Credit unions will have to compete in a credit card market stripped of some of their traditional consumer advantages, thanks to the credit card reform legislation recently signed into law.
President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 into law on May 22. The new law prohibits many of the practices credit unions have generally stayed away from, such as double-cycle billing and universal default fees.
Consumer advocates largely celebrated the banning of those practices, but credit unions face the prospect of having their biggest card nemesis forced to clean up its act. The result will be that credit union- and bank-issued cards are going to look remarkably similar in a number of ways because the new law has forced banks to act more like credit unions in issuing cards.
"This will end up making credit union and bank cards look a lot alike on the surface, but only on the surface," acknowledged Ondine Irving, founder of Card Analysis Solutions. Irving maintained that credit unions are likely to retain their advantage with consumers even if bank card issuers have to change some of their practices.
"The fundamental difference between credit unions and banks hasn't changed," Irving observed. "I believe the banks will seek ways using other fees and charges to get around these rules. Credit unions won't use things like that, so the difference between them will remain."
Irving noted, for example, that the practice of charging a minimum finance charge even when a cardholder does not carry a balance is something almost only banks do, which by her understanding is still allowed.
"Doing things like charging $2.50 every month even when a cardholder pays off their balance every month is going to mark the bank cards," Irving added.
Scott Wagner, executive vice president for TNB Card Services, agreed. "I believe that over time banks will find loopholes in the law that will enable to them to recoup some of the income they might otherwise lose," Wagner said. He added that credit union card issuers remain rooted in a nonprofit, cooperative ethic, which is an advantage they have over the bank issuers.
Glenn Schechter, director of card services for PSCU Financial Services, also argued that credit unions would differentiate themselves by continuing to offer credit cards to their members.
Schechter argued that the banks have been using higher interest rates and fees on a portion of their portfolios to subsidize the less profitable parts, for example the accounts of cardholders who don't carry a balance.
"When the income from those other parts of their portfolios are cut, it's unclear that those accounts are going to remain as profitable for the banks," Schechter observed. "If those credit lines are cut or even closed, those cardholders are still going to need credit, and their credit unions will be there to offer it."
The question of whether or not credit unions would start to charge annual fees on their card accounts met with more differences of opinion. Bank card issuers have warned that passage of the new law would mean annual fees on many bank-issued cards, but Schechter doubted whether they would really put any annual fees in place.
"A few people might remember the early 1990s when the first-issued credit card with no annual fee drew 16 million cardholders in 18 months," Schechter said. He pointed out that the power of offering a credit card with no annual fee was likely enough to stave off annual fees, and thus deprive credit unions from taking any PR advantage from not charging them.
Wagner estimated that annual fees on both bank and credit union cards may make an appearance in very targeted ways, for example on cards that carry extra rewards programs or specialized enhancements, like concierge service or special travel benefits.
Analysts also agreed that credit union card issuers would have to evaluate their card programs to determine changes necessary to comply with the new law. For example, credit unions affiliated with colleges or universities with significant student populations may need to change the way they market their cards to students under 21 to comply with the law that requires student cardholders to have co-signers.
–dmorrison@cutimes.com

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New Card Bill Brings Market Perils And Opportunities for Credit Unions

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