Federal regulators recently announced the Unfair or Deceptive Acts or Practices regulation (UDAP) aimed towards curbing credit card issuer practices construed as harmful to consumers. The regulation in part severely restricts credit card issuers’ ability to adjust interest rates, the primary means for controlling risk exposure. Although there are parts of UDAP that address credit card practices unrelated to interest rates, many industry experts predict that the regulation will result in a drastic reduction in available credit and an increase in pricing (i.e., to compensate for less flexibility). Given the current trepidation in lending across the country, and the general condition of our nation’s financial institutions, there is widespread concern that this new regulation could not be coming at a worse time for both consumers and issuers.
There are mixed messages coming from both Congress and regulators. Why would federal regulators introduce UDAP while simultaneously touting the urgency to get credit flowing again? Could government actions to shore up banks be exacerbated by this seemingly well intentioned regulation? Why is Congress still pushing for legislation that is even more aggressive than the UDAP reforms, but at the same time critical of banks for not making a sufficient amount of new loans? There is no clear explanation. At a time when unemployment is at levels not seen in over 25 years, and when some consumers are being forced to rely on credit cards for their everyday needs, access to credit is vital to managing one’s personal finances. According to Mitchell Uretsky, a Managing Associate at Auriemma Consulting Group, “Before the credit crisis, consumers could dip into the value of their homes in the event of prolonged unemployment. Now, many consumers are reliant on their credit cards to get them through these rough economic times.”
To ensure their own survival, credit card issuers must take matters into their own hands by monitoring the health of both their financial positions and that of consumer spending. Issuers need to be mindful of the different impacts UDAP will have on alternative segments of their portfolio populations. According to Uretsky, “This underscores the importance issuers have in ensuring that their different portfolios, from a strategic point of view, are appropriately in tune with these changes. That means overhauling their pricing strategies, underwriting standards, customer experience philosophy, and more at the portfolio segment level.”
The near future is certainly going to be an interesting test for all Americans. Restriction of credit is going to force everyone, including consumers and credit card issuers, to work together to ensure their mutual well being. It is clear, though, that the card market is in for some significant changes.
About Auriemma Consulting Group
Since 1984, ACG has offered comprehensive management consulting, consumer research, and industry roundtable and benchmarking services to the financial services industry. ACG clients include credit card issuers, commercial banks, auto and mortgage lenders, merchants, networks, and industry vendors. Areas of expertise include collections, operational effectiveness, customer service, risk management, alliance development, marketing, knowledge management, strategic planning, financial strategies, benchmarking and litigation support. With offices in New York and London, ACG offers actionable solutions to help clients make important business decisions to maximize their efficiencies and revenues.