The Decade’s 12 Greatest Developments in Payments: #10 Collateral Damage from the Financial Crisis – Consolidation and Regulation

The decade ended with the start of the most severe financial crisis the world has faced since the Great Depression of the 1930s. In many respects the payments industry was rock solid during the meltdown. The payment systems processed transactions without losing a beat. While consumers faced a real risk that they would find their retirement accounts dry, and not a banker in town would be willing to give them a loan, they had full confidence that they could pay merchants with any tender type that merchant usually took. Pure payments companies such as MasterCard and Visa not surprisingly held their value while most other stocks crashed.

But as with all of us the financial crisis has profoundly affected the payments industry in ways that will reshape the business for years to come. At least that’s true for the United States, which will be my focus here.

Banks are central to the payments business and to the financial crisis. The bank card business had undergone tremendous consolidation before the financial crisis. In the course of a few months massive additional consolidation occurred. Wachovia became part of Wells Fargo and Washington Mutual part of JP Morgan. JPMorgan, Bank of America and Citi now account for more than 50 percent of credit-card balances and the top ten issuers (which include American Express and Discover) account for almost 90 percent.

More importantly, cards became swept up in the political hysteria following the financial crisis. Congress and the media blamed “banks” for having caused the financial crisis. Just about anything that banks did was tainted. Of course several of the largest banks did contribute mightily to the financial crisis largely by taking on far too many mortgage backed securities and holding too much to the risk on their books. The politicians and the media also targeted anything involving credit. Banks did in fact extend way too much credit to homeowners — egged on of course by Congress — and were part of the herd mentality that came to believe that housing prices could skyrocket forever. But there is absolutely no evidence that credit cards contributed significantly to causing the crisis. Defaults have risen for cards because of crisis-increased-unemployment and reduced incomes; but credit card lending did not lead to the crisis.

Credit cards were a target of Congress and the media before the financial crisis in part because some card issuers alienated consumers by engaging in some practices that were too aggressive and nontransparent. Unfortunately, credit cards rose to the top of the list of industries to do something about once the crisis hit. Politicians were looking for ways to show their constituents that they were responding to the crisis and to take a pound of flesh from the banks that were widely perceived as the villains.

The major result so far: The CARD Act of 2009. This legislation imposes highly restrictive price regulations on card issuers that essentially makes it harder for them to impose higher fees on customers who engage in risky borrowing behavior. Card issuers have devoted significant amounts of their resources to responding to the Act and are engaging in revolutionary changes to their prices to take into account the restrictions they now face. The card industry will have to live with this regulation for years to come.

But the CARD Act has transformed the card business in the United States and that’s why it is number 10 on my list of the great developments in the card industry in the last decade along with the further consolidation that resulted from the crisis.

David S. Evans bio

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