T H E WA L L ST R E E T J O U R NA L .
M ONDAY, M AY 25, 2009 21
MONEY & INVESTING
U.S. credit-card firms likely to lose billions in fees Law expected to hurt revenue at issuers to riskier borrowers
House of cards Percentage of credit-card balances owed by subprime customers*: Bank of America 30.3%
By Robin Sidel Risky borrowers usually are a cash cow for credit-card issuers, thanks to hefty fees and interest rates. But some of that revenue will dry up after U.S. President Barack Obama signed new creditcard legislation Friday. Companies that pitch plastic to customers with dented credit histories and issuers specializing in cards for retailers likely will be hit hard by the federal law, according to analysts. Major players in those niches run from banks such as Bank of America Corp., Citigroup Inc. and HSBC Holdings PLC to General Electric Co. and Target Corp. GE issues cards stamped with the logos of J.C. Penney Co. and Lowe’s Cos., while Target is one of the few retailers that issues its own credit cards. The law will restrict some fees, limit certain interest-rate increases and require companies to provide more disclosure to customers. It is yet another headache for the credit-card industry, already battered by rising delinquencies and defaults because of the recession. Analysts are scrambling to calculate the financial impact, which is difficult because few card com-
Capital One (consumer) 29.8% Discover 27.9% Citigroup 27.3%
Companies ranked by market share in private-label cards: General Electric 39.2% Citigroup 21.7% *Bank percentages include only securitized credit-card loans. Subprime customers have credit scores lower than 660.
panies disclose how much revenue is derived from raising interest rates or imposing fees and other penalties on customers who fall behind on their bills. Robert Hammer, who runs a credit-card consulting firm, predicts that the new law will subtract $10 billion in revenue from the industry’s overall interest income. Credit-card companies are expected to impose $20.5 billion of penalty fees this year, up from $19.1 billion in 2008. “Those portfolios that are
AIG chief to make room for long-term successor Liddy leaves, and Mr. Liddy said the newboard head is likely to playanimportant behind-the-scenes role in American International Group Congress, where AIG has endured Inc. Chairman and Chief Executive sharp criticism in recent months. Edward Liddy will step down as “We need to spend considerably soon as successors are chosen, more time in Washington,” said Mr. which people familiar with the mat- Liddy, who was grilled last week in ter estimated could take roughly the House of Representatives for three to six months. the second time in three months. Mr. Liddy, in an interview ThursIn addition to answering to Conday, said the decision to leave AIG gress and AIG’s board, Mr. Liddy has was his. He said the comalso worked with the Fedpany had reached an “ineral Reserve Bank of New flection point” and needed York, which has agreed to a CEO who was ready to lend AIG as much as $60 bilcommit long term. He relion in the bailout. cently said in an interview The Fed, in consultation with The Wall Street Jourwith the Treasury Departnal that he planned to leave ment, has also appointed within a year. three trustees to oversee Mr. Liddy has led the inthe nearly 80% stake the surer since a U.S. governgovernment got due to the ment bailout in September, bailout. through more than eight tuMr. Liddy, who came out multuous months that Edward Liddy of retirement from the inhave included three subsesurance industry to take quent expansions of the rescue plan. the CEO job, agreed to a salary of $1 The government has committed as a year. But he said his successor as much as $173.3 billion in aid to AIG. CEO should be paid “commensurate Mr. Liddy has had to answer to with the complexity of the commultiple overseers, try to dismantle pany.” The company has operations a massive conglomerate amid a fi- in 130 countries, more than 100,000 nancial crisis and navigate a public- employees, and businesses ranging relations minefield. In a statement from insurance to aircraft leasing. expressing gratitude to Mr. Liddy Yet Mr. Liddy has said even he was for taking “stewardship of AIG” at surprised at how complicated the the government’s request, Treasury company has proven to be. Secretary Timothy Geithner called For the next CEO, he says, a backit “one of the most challenging jobs ground in insurance would be “good in the American financial system to- to have but not necessary.” Leaderday.” ship skills, he says, are important, as The chairman and CEO jobs are is experience in financial services likely to be separated when Mr. generally.
By Liam Pleven And Joann S. Lublin
Sources: Keefe Bruyette & Woods; The Nilson Report
Tim Foley
skewed toward late-payment fees, over-limit fees and penalty repricing will be most at risk,” says Craig Maurer, an analyst at Calyon Securities, a unit of Crédit Agricole SA. Subprime customers represent nearly a third of the credit-card portfolios at Bank of America, Citigroup and Capital One Financial Corp., according to Keefe Bruyette & Woods Inc., a research firm that specializes in the financial-services industry. Such accounts, typically including borrowers with a credit score of less than 660, ex-
ploded in number as card companies tried to offset slower growth by extending credit to less-creditworthy borrowers. “It’s our intention to continue providing credit to the broadest range of creditworthy customers possible, while remaining prudent in our lending practices,” a Bank of America spokeswoman said. Specialized retail credit cards, known as private-label cards, also are considered risky because those bills often are among the last to be paid if a customer falls into finan-
cial distress. GE is the U.S.’s biggest issuer of private-label cards and tried unsuccessfully last year to sell that business. A GE spokesman couldn’t be reached for comment. Target earned $355 million in credit-card finance charges and $87 million in late fees and other revenue in its latest fiscal quarter. The Minneapolis-based discount retailer struck a deal with J.P. Morgan Chase & Co. last year in which the New York bank took on about half of the risk in Target’s card portfolio. “Our view is that we will be impacted by a much less degree than anybody else,” said Eric Hausman, a Target spokesman. One of the most significant changes under the new law would prohibit credit-card companies from raising interest rates on card balances until customers are 60 days late on their payments. That will provide some initial relief to subprime and retail-card customers, who typically rack up the highest delinquency rates in the industry. Those cards also carry among the highest fees and interest rates. Credit-card companies are trying to decide how to recalibrate their portfolios to reflect the coming changes. Industry executives say that credit is likely to become less available, particularly to risky borrowers, and more fees likely will be loaded into the front end of the account, rather than being assessed after a customer falls behind on payments.
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