Credit Card Regulation on Cards?

Credit card companies were reeling Thursday evening after the U.S. Senate passed a financial regulation bill that many in the industry expect to have far-reaching consequences. A weeks-long process of reconciliation now begins with a House bill that covers similar regulatory territory. The White House plans to be closely involved in those negotiations.

Credit Card Rates May Escape Controls

Although amendments designed to cap or control credit card rates were not passed, card issuers are concerned about other provisions, including the creation of a new regulator. The Senate proposes that this should be a new office within the Federal Reserve, but Congress wants to create a stand-alone agency. Either way, it’s not good news for credit card companies.

Yet more worrying for the industry is the Senate’s move to moderate so-called “interchange” or “swipe” fees that merchants pay to Visa and MasterCard every time a debit card is used. If, as planned, these must in future be “reasonable and proportional” to the transaction processing costs then this will cost banks’ card divisions dearly. What the industry really fears is that interchange fees on credit card use will also be regulated, a move that BusinessWeek, quoting an analyst’s note, described as “inevitable.”

Interchange fees on debit and credit card use are said to have amounted to close to $50 billion in 2008, a sum that even bankers regard as worthwhile.

Credit Card Deals to Suffer?

Writing in Forbes, one industry insider, Bill Hardekopf, observed:

Banks say they charge the interchange fee to cover operating costs to process credit card transactions, to maintain the processing network, and to protect against fraud. They warn that if the interchange fees are cut, they will have to find other ways to recoup these costs. This could force them to once again squeeze credit and raise the cost of credit cards at a time when economists and retailers are hoping for looser credit to boost the economic recovery.

As we discussed in the last of these columns, the amount retained by Visa and MasterCard to pay for transaction processing and maintaining the network is small (about nine cents a dollar), while roughly 87c is passed on to the card issuer to help pay the companies’ outgoings and to fund “extras” such as credit card rewards programs.

If that income stream is reduced, credit card companies will have to charge customers in other ways to keep afloat.

Prepaid Credit Cards an Answer?

You may think that the best way to avoid all the cardholder issues that new credit card regulation is likely to implement would be to switch to a prepaid credit (or–more accurately–debit) card. One thing’s for sure, you won’t have to pay any interest, because you won’t borrow money on one of these. And you can obtain one pretty much regardless of your credit score.

But, last October, the New York Times ran a long feature about how some prepaid card issuers gouge their customers with outrageous fees. So it’s very important to make sure you fully understand the terms and conditions before you sign a credit card application for one of these.

Published 05/21/10 (Modified 03/24/13)