Summary
Capital One and other credit card companies will not be able to make up the lost fees directly from the new card act. This will be due in part to the stringent requirements on new fees implementation. While the new bill does address some much needed reforms in the industry, it does not address the issue of accrued interest and interest rates.
Analysis
The credit card company will lose a large source of revenue from their fees and the end to “double cycle billing”. This is due in part to the ease at which the companies were able to implement these fees in the past. With the new requirements the companies will now have to be more open about the implementation of new fees. This loss of a revenue stream will result in the credit card companies such as Capital one to pursue other revenue streams. It is my opinion that the Capital One and other credit card companies will do this through manipulation of interest rates.
What makes the most money for a credit card company? There are no depositors as in other lending institutions. The company is not making money on the deposits and there is no real capital in which one is investing in.
A credit card company makes their profit on the fees and the interest charged on the balances of their cards. The implementation of the new requirements for the fees slows, but does not stop, one major revenue stream. A financially astute credit card company will seek to make up this revenue through other means. Since there are no depositors and no real capital in which one can invest in, yes stocks perhaps but this is not a true capital investment, the company will have to manipulate the interest rates. This they can do because the new bill does not address the issue of interest rates and many money analysts are making this point.
What is the point of the reform if you have a $5000 balance and you are paying 12% compounded interest on the card? That means your are paying 12 cents interest every day in addition to the principal of $5000 that is owed on the card. Companies such as Capital One will continue this practice despite the new legislative restrictions.
One area that will impact Capital One is the end to “double cycle billing” in which the consumer will pay the interest on the highest balance even though the card has been paid down. For instance, if you have a $1000 limit and you pay down the card to $100 the company will continue to charge the interest on the $1000 and not the lower actual principal amount.
One should not assume that a credit card company such as Capital One can not make up for the lost revenue from the restrictions on fees. Capital One and other credit card companies will manipulate the interest rates, use the “universal default” clause and implement other means to make up this loss of revenue. It is up to the consumer, caveat emptor, to be wise and take advantage of the new regulations regarding billing statements.
