2008 through 2009 will undoubtedly go down in history as a changing time for the credit card industry in the United States.
In late 2008 Federal Reserve rules were developed that regulated credit card terms and conditions. Then came the 111th Congress.
The Credit Card Bill of Rights passed the U.S. House, imposing many restrictions on card issuers. Vocal on the issue is the American Banking Association - a powerful lobby for banks who issue cards.
At press time the bill is going through the U.S. Senate with many proposed amendments. An amendment to cap interest rates failed with only 33 of the 99 filled seats in the Senate voting for it. Much of the opposition came not just from Republicans, but also from moderate "Blue Dog" Democrats.
With 59 Democratic seats in the U.S. Senate, counting the recent defection of Senator Arlen Specter of Pennsylvania, and a possible 60th seat coming for the Democrats from Minnesota, one would think that legislation could sail through the Senate without opposition to amendments.
Richard Bialek, CEO Bialek Group in Wheaton, Illinois and former SVP of Consumer Credit Products and SVP of Strategic Research and Intelligence for Visa International encourages vigilance, however
sees the possibility of some good coming out of all of this for the acquiring industry.
"Diligent industry players should always be watchful of what is happening in Congress, especially in this economy," says Bialek. "Congress is looking for "villains" and the credit card industry is a favorite source for many Congressmen. There will be consideration of new regulation around interchange rates and the concept of interchange. But, I do not see it going as far as it has in Australia, where caps were set on interchange rates."
Bialek believes that the Credit Card Bill of Rights is a benefit for processors and acquirers. "The issuing side of the industry is more familiar to consumers. Congressmen can go back to their constituents and show how they have taken on the credit card companies," he says. "The acquiring side is less familiar and thus less understood by the consumer. Consumers do not directly pay interchange; it does not appear on their card statements. Interchange is seen as a merchant issue without the populist appeal of credit card interest rates."
He outlines the salient points of the bill as one focused on the issuing side of the industry.
While it does not have a direct impact on processors and merchant acquirers, those two groups will need to address the secondary impacts of this legislation. This, he says, will come as of the result of issuing responses to the following new restrictions and requirements:
 Interest rate calculations - new prohibitions on double cycle billing.
Interest rate increases - notification periods increased to 45 days.
Payment allocation - payments in excess of the minimum payment must now be applied to balances with the highest interest rate.
Fee limits - restrictions on over limit and late fees.
Consumer disclosures - new language requirements and time periods.
"Issuers will be searching for expense savings and new revenue sources. This will impact processors," says Bialek. "Processors will be asked to make programming changes to support the implementation of the new legislation. They will also be challenged by issuers to reduce processing fees to make up for lost issuer revenue. Merchant acquirers will see the battle for share of interchange increase as issuers look to replace lost fee and finance charge revenue and merchants continue to push for lower interchange rates."
Matt Sumsion, vice president of iTransact, Inc. emphasizes the popular support of the legislation and thinks it could have a positive impact on transaction volumes. "Regulation of the industry has widespread popular support, so new legislation is inevitable regardless of the composition of the Senate," he says. "One result of increased regulation will be the introduction of alternative, less-scrutinized payment methods and technologies. ISOs will need to adapt and adopt. On the bright side, increasing regulation may also increase consumers' willingness to use plastic."
There are many efforts in the legislation and in the prior rulemaking that are aimed at making terms and conditions readable and comprehensible to consumers.
Dr. Deborah Bosley, an associate professor of technical writing and a plain language expert at UNC Charlotte, who specializes in the use of plain language in legal and financial disclosure documents, says that in a recent survey of 1,200 consumers, 50 percent think their credit card statements are difficult to understand and 84 percent are more likely to trust a company that uses jargon-free language in their communications.
"Plain language becomes an issue of trust. Right now, credit card companies, and all ancillary credit card businesses, would do well to help promote trust and transparency," she says. "The more consumers trust a company or an industry, either credit card-related or even broader, the more willing they are to use those products or services."
Despite a growing trust by consumers, Ed Rarick, PCI Evangelist at Tripwire, is not terribly optimistic for the industry — particularly when it comes to compliance issues. "This issue could affect our industry because the Democrats will be more likely to try to influence or control what the card brands are now doing with PCI DSS as more and more merchants complain about how difficult it is to comply with that standard," says Rarick. "We have already seen Rep. Yvette Clarke (D-N.Y.) say some disparaging things about PCI DSS so the more the government gets involved in this issue the more likely it will be they try to interfere with this issue."
Indeed statements like that from Congresswoman Clarke who said of PCI DSS, "the standard by itself is simply not enough to protect cardholder data. I do want to dispel the myth once and for all that PCI compliance is enough to keep a company secure," are actually quite rational and carry a common-sense tone. This could mean added emphasis on compliance over the next 18 months, which many, on both sides of the payments industry, agree is a needed step.
"I think the PCI DSS may be looked at more intensely in the next 18 months as regulators and the Congress' move to build better rules for control of fraud and increase security," says Sean Sherman of Tripwire. "The PCI DSS affected the Minnesota state law directly and has had affect on other states rules. Merchants and card processors in large numbers continue to treat PCI DSS as a checklist they need to meet annually rather than best practice IT security they need to meet on a daily basis. The result of this will be more and larger breaches like Heartland Payment Systems and RBS World Bank."
What is a sensible strategy for card processors to take in light of our current economic situation to stay afloat in times like these?
"Differentiate, differentiate, differentiate," advises Matt Sumsion. "Merchant accounts are becoming more of a commodity every day. Pricing will become continually more transparent and competitive,
if not ultimately the same for all merchants. The processors who survive and thrive, therefore, will
be those who find new ways to provide value to merchants and who can compete on more than price. We must ask ourselves what we can provide to our merchants that our competitors cannot."
Bialek says that the key is to get big or get special. "Become large enough to gain operating scale economies that provide a pricing advantage," he says. "Or, find market segments where custom solutions can be developed to support value pricing and merchant loyalty. Successful processors will understand and identify the most profitable merchants and merchant segments and proactively reach out to those merchants with new pricing and terms to extend contracts. Processors need to find their unprofitable merchants and re-price to profitability, if that causes them to terminate, the processor still comes out ahead."
Rahul Matha, CEO of TalentBeat, says that innovation is going to be a key differentiator for processors to get through the recession. The link between consumers and merchants using payment as the mechanism will be an important technological driver for the future of the acquiring industry. "Cardless loyalty, Mobile CRM campaigns and social networking portals are some of the differentiators our platform would offer giving processors a different image to their retailers," he says. "Instead of looking at processors as a cost center, retailers can look at them as a marketing engine."
A time of change indeed on many fronts, any way you look at it.
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