On May 22, 2009, President Obama signed the Credit CARD Act of 2009, which restricted a number of practices, such as universal default, double-cycle billing, and overlimit fees, that had been criticized by consumer advocates for years. It was unquestionably the most punitive legislation ever to hit the credit card industry, and was probably made possible by the sub-prime mortgage crisis, which uncovered a whole host of unsavory practices that provoked public outrage.
The question now is, what should banks do about it? The decision seems to have been made to punish consumers and thereby drive them back to their legislators to get this law repealed. Good luck with that.
I recently heard a high-placed industry official comment that modification of the Credit CARD Act is off the table, and that the industry’s strategy now should be to do what it threatened to do before the Act passed: raise rates, raise fees, raise minimum payments, lower lines, and let Congress feel the angry response from the consumers that it harmed.
Indeed, we have seen many industry reports (see here and here) that rates and fees have indeed gone up since the Act was passed. Some of this activity was probably in the works anyway, since banks have been encountering very high chargeoffs, and would need to recover their losses somehow. Also, the majority of the new law’s provisions do not go into effect until February 22, 2010, so the impact from them will not be felt until next year. However, there does seem to be a deliberate strategy on the part of at least some issuers to punish consumers for Congress’ actions, and this seems to me to be an extremely risky idea.
Let’s assume that consumers do get angry from having their rates, fees, and minimum payments raised. What is more likely, that they will criticize their lawmaker for being too tough on the industry, or for being too lenient? We just had another report of huge bonuses being paid to bankers, which is sure to provoke even more outrage. Never mind that it has nothing to do with the credit card business, consumers won’t make that distinction. They are going to be pushing harder than ever for more restrictions on banks.
Next up: check clearing and overdraft fees. Last month, I read a blog posting by the editor of the Chicago Daily News about unreasonably long hold times for deposits with Bank of America that put his payroll at risk, and outright rude responses from customer service. At about the same time, I talked to an independent consultant who told a similar tale of woe: his bank, also Bank of America, increased its hold times to 7-10 days even as their electronic check clearing percentage went to 92%. I doubt these are isolated incidents; banks are increasing float revenues by holding onto deposits longer. Naturally, longer hold times also increase overdraft fees, which are the biggest payments revenue source at most banks, bigger even than interchange fees.
My own bank recently informed me that due to a “limitation” of their system, if there isn’t enough money in your overdraft line of credit to pay all of the checks that get presented on a given day, all of them get returned, even if there is enough credit to pay some of them. What a convenient “limitation”! I wonder why that hasn’t gotten fixed yet?
Sure enough, the Fed is already looking at restricting these practices, and I bet Congress will be eager to help them along. If you thought the Credit CARD Act was bad, just wait until overdrafts get restricted. Why is the banking industry pouring fuel on the fire, in effect daring the federal government to smack them down?
Such punitive tactics only make regulation more likely, and with the interchange legislation waiting in the wings, the banks have more than enough regulation to worry about. They should not be pursuing policies that make such regulation more likely.
Perhaps they think the CARD in the Credit CARD Act of 2009 stands for Consumer Attrition, Reduction, and Destruction?
