The Future of the Credit Card Industry
Major credit card issuers are now scrambling to rethink their business models in light of the recent passage of the Credit Card Reform Act legislation. This legislation will bring huge changes in the way that the credit card issuers profit. Because the credit card companies are so reliant upon charging high interest rates and fees, they will now be scrambling to make up for these lost revenues.
When you couple this along with the fact that many of these firms are struggling with record high default rates then you can see how the very existence of some has now come into question. On the other hand, there are some firms that limited their exposure to the subprime market and should therefore be poised to emerge from the current recession in a position of financial strength.
To recap, the Credit Card Reform Act puts a cap on the amount of interest and fees that credit card issuers can charge cardholders. By putting restrictions on how much can be charged to account holders, the profit margins are going to be greatly reduced. When you couple this along with the fact that charge-offs are now at a record high then you can see that it does not bode well for the future of some in the credit card industry.
Three companies in particular will be greatly challenged going forward. They are Bank of America, Citigroup and Capital One. All three of these credit card issuers aggressively sought out anyone and everyone to be their customers. They were the ones that you saw the most on television commercials and sent out the most solicitations to your mailboxes. Bank of America especially caught heat for issuing credit cards to illegal aliens.
Because of their huge exposure to the subprime market they are specially feeling pressure during the current economic cycle. Add in the fact that they are so reliant upon high interest rates and fees charged to less sophisticated cardholders and you can see just how serious their predicament has become.
Bank of America and Citigroup also have the added burden of being on the hook to the federal government to the tune of $45 billion a piece. That is how much federal stimulus money each institution received.
But it is not all gloom and doom for the credit card industry. Three companies in particular should emerge from this recession in a position of strength to take advantage of the credit market. These three credit card issuers with relatively healthy books include American Express, Discover Card and J.P. Morgan Chase.
They all avoided the temptation of the easy dollar and did not overextended themselves into the subprime market. For their foresight and responsible lending practices, they will no doubt be rewarded when this recession ends and spending begins again.
Related Information:
- The Future of Credit Cards It is no secret that the recession has hit the credit card industry exceptionally hard. Banks and credit card issuers are scrambling to collect on debts owed to them by...
- Capital One Financial Corp Reports A Record 4th Quarter Loss Capital One Financial Corp. is the parent company of credit card behemoth Capital One. It also has recently gotten into the branch banking business by buying Louisiana based Hibernia and...
- The Future of Visa Inc. In our last post we discussed how Joseph Saunders, the Chief Executive of Visa Inc., foresees the new credit card reform legislation affecting his industry. In this post I think...