Card Firms' Loss Tally: Billions of Dollars in Fees

New Law to Hit Revenue Streams for Issuers to Weak Borrowers 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 President Obama signs new credit-card 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. Tim Foley 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 companies 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 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, exploded 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 financial distress. GE is the country's biggest issuer of private-label cards and tried unsuccessfully last year to sell that business. A GE spokesman couldn't be reached. 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. Write to Robin Sidel at robin.sidel@wsj.com