In addition to increasing transparency
throughout the credit card industry and instituting myriad consumer protections
, the Credit CARD Act of 2009 has made sophisticated underwriting techniques increasingly important to credit card companies' success. While many issuers have both recognized this necessity and adapted to the new system, it appears that Bank of America
(BAC), with its soon-to-be-implemented $59 membership fee increase, has not adjusted. The announcement of this fee -- which will be assessed to about 5% of the company’s credit card customers -- not only represents a breach of the CARD Act’s intent but also signals a need for strategic organizational changes if Bank of America is to truly compete with the country’s most sophisticated, compliant credit card issuers.
Prior to the CARD Act’s passage, credit card companies were able to use various re-pricing tactics and penalty fees to cover up and support their flawed underwriting techniques. Now, however, these deceptive practices have been outlawed, widening the already-existing gap between the most advanced credit card companies, like Capital One
(COF), and the likes of Bank of America. Capital One was the most financially successful credit card company in the worst year of the recession, 2009, while Bank of America was the worst, with $5.56 billion in losses stemming from its credit card operations.
It initially appeared as if Bank of America grasped just how precarious of a position it held within the credit card landscape when, indicating a commitment to break from the practices of the past, the company eliminated overdraft fees for its checking accounts. However, the recently announced membership fee changes all of that.
According to Regulation Z - Truth in Lending Act
, both interest rates and credit card membership fees are considered finance charges. As a result, Bank of America’s announced fee -- which will almost certainly be applied to accounts with existing balances -- violates the intent of the CARD Act stipulation preventing creditors from increasing interest rates on existing balances unless consumers are at least 60 days delinquent. Therefore, neither this fee nor future attempts to circumvent the law in order to garner quick-fix profits are likely to last long, especially considering the Fed’s illustrated commitment to closing loopholes
in credit card laws and the announced intention of the Consumer Financial Protection Agency (CFPA) to further increase credit card industry transparency.
As a result, anyone invested in Bank of America or like-minded credit card issuers has reason to worry. If these companies do not soon change course, they will lose market share and face an increasingly uphill battle in trying to compete with their peers. Regulators are prepared to protect the new-and-improved credit card landscape and banks that are unwilling or unable to adapt will struggle.
Position in COF
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