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) -- The CARD Act that goes into effect today will make the credit-card business less profitable, but also less risky, for the country's largest card lenders and issuers.

Credit cards had become a cash cow of sorts for big firms like

Bank of America

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JPMorgan Chase

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Capital One

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. Credit cards provided $23 billion in fees alone last year, according to the advisory firm R.K. Hammer, and also have higher interest rates than most other types of consumer debt.

Those penalty fees soared 21% from 2008 while the average interest rate has climbed 2 percentage points over just the past six months, to over 14%, according to Customers with the worst credit have gotten hit the hardest, with their average rate surging to nearly 24.86% from 14.29% over the same period of time.

But just as implied revenue has climbed in the worsened economic environment, so too have losses from delinquencies and defaults. Bank of America, the largest U.S. lender, collected $20.3 billion in interest payments and $9.1 billion in fees from credit-card borrowers last year. Still, it ultimately lost $5.6 billion on the business in 2009 because of charge-offs of bad debt and provisions for future losses.

There have been some signs of improvement recently in monthly payment data from big banks, but they aren't out of the woods yet. Consumers are still relying on credit cards as a loan of last resort, and many of them aren't paying it back, due to job losses and other financial stress. Once the economy recovers, the CARD Act will make it much more difficult for lenders to earn quick, easy profits from even the best credit-card borrowers.

Broadly speaking, the regulation will force banks to be more transparent about terms, in simple language, and will not allow them to quickly change rates or fee structures. Additionally, if they do plan on raising rates, customers will now not only get more time to opt out of the debt agreement, but also more time to pay off their outstanding balance.

The CARD Act will also ban lenders from preying on less-sophisticated consumers. For instance, the common practice of offering college students gifts or food in exchange for filling out an application will now be banned, and students will also have to prove their ability to pay before being approved.

Big banks are using very different approaches to deal with the impending changes, and the negative effect they will have on revenue and profit. They will have to be careful about the strategies they use to replace that income without angering customers and regulators.

Bank of America, for one, appears to have embraced regulatory changes aimed at helping consumers, as part of its overall push for better customer service. The bank rolled out a "clarity initiative" for its 40 million credit-card customers in November, distributing one-page explainers of terms and fees that were easy to understand. Management has warned investors during conference calls that Bank of America will simply lose revenue from practices that are being banned by regulators -- up to $800 million due to the CARD Act alone -- until the firm figures out how to spread those fees across other products and services.

Citigroup, on the other hand, has been combating the change by

adding annual fees onto popular credit cards. The New York Attorney General attacked the firm for attempting to use the same tactic on checking accounts. Citigroup settled the dispute by suspending those plans.

Management indicated during a fourth-quarter conference call that Citi will lose anywhere from $400 million to $600 million in net pre-tax revenue as a result of the CARD Act. It's unclear whether the government will crack the whip again for Citi's planned credit-card fees, which customers have been informed about via mass mailings.

Capital One had also been using some less-than-savory tactics, until a bank regulator recently took notice. Capital One had been charging some customers an annual fee, despite the fact that they had already closed their accounts years ago. Capital One attributed the post-mortem fees to a system glitch, and agreed to reimburse customers a total of $775,000, as part of an agreement with the Office of the Comptroller of the Currency.

JPMorgan Chase's Jamie Dimon has been a vocal critic of much of the consumer-protection legislation, asserting that it will increase costs for banks while reducing revenue, and not helping consumers all that much. Since banks will continue on their profit-driven mission, the changes will eventually make all consumers pay more, rather than targeting the ones who are bad at managing their money. Dimon has a point, but it's one that has largely fallen on deaf ears.

"The effects of the CARD Act coupled with the overall attitude in Washington regarding consumer protection will likely continue to reduce industry revenues and profits over the next several years," Credit Suisse analyst Moshe Orenbuch said in a recent note to clients.

As a result, JPMorgan has been aggressive in

pursuing new customers and expanding banking relationships with existing ones, until there is more clarity on where new fees can acceptably land. The bank estimates it will lose $500 million to $750 million in annual revenue as a result of the CARD Act legislation until then.

In the meantime, the outlook for the card business is challenging. Credit quality of borrowers won't fully recover until the job market does, and stiff regulation will further push down profits. Issuers will therefore face tough competition for the 'primest' of prime borrowers, a space typically inhabited by

American Express

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Orenbuch said the current environment is "one of the most challenging in the history of the business," predicting "few 2010."

He suggests that investors buy shares of


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, which, as processors, have little exposure to any of the regulatory or credit headwinds. He remains neutral on Capital One and


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, and thinks American Express will underperform because it lacks exposure to the fast-growing debit card business.

For diversified lenders, the impact of new rules will certainly be felt in the near-term. But perhaps over the long haul, the CARD Act may actually benefit the banks it sought to redress more than the consumers that it sought to assist.

"While the recently instituted

CARD Act will reduce near-term profitability, we expect it to lead to a healthier card issuing business with lower credit risk, reducing the sensitivity of the business to economic downturns," William Blair analyst David Long said in a recent report.

-- Written by Lauren Tara LaCapra in New York