I do believe there will always be a market for no-annual-fee cards."
Richard Vague, a veteran credit card executive, said many issuers may focus on rate hikes as the most palatable way to reprice for risk without alienating customers. "Historically, the credit limit has been the most important factor. If I have a $10,000 credit line versus a $5,000 credit line, I like that [higher-limit] card more," Vague said. "It's also true that annual fees are more objectionable to a consumer than APR, because the consumer feels, 'I'm going to pay on time. I prefer a fee that I can control with my behavior to an annual fee.' "
American Express Co., which already charges annual fees on most of its cards, said that practice will help insulate it somewhat from the effects of the legislation. However, "it's more negative than positive," Kenneth I. Chenault, Amex's chairman, told investors on a conference call last week. "We're still studying what the impacts will be."
Brian Shniderman, a director of the banking team at Deloitte Consulting, said he expects some issuers to introduce hybrid products to offer as credit alternatives. His clients are "looking at ways to secure unsecured items," such as by "having an automotive to secure a credit card," he said. "A lot of these haven't been tested." Card companies "may go back to this notion of cosigning $2,000 may be unsecured, but $15,000 may be secured by a parent or a friend."
The law will also ban double-cycle billing, give consumers more time to pay their bills and significantly reduce issuers' ability to increase rates and charge over-the-limit fees. Nevertheless, "one thing issuers are very good at is finding a way to make money," said Duncan Douglass, a partner in the Atlanta office of Alston & Bird. "You're probably not going to get any of your paper statements for free anymore. Anything that they can get away with charging a fee for, they will."