Credit Card Issuers in Transition

NEW YORK ( TheStreet) -- Bank of America's motivation for its recent move to tack on annual fees for a small percentage of its credit card customers is telling.

Unlike most of the other big issuers, the company has pledged that it won't be raising interest rates ahead of sweeping legislative changes for the credit card industry due in early 2010. But the decision to introduce annual fees for less than half a percent of its customers indicates it's not standing pat either. Instead, what BofA is essentially probing to see what works and what doesn't, for both it and its cardholders.

"What we're trying to do is get a better understanding of the value the customer places on the card," spokesperson Anne Pace tells TheStreet, adding later: "Right now, it's still too soon to tell what impact the new rules will have."

This approach could be the paradigm for card issuers over the next 12 months as they search for ways to mitigate an inevitable revenue hit. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act is going to put in numerous protections for consumers, such as banning retroactive interest rate increases and requiring companies send bills earlier in order to cut down on late fees. A prime aim of the legislation is to lessen the estimated $15 billion in penalty fees that U.S. consumers pay card issuers each year, as a press release from the White House said in May when the CARD Act was signed into law by President Obama.

That's revenue that the banks are loathe to lose, especially considering the difficulties of the current business environment where unemployment has edged into double-digit territory, dragging charge-offs for many institutions along for the ride. The economy seems to have stabilized in recent months, but the issuers will continue to deal with the fallout from the financial crisis in the form of uncollectible debts for quite a while.

"It's clear that we won't be returning to 'business as usual' as we come out of this economic cycle," said Kenneth Chenault, the chairman and CEO of American Express ( AXP ), during the company's October conference call to discuss its third-quarter results. "I believe we'll face a 'new normal' with a number of substantial changes."

Thus far, it looks like some old standbys are coming back ahead of the CARD Act's provisions becoming effective in February, namely higher interest rates, the return of annual fees, and even lower credit limits for existing customers, who can most times opt out of the changes and cancel the cards.

Among the big banks, Citigroup ( C ), JPMorgan Chase ( JPM ), and Wells Fargo ( WFC) have been among those believed to be raising rates for certain customers ahead of the legislation's enactment.

AmEx, which has set up a special section of its Web site to communicate with customers about the impact of the CARD Act, has been aggressive about winnowing down its number of accounts. The company's cards in force declined in both the second and third quarters as it opted to cancel 3.3 million cards globally that it said were "spend inactive over the last 24 months and balance inactive from 12 to 24 months."

That strategy of trying to hold onto more desirable customers while pushing away others who are less appealing for a variety of reasons -- a poor credit score/track record of payment, infrequent usage, pay bill in full each month -- is likely to come into play for all the major issuers. JPMorgan has already made a conscious decision to develop specific brands for certain customer segments, and there's evidence others are following suit, such as BofA's introduction of its Basic brand Visa card in early September, which the company says is a simplified offering designed with the new rules in mind.

The holy grail is scaling back the customer base to prime borrowers who will make heavier use of credit cards. From a demographic standpoint, Baby Boomers are ideal because they tend to see the cards more as a payment tool, says Ron Shevlin, a senior analyst at Aite Group, a Boston-based research and advisory services firm."The money to be made there is in not in the interest fees," says Shevlin. "The money to be made is in the interchange fee."

The Federal Reserve's October survey of senior loan officers released on Nov. 9 found that 75% of respondents, which included representatives of 57 domestic banks and 23 U.S. branches and agencies of foreign banks, didn't expect to be compliant with the CARD act by the effective date in February 2010.

The survey also found, when factoring in both prime and sub-prime borrowers, that most issuers planned to tighten terms and standards for new accounts, taking steps like increasing interest rate spreads and requiring higher minimum credit scores.

The intervening months between now and February will yield more clues of how the big banks, as well as other prominent issuers, such as Capital One ( COF ), Discover Financial ( DFS ) and U.S. Bancorp ( USB) will deal with the legislative changes.

As for BofA, spokesperson Pace says the annual fees are currently being tested with a variety of customers and accounts, and she didn't have a timeframe for when the initiative might end or be evaluated. With the jury is still out on whether the fees will stick or be implemented for a wider group of card holders.

In the broader view, what's clear at the moment is that the landscape of the industry is undergoing systemic changes that are likely to lessen the prominence of credit cards in not only company bottom lines, but consumer wallets as well.

Written by Michael Baron in New York. Laurie Kulikowski contributed to this report.

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