Credit Card Firms May Face State Rate Caps, Other Tightening

Photographer: Daniel Acker/Bloomberg

Credit-card firms face new legislation and possible limits on interest rates. Close

Credit-card firms face new legislation and possible limits on interest rates.

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Photographer: Daniel Acker/Bloomberg

Credit-card firms face new legislation and possible limits on interest rates.

Credit-card firms caught off-guard by U.S. Senate passage of curbs on debit fees are facing what one executive sees as a “volcanic” eruption of legislation, including possible limits on interest rates.

States could enforce their own rate limits on cards, regardless of where the issuer is based, under a proposal by Sheldon Whitehouse, a Rhode Island Democrat. Whitehouse pushed his amendment on the Senate floor yesterday, the same day colleagues voted to let consumers get credit scores for free.

Card companies including Visa Inc. and MasterCard Inc. already are reeling from the Senate’s surprise passage last week of limits on debit-card “swipe” fees, the levy charged to merchants for each transaction. The stream of proposed rules “rivals only the Icelandic volcanic reports,” Discover Financial Services Chief Financial Officer Roy Guthrie told investors and analysts.

“Every half-day we’re getting a new batch,” Guthrie said today during the Barclays Capital Financial Services Conference. “I hope that calmer heads prevail.” Visa, whose shares slid for a third straight day, said Senate approval of the debit rule is a victory for the biggest retailers including Wal-Mart Stores Inc. and a loss for consumers because banks may charge them more for financial services.

One Billion Cards

Whitehouse said his amendment on interest rates is supported by Richard Durbin of Illinois, the Democratic majority whip who engineered passage of the swipe-fee limits, and Republican Thad Cochran of Mississippi. More than 1 billion credit and debit cards were in circulation last year in the U.S., according to the Nilson Report, an industry newsletter.

“It has bipartisan appeal,” Whitehouse told reporters. “I don’t see any reason why somebody in Mississippi or Idaho is any less screwed by an out-of-state bank gouging them 30-plus percent interest rates than somebody in Rhode Island or Illinois.”

Curbs on the industry may crimp revenue at card lenders including Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., as well as New York-based American Express Co. and Discover, based in Riverwoods, Illinois. U.S. purchases on the four biggest card networks totaled $2.97 trillion last year, according to the Nilson Report.

Card lenders have resisted rate limits, saying they need to charge more for riskier customers to cover the cost of defaults. Those rose to record levels last year along with the jobless rate, which topped 10 percent, with Bank of America, based in Charlotte, North Carolina and New York-based JPMorgan reporting combined 2009 losses of $7.78 billion from their card units.

Political Fight

“Our success last Thursday night is an indication that the credit-card giants can be successfully challenged,” Durbin told reporters yesterday, referring to the Senate’s 64-33 vote to pass the swipe-fee restrictions. The limits would still need approval by the House of Representatives.

The biggest merchants have exploited a populist disdain for banks to push through the measure, which would damage consumers and “the vast majority” of retailers, said William Sheedy, group executive of the Americas for San Francisco-based Visa, the world’s largest card-payment network.

“The Durbin amendment is anti-consumer and irresponsible in a way that the big-box retailers and their lobbyists don’t want their consumers to know,” Sheedy said today in a telephone interview. “It would have been impossible absent this political environment for this kind of amendment to be slipped into the reform bill.”

Business Beneficiaries

Small businesses will benefit most from the Senate amendments, according to Brian Dodge, a spokesman for the Retail Industry Leaders Association, a trade group whose members include Wal-Mart, Home Depot Inc. and Target Corp.

“Big banks and credit-card companies are not victims of the current political climate, they are the cause of it,” Dodge said today in an e-mailed statement.

Visa fell $4.62, or 6.2 percent, to $70.09 at 4:15 p.m. in New York Stock Exchange composite trading and was the fourth- worst performer in the Standard & Poor’s 500 index. The shares have posted a three-day decline of 18 percent, the biggest since the company’s initial public offering in March 2008. Wal-Mart advanced 1.8 percent, the ninth-best performance in the S&P.

MasterCard, the world’s second-biggest card network, dropped 3.8 percent to $202.81. Discover slid 5.3 percent to $13.46 and AmEx fell 3.4 percent to $39.84.

Bankers Opposed

The American Bankers Association, the industry trade group and lobby, opposes Whitehouse’s plan to curb interest rates, saying in a statement that banks would face an “avalanche of lawsuits” as they try to comply with differing state laws. The amendment might mean less credit available for consumers and small businesses, the ABA said.

Whitehouse’s amendment wouldn’t set rate caps, leaving that to individual states under their local usury laws. The measure would cover all consumer lenders regardless of their legal form to prevent them from changing charters to escape the new rules. The law would take effect 12 months after enactment.

“The loopholes that let big banks escape local laws need to be closed,” Elizabeth Warren, chairwoman of the Congressional Oversight Panel on the Troubled Asset Relief Program, said in a statement. “There is no good reason why large institutions should be able to headquarter in states with lax protection and then do business all over the country without following local laws.”

Merchants last year paid $19.7 billion in fees tied to debit transactions processed by Visa and MasterCard, with more than half that amount paid to banks, according to the National Retail Federation.

Visa doesn’t see “much risk” to its revenue from the Durbin amendment, Chief Executive Officer Joseph Saunders said today during a JPMorgan-sponsored investor conference.

“I will certainly be a part of vigorously attempting to make sure that financial institutions are not put out to dry,” he said.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

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