The largest payment network of the world, Visa Inc., recently released a statement saying that the new U.S. legislations are going to force the credit industry to rethink itself and restructure to adapt to the expected loss in revenue.
The legislations that Visa is referring to is the much heralded and highly controversial credit card bill which President Barack Obama recently signed into law. Among other things, the bill will take away the capabilities of credit companies to make arbitrary interest rate increases, it will block them from charging certain types of fees and it will put a limit on the penalties that credit companies give out which the government considers to be unfair.
According to Joseph Saunders, Chief Executive of Visa Inc, the credit card bill will have a major impact on the way the credit industry operates. “It's going to cause the whole industry to rethink itself.”, he said during an interview. He further elaborated that the legislation will result in a shortage of credit, making it available only to a limited number of people.
Major credit card companies including Citigroup, JPMorgan, Capital One, Bank of America, Discover and American Express will be the ones who will feel the effects the most. Collectively, these companies hold 80% of the credit card industry in the U.S.
In the past few years, these credit card companies saw their profits rise to astronomical levels as the credit boom happened. When the economic crisis hit, they soon saw losses by the billions. Credit cardholders, burdened by debt and pressured by job losses and other economic forces began to default on their credit card payments. Credit card debt was at the $945 billion mark last March. Although this figure may be lower than the $962 billion posted last December, it still represents an increase of around 25% from figures taken a decade before.
Credit card companies will have to make up for losses in some other way. The most obvious would be a tightening up of credit and a decline in investments on risky borrowers. Credit is also going to be more expensive, with annual fees making a come back and initial interest rates going up from their previous levels.
Although partly protected from the credit crisis which has reached global levels, Visa is still seeing a slow down in revenue growth as consumer transaction volume go down. Visa thrives on the transaction processing, not on fund lending. According to Saunders, the slowdown on credit card transactions will be markedly offset by an increase in electronic payment. Debit cards, he said are also going to be very important and will play a large part in the continuing operations of Visa.