Surprise: CARD Act Works


The Center for Responsible Lending just released a report indicating that the reforms in the CARD Act of 2009 are working.  They have not raised prices and they have contributed to consumer transparency. These results are of course contradictory to the propaganda that we heard from the industry. They very ingenuously claimed that the act would hurt consumers by raising prices. As anyone can see for themselves, the report concluded that the reforms didn’t even make a dent in the solicitations that consumers have been receiving in the mail.

What The Report Found

Stated prices were tracking actual prices a lot more closely. They also found that prices remained stable and available credit was not curtailed beyond what can be attributed to the economic downturn.  One interesting methodology they used was to compare the market for business cards with that of the consumer market. Since business cards were not subject to the CARD Act, they were able to use those cards as a control group in order to draw conclusions about the consumer market.

My Thoughts

I had always been a huge supporter of the CARD Act, and this reports seems to vindicate my belief that it was a success. In fact, I had thought that higher interest rates was an acceptable trade off for the elimination of the tricks and traps business mode. It actually surprised me that interest rates did not rise appreciably. It has always been my hope that the CARD Act was just step one in a persistent effort to effectively regulate credit cards. I can only wish that those opposing future regulations can have their arguments effectively countered with this report.

Update On Swipe Fees

Yesterday, Congress handed yet another victory to the retailers by refusing to delay the implementation of the swipe fee cap on debit cards. While I am not normally too concerned with the debit card market, I am worried that this precedent might affect credit cards in the near future. These caps will eliminate all debit card rewards and may come around to increase banking fees for consumers. I can appreciate the argument that there are far less costs to the banks for debit card transactions. There is no risk of default or chargeback in the same way there is with a credit card transaction. At the same time, there is also little opportunity to profit from interest like credit cards do.

My worry is that if swipe fees on credit cards were regulated, all of the reward cards would disappear just as debit card rewards are. Consumers should understand that rewards are subsidized by merchant fees. Rewards are basically kick-backs of merchant fees from banks. While merchants complain how unfair this is, they rarely cite all of the ways that they benefit from credit card acceptance. We won’t see prices fall at retailers now that debit card swipe fees are being slashed, and we certainly would not see any price breaks if credit card fees are cut either. The real looser will be reward card users like myself who would actually have to fly on an airplane to get frequent flier miles.

Who Else Would Loose

Just because people would have to pay for an airline ticket to get miles, doesn’t mean that they actually will. In fact, the fragile airline industry has been making billions from the sale of miles to the banks. If the banks can’t charge swipe fees, they can’t use that money to purchase miles to give out to their customers. The whole gravy train grinds to a halt pretty quickly. There are not too many mileage earning debit cards, and they are not too popular, but I have a hunch that the banks will stop ing as many miles as before and the airlines will notice.  The same will be true, to a lesser extent, for the hotel industry. Once the airlines feel the pinch from the loss of milege sales to banks, you can expect them to line up against credit card swipe fee regulation. It might not be a public lobbying effort, but they will certainly be doing their part behind the scenes. Sure, airlines would save some money by not paying the swipe fees, but I think they are getting more money from selling miles and other business arrangements that rely on reward credit cards.

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