Tuesday, October 14, 2008
Two proposed amendments from the Financial Accounting Standards Board to the rules governing the requirements by which banks secure loan assets could, if passed into law, adversely affect credit card profitability and reportedly cost financial institutions up to $60 billion a year.
Dennis Moroney, Tower Group's Research Director, Bank Cards Division, said these amendments could adversely affect acquirers, processors and ISOs who depend on credit card transaction revenue for a majority of their profits.
"The FASB amendments essentially would require the assets that banks sell to investors be placed back onto the lenders' books," Moroney said. "The banks were getting the benefit of not having to secure those reserves. But the new rules would eliminate those outstanding reserves and require banks to match that capital with in-house assets.
"This means that banks have less money for loan investment, and consumers have less credit available to them. The unintended consequence here is that consumers will spend less on their cards, affecting acquirers and processors who depend on those transactions for much of their revenue."
The proposed methods of reporting and accounting for loan asset securitization – including credit card loans – could eliminate a significant portion of card revenue generated by interest and late payment fees. According to the Tower Group, these fees account for as much as 80 percent of credit card revenue. The remaining 20 percent is derived from interchange, cash advances and annual fees.
FASB is charged with establishing and updating standards of financial accounting and reporting. Amendments to its asset securitization accounting rules, FAS 140 and FIN 46R would require additional disclosures and higher transparency of unsecured trusts, known as off-balance-sheet assets.
The Office of the Comptroller of the Currency believes these proposals take away flexibility for issuers to use risk-based pricing because it will force lenders to reduce the availability of credit cards and borrowers' credit limits. This most directly affects higher-risk consumers who rely on revolving credit.
Risk-based credit card users pay higher interest rates because of a greater probability of delinquencies or chargebacks. The FASB amendments would strictly forbid changes and rate increases in this area. "All of these factors, plus the Fed changes to credit terms and the Maloney Bill [HR 5244, the Credit Cardholders Bill of Rights] merely exacerbate events that seem independent but are really quite interrelated," Moroney said.
Moroney feels that continued lobbying by the financial services industry is the best way to combat these proposed amendments. For the payments industry, he believes merchant stickiness and budget controls are priorities to maintain in lieu of potential losses the FASB amendments would reportedly bring.
"You want to hold onto your best customers, so I think there will be some extra focus on expense management," Moroney said. "And rewards [programs] are tied to maybe 70 percent of all transactions at the point of sale, so I think you're going to see closer scrutiny of those rewards in an effort to reduce expenses there. And with the financial crisis bringing higher delinquencies, I also think private label cards may get hammered."
With an increase in the number of consumers not keeping their credit card payments current, Moroney sees issuers suspending or eliminating credit or reducing credit limits substantially. Those types of activities, he said, affect merchants' customer traffic and purchasing patterns.
"I think everybody is holding their breath as we go into the most important time of year for retailers because projections right now for holiday spending look bleak," Moroney said.
According to Tower Group, the Federal Reserve noted that policies have become increasingly tighter for both consumer lending and credit cards since the third quarter of 2007. Moroney believes lending restrictions will only increase due largely to rising delinquencies, chargebacks and anticipation of potential interest rate changes.
"We see the way the winds are blowing; there's a lot of activity on the Hill, but this is an election year so everybody wants to look good," he said. "You've got a series of events [from years of legislation] all converging now. They [Congress] believe their intentions are good, but the outcome – if all these fall into place over the next year or so – could cause collateral damage that is very bad for the markets in general.
The proposed FASB amendments will be open for public comment from financial institutions beginning Nov. 1, 2008. "The interesting thing, in my opinion, is no one is talking about this FASB change," Moroney added. "This is a big deal and I'm wondering why more folks aren't reacting to this."
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