CARD Act: Only the Most Sophisticated Credit Card Companies Will See Gains

At one year old, the Credit CARD Act seems to be an overall success ­— a fact that will have major implications for credit card issuers resulting in the most sophisticated companies growing stronger and the less advanced becoming significantly weaker. This credit card reform law, which was enacted on Feb, 22, 2010, has by all accounts increased transparency throughout the credit card industry, resulting in improved issuer-customer communication, more clearly expressed fees and more predictable terms. In addition, contrary to the fears that enveloped the bill prior to its passage, the CARD Act has not been responsible for either increased interest rates or decreased amounts of available credit.

While both have indeed occurred, studies have shown that these trends are not attributable to the law. Therefore, the CARD Act is not expected to undergo major changes moving forward. As a result, certain events and trends should be anticipated in the credit card market during the coming years.

First, companies like First Premier and CompuCredit (CCRT) will undergo commoditization because their unsophisticated underwriting techniques will not be able to sustain unsecured products. Prior to the passage of the CARD Act, these companies routinely charged fees as high as $200 for $250 credit lines and as a result were willing to approve nearly everyone who applied for their cards. Now, as a result of the CARD Act’s fee restrictions on subprime credit cards, the companies’ unsecured products are gradually disappearing. This shift toward commodity-type products like secured credit cards will result in the aforementioned companies commanding a significantly decreased position in the credit card market.

Secondly, given the company’s impressive performance during the Great Recession, Capital One (COF) is extremely well positioned for success as the economy recovers. Capital One’s credit card division was more profitable than that of any other bank in 2009, the worst year of the recession, and such impressive perseverance indicates an extremely sophisticated underwriting strategy whose effectiveness will only be emphasized further by the CARD Act. According to Capital One Chairman and CEO Richard Fairbank, this law will "level the playing field," for companies like Capital One, which once had "an arm and a leg tied behind our back" because of an unwillingness to engage in now-illegal predatory maneuvering.

Finally, JPMorgan Chase (JPM), Bank of America (BAC) and Citi (C) have work to do in catching up to the competition. Out of the top 10 issuers, the credit card operations of these three companies were the only ones that actually lost money in 2009. Unless they improve in a new, more transparent financial environment, their position in the credit card marketplace will continue to weaken.

In all, the CARD Act has proven a success and has not only benefitted consumers but has also created a marketplace in which the most sophisticated and efficient companies flourish. Before the law’s implementation, free market principles could not operate effectively in the credit card space because hidden fees and rates prevented consumers from accurately comparing offers and ultimately applying for the best credit card deals. Now, however, tactics that effectively allowed less sophisticated companies unfair grounds on which to compete with their more advanced counterparts have been abolished and the companies that intuition says should dominate will begin to truly do so.

Disclosure: I am long COF.