Credit Card Bill Impact on ARM Industry Uncertain

The Credit Cardholders Bill of Rights Act of 2009, signed into law late last week by President Obama, will lead to a restructuring of credit card operations, including accounts receivable management and collections, financial experts agree. But how the bill will impact credit card collectors remains unclear.

“I think it’s really short-sighted by the Congress and the President,” Tim Smith, vice president of collections for Firstsource Advantage LLC in Mumbai, India, told insideARM.  “The new legislation will force the credit card companies to tighten credit lines. And for many consumers, the credit card is the only short-term form of credit that they have. The legislation is going to hurt consumers more than help them.”

Alan Mattei, managing director of Novantas, a New York-based management consultancy that specializes in financial services, agreed. “As a result of the legislation, the revenue model of the credit card companies is going to have to change,” he noted. “They’re going to have to shift their models toward safer credit. They will be reducing their revenue while reducing their risk. They’re going to have to divest themselves of some people who might have been reasonably profitable in the past.”

The legislation, which doesn’t take effect until next year, is expected to hit the revenues of card companies because it limits many of the practices (e.g., applying payments to low interest balances first) that have proven to be the mainstays of many card companies’ cash flows.

Some of the riskier accounts that credit card firms have taken on in the past will not be accepted in the future, Mattei said, pointing to college students as a prime example. “They’re going to have to tighten up who they focus on.”

Mattei cited the case of Advanta, one of the larger credit card issuers, which announced tow weeks ago that it would amortize its securitization trust beginning on June 10, and would shut down all credit card accounts to future use at that time.

“Neither Advanta Bank Corp. nor any other Advanta-related entity will fund activity on its balance sheet from the accounts,” the company said in a press release. “Therefore, the company will not take any off-balance sheet receivables onto its balance sheet. Shutting down the accounts will not accelerate payments required from cardholders on existing balances.”

Mattei and Smith agreed that legislation will push credit card firms to increase interest rates, shorten or even totally eliminate grace periods, add annual fees for “convenience users” (those who pay off their balances every month) and find other ways to replace the revenue they expect to lose.

Annual fees were common for credit cards up to the 1990s, when the practice went out of vogue.

Smith points out that 80 percent of credit cards in the United Kingdom have annual fees, but only 20 percent of the cards in the U.S. have them. So there is certainly room for those fees to rise.

“Again, this will be hurting the consumer,” Smith said.

Smith and Mattei have differing views when it comes to how the legislation will impact credit card receivables, delinquencies and collections.

Smith points to the continuing weak economy, especially the continuing employment weakness, as a reason that credit card receivables and delinquencies will continue to rise. “Balances are still going up.”

As charge-offs increase, Smith expects credit card companies to continue to seek the most effective ways to collect on these accounts.

^pullquoteThe average chargeoff rate for credit card accounts was 8.43% in February – Kaulkin Ginsberg Consumer Finance Reportpullquote^

But Mattei expects credit card firms to attempt to shrink collections by being more aggressive as accounts become past due. “They’re going to try to cure customers’ [credit].”

By the time the legislation actually goes into effect, Mattei expects credit card firms to have cut their receivables and the collections they outsource.