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As the CARD (Credit Card Accountability, Responsibility and Disclosure) Act goes fully into effect in the USA on Monday, consumer finance industry observers are preparing to witness changes.
Current revenue models in the US based on more flexible fee and pricing policies are in the course of being adjusted to conform to the new rules, including banning double-cycle billing and some retroactive interest-rate increases, among others.
But how do the CARD Act’s measures stack up internationally? A look at regulation in some of the world’s other major credit card markets sheds light on exactly how far the rules could go toward revolutionizing the US industry.
Japan and South Korea, two of Asia’s most developed credit card markets, have both experienced credit regulatory changes and ensuing fallout in the industry in recent years. The South Korean government moved quickly to tighten credit card regulation in the wake of the market’s infamous consumer credit card bubble in 2002-2003.
After several years of extremely high growth in credit cards driven largely by the South Korean government’s own policy of encouraging issuance in order to boost consumer spending and clamp down on the grey market, a surge in consumer bankruptcies and bad card debt forced the government to intervene in the market to support the country’s major issuers.
It went as far as to set up a type of national collections and financial literacy agency, the Credit Recovery Supporting Service, re-scheduling consumer debt and offering credit counselling.
Regulation was also tightened, with the South Korean government virtually back-paddling against the wave of easy credit it had helped promote. It re-instated a limit on the amount of cash a cardholder can withdraw against a credit card based on income, reduced card companies’ commissions, banned promotional gifts to new cardholders and cracked down on ‘loose’ credit card issuing. LG Group and Samsung Corp’s card issuers – the country’s number one and number three credit issuers by card numbers at the time – were even ordered to suspend credit card issuing for several weeks in spring 2002.
While growth in the number of cards issued dropped drastically starting in 2003, the industry has since managed a solid recovery. Growth in the value of credit card transactions has stayed continuously positive since the crisis, reaching as high as 13.7% in 2006-2007, while credit card issuance picked back up in 2006, falling negative in 2007 and reaching growth of 6.5% in 2007-2008.
As of 2009, the main source of revenue for South Korean issuers was merchant fees, while their business structure is characterized by high operational costs and low profit-asset composition, with increasing pressure to reduce merchant fees for small business establishments and tightening requirements for the provision of point rewards accumulated by members.
South Korean credit card companies have begun a process of refining their rewards programmes to link them more tightly with the purchasing performance of cardholders, rather than orienting marketing efforts around new customer acquisition as previously practiced.
While the government’s support of the major South Korean issuing banks kept a resulting wave of industry consolidation at bay for the most part, Japan’s credit regulation changes in 2006 had a visible impact on both issuing trends and industry structure.
The effects of the amendment of Japan’s ‘Money Lending Business Law’ in December 2006 are still being felt, with major players restructuring their card businesses through 2009. The amendment, which lowered the maximum legal interest rate from 29.2% to 20.0% and banned loans that exceed one-third of a borrower’s annual income, had a direct impact on credit card issuers’ revenue structures. Before the change, revenue from higher-interest cash advances was a key source of profit.
Companies such as Orient Corporation and OMC Card Co Ltd reportedly derived about 70% of their profits from cash advances, and thus suffered considerably from the reduction in the maximum interest rate chargeable from 29.2% to 15-20%. The lower acquiring fees offered to public institutions, such as utilities and tax payments, also ate into profits.
The reduced profitability of credit card operations led to a spate of mergers and acquisitions among credit card companies, in a similar process of consolidation to that which characterised the banking business in Japan in the 1990s.
However, mergers alone were not sufficient to overcome the impact of the regulatory changes on profits, and companies have had to find other ways to profit from credit card issuance. UFJ Nicos and DC Card Co Ltd merged in April 2007, and the combined entity acquired Jaccs Card in April 2008.
Sumitomo Mitsui Financial Group Inc merged with Central Finance Co Ltd in 2007, which was previously under Bank of Tokyo-Mitsubishi UFJ. Sumitomo Mitsui Financial Group Inc aimed to merge with Central Finance Co Ltd in 2007. However, the merger was not completed and Sumitomo Mitsui Financial Group restructured its credit card business again, and launching Cedyna Co Ltd in April 2009, a merger of Quork Co Ltd, OMC Card Co Ltd and Central Finance Co Ltd. Sumitomo Mitsui Financial Group has a substantial acquiring infrastructure in the Japanese credit card industry, and the new company has pursued profit through offering new services in order to survive in the current difficult environment.
While Quork, OMC and Central Finance did not perform well in 2007, Sumitomo Mitsui Bank is expecting to achieve profits of ¥30 billion by 2011.
Credit card issuers in most euro-zone markets have been operating under tighter regulatory conditions than their US, UK and some other counterparts for years. In an editorial article in the February 2010 edition of the German industry publication “cards Karten cartes”, the Head of Finance Instruments at Germany’s BaFin financial regulator referred to the practices now being banned in the US as “adventurous privileges” from the German point of view.
A general lack of trust in credit and German banks’ traditional focus on charge cards and debit cards with an overdraft function continued to keep credit function cards at just 3% of financial cards in circulation in the German market in 2009.
Most of Germany’s neighbours in continental Western Europe have had comparable experiences with credit. Despite credit penetration being not much higher in France than in Germany, with credit function cards equaling just 16% of financial cards in circulation in 2009, regulators there have clamped down on consumer credit lenders in the wake of the financial crisis.
The new “Loi Lagarde”, set to go into effect in May 2010, will require extended time for a customer to cancel a credit contract, an 8-day period between contact with the lender and access to a credit line and even go as far as to forbid implications by the lender that credit can serve as a budgeting tool or improve the financial situation of the borrower. In fact, when the law was under consideration last year, France’s Parti socialiste (PS), which currently commands almost one-third of the seats in the National Assembly, argued for a complete ban on revolving credit for consumers.
Of Europe’s large credit card markets, the current regulatory situation in the UK is most similar to that in the US. UK regulators also appear to be headed down a path of tighter credit rules as non-performing card lending rates there rose to over 11% in 2009 due to the global recession. In a White Paper on consumers released in July 2009 just months after the signing of the CARD Act in the US, the UK government proposed a review initiative by the Department for Business, Innovation and Skills to look into credit and store card practices.
The results of the review are to be released this spring and the measures examined, including requiring application of payments to higher interest rate balances, higher required minimum payments and restrictions on raising interest rates, seem likely to come into effect in some form over the next several years.
Set in the international context, the CARD Act rules and potential effects on the US market seem both overdue and inevitable. As US issuers were making complicated fee and interest rate policies a profitable part of their revenue streams over the past decade, their counterparts in many of the world’s other major credit card markets were dealing with the realities of stricter rules perceived as necessary by regulators to protect the millions of either “credit-illiterate” or “credit-shy” consumers in their countries.
South Korea’s problems and ensuing rules can be traced to the ‘newness’ of credit cards to the market at the end of the 1990’s and the government’s original assumption that consumers would innately understand the complexities of credit card usage when cards were placed in their hands. In Japan, a high debt-related suicide rate was a significant driver behind the 2006 reforms, while continental Europe’s historical caution toward credit has made for stricter treatment of it in many of the region’s legal systems.
Double-cycle billing and universal default re-pricing really do seem like “adventurous privileges” when set against measures such as temporary suspension of credit card issuing during a bank bailout or a ban on messaging that promotes credit as a tool for budgeting.
Given the recent consolidation in US issuing in the wake of the financial crisis, however, it seems unlikely that the industry will see even more restructuring on the level of what happened in Japan after 2006. Nonetheless, more purchase-driven marketing efforts, re-instatement of annual fees and a significant drop in balance transfer offers can be expected in the US over the coming months as issuers adapt to the new – and perhaps more conventional in an international context – regulatory environment.