The Bank’s Take on Credit Card Reform
It certainly is hard to feel sympathy for a bank but if you ever could harbor such feelings then perhaps now would be the time to empathize with them. Yeah, I know there’s not going to be a whole lot of sympathy for them but they most certainly have been hit hard from all sides over the past few years and it truly has sent them reeling.
The economy began to go sour a few years ago and has recovered little if any since then despite the best efforts of the Obama administration and their various stimulus plans.
The unemployment numbers released last week revealed that we are now officially in double-digit territory for the first time in 26 years at 10.2% nationwide.
And the third major hurdle that they’re now facing comes in the form of credit card reform legislation. This three headed monster taken individually would have a deleterious effect on the bottom line of financial institutions. When they all come at once, well, it’s a challenge to say the least.
The Federal Reserve recently conducted a poll of a cross-section of banks throughout the United States. They asked the banks how they saw themselves reacting to the newly minted credit card reform legislation. Predictably, they don’t much care for it.
While there is a movement afoot in Congress to speed up the legislation so it goes into effect on December 1, as opposed to February of 2010 as scheduled, a full 75% of the banks polled said that they will not be compliant until February 2010.
When queried about how they were likely to respond from a business standpoint the answers weren’t surprising at all. Because the legislation will curb the ability of credit card issuers to arbitrarily raise interest rates and charge penalty fees, they will be scrambling to find ways to make up for that lost revenue.
While dealing with that they also must deal with a record high number of defaults. That issue alone is threatening the very existence of some banks and credit card issuers. Recently Advanta, a formally big player in the small business credit card market, declared bankruptcy.
In order to stem the tide of these record default levels the banks, pretty much across the board, will be taking a three tiered approach.
The three ways they plan on addressing these issues include:
- Raising interest rates
- Raising the minimum credit scores required to get a credit card
- Reducing credit limits
Now no one knows for sure how this is all going to play out for the credit card industry. What we do know is that we really won’t have a good idea of how the new credit card reform laws will truly affect the way the banks do business until all the provisions are in place. Then and only then will we have an idea of the true effect that the legislation will have.
Perhaps come February and will finally see the employment numbers begin to abate. That alone will go along way in propping up many of these staggering banks. As any economist will tell you, as unemployment goes, so goes the credit card industry.
Related Information:
- Credit Card Reform May Be Moved Up There is a call on Capitol Hill to move up the credit card reform deadline by three months....
- House Moves to Accelerate the Effective Date of Credit Card Reform Legislation The House of Representatives is talking about moving up the date for credit card reform....
- Credit Card Reform Legislation Passes The House or Representatives overwhelmingly passes credit card reform legislation and now it's off to the Senate....
- Obama Supports Credit Card Reform Now the Obama administration is throwing their weight behind credit card reform....