On May 22, President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009, legislation that stands to materially change credit card product offerings. Reacting to consumer backlash from the financial crisis, Congress easily passed new regulations that prohibit or restrict many common credit card pricing, billing, marketing, and other practices.
While most of these changes do not take effect until February, many constituents in the industry are already grappling with the impacts of CARD. Most of the focus is on card issuers, but this new legislation may also have significant ramifications for merchants, acquirers, and independent sales organizations.
Interchange
The provision of the CARD Act with the greatest potential to affect acquirers and ISOs is the requirement that the Government Accountability Office (GAO) conduct a study on interchange within 180 days of the enactment of the law (November 2009). Specific topics to be studied include:
The extent to which interchange fees are required to be disclosed to consumers and merchants, and consequences of the “undisclosed nature of interchange fees;”
The extent to which the rules of payment card networks are available to merchants;
How costs and other factors are incorporated into interchange fees and how merchant discount fees compare to the cost of other merchant payment forms.
The law even goes so far as to indicate that the report should incorporate “recommendations for legislative or administrative actions as may be appropriate.” Between the CARD Act and two recently introduced versions of the Credit Card Fair Fee Act in Congress, interchange is clearly coming under the regulatory magnifying glass this year.
It is difficult to speculate on the ultimate impacts of these examinations, but certainly the underlying drivers are merchant-focused and oriented towards at least providing more visibility into the interchange system. For example, it is possible that the GAO’s report will shed more light on the differences between interchange rates and the discount rate and fees charged to merchants, which could result in further scrutiny of pricing to small to mid-size merchants that typically generate the majority of acquiring-industry net revenues.
Additionally, the law calls for a review of the ways in which merchants can negotiate pricing with the card networks, and this is also the main thrust of the Credit Card Fair Fee Act proposals. If either of these initiatives results in the introduction of some sort of bi-lateral interchange agreements, acquirers’ and ISOs’ ability to set final pricing to merchants may be at risk.
Another potential outcome of any interchange legislation could be a new set of protocols related to the disclosure of merchant pricing and paymentnetwork policies. Acquirers and processors might be required to deliver this information to merchants and other constituents. This, along with any potential price-structure changes, could have significant technology and operational ramifications.
Ironically, despite all of the merchant- focused interchange items in the CARD Act, the legislation will leave interchange as the only currently unregulated, material revenue driver for card issuers. This will likely heighten issuers’ desires to protect interchange through lobbying and portfolio-management tactics such as continuing to shift cardholders to premium interchange products. (A bill from U.S. Rep. Peter Welch, however, aims to level premium and non-premium card interchange rates.)
Payment Mix Shift
The credit card market is already reeling from the economic crisis, with consumers both reducing overall spending and “de-leveraging” by shifting their spending from credit to other forms of payment.
Will the Credit CARD Act prolong this mix shift? The answer depends on how issuers evaluate and make adjustments for provisions of the law that will likely have the greatest financial impact. They include limitations on increases in interest rates on outstanding balances; generally restricting interest-rate increases in the first year of a new card account or for six months for a promotional rate; and charging penalty fees that are “reasonable and proportional” to cardholderagreement violations.
Other components of the Act are squarely focused on more clearly disclosing credit card terms to consumers. In response, cardholders may reduce their purchasing and borrowing behavior on credit cards.
Since many of these changes must be implemented by early 2010, one could envision a scenario where, as the recession begins to ebb, acquirers and ISOs will begin to see the effects of the CARD Act in the form of continued away from credit cards (or reduced growth relative to other electronic payment forms). This, in turn, may erode acquirer revenues, particularly if products like PIN debit play a greater role in consumer purchase behavior.
Prepaid products have already been the subject of federal and state regulatory actions over the past five years, and the CARD Act places new limits on expiration timeframes and fees for particular types of prepaid products, specifically non-reloadable gift cards and certificates.
Due to current pricing structures, these new regulations may not have a significant impact on major merchants’ closed-loop products. However, the overall economics of gift cards for third-party providers, including ISOs and acquirers, may become less appealing, especially relative to offerings provided directly by major merchants.
In sum, while the headlines for the Credit CARD Act of 2009 are mainly related to issuers and consumers, acquirers and ISOs need to be prepared for the downstream impacts of this important legislation. and sustained volume shifts.
