Bank reforms to pinch consumer credit

Call it the law of unintended consequences.

That’s what many finance experts are saying will be the result of Congress‘ latest attempt to micromanage the world of consumer credit through the financial-reform measure President Obama signed into law last week.

Many are predicting that well-meaning provisions to force banks to lower their fees for debit card services will boomerang once again and result in less credit available for consumers — the same phenomenon seen when Congress enacted a law a year ago to rein in credit card fees.

Banks reacted to the earlier measure by further constricting credit for consumers — which already has dropped by the biggest amount on record and could fall by an additional $2 trillion in the next year — while abandoning the fees targeted by Congress and raising fees elsewhere to compensate for the lost revenue.

Analysts are predicting that the latest round of restrictions forcing banks to lower their so-called “swipe fees” on debit card transactions will simply prompt banks to raise charges elsewhere. Some foresee the end of free bank checking accounts, as well as the return of annual fees on many credit cards as a result of Congress‘ efforts to shave a fraction of the 1 percent to 2 percent swipe fees paid by merchants.

“Regulations may be needed, but they are not free,” said Bill Hardekopf, author of the Credit Card Guidebook. “Banks respond quickly when their income is restricted in one area. Unfortunately, the first victims of these new fees will probably be the people with a basic checking account who need every dollar they make.”

Consumers have grown used to free checking accounts and cards with no annual fees. Such service charges became the exception rather than the rule, as they were during the boom years when credit flowed freely.

But as of this month, one major bank — Wells Fargo — has stopped providing free checking, while Bank of America is testing account fees and other options that it plans to add later this year. Most other banks are expected to join in.

“Banks have already lost billions of dollars in fees and revenue” because of the restrictions on credit card fees and checking account overdraft fees passed last year, Mr. Hardekopf said.

The changes were made at a time when major banks like Citigroup and Bank of America were experiencing record losses because of recession-driven credit card defaults, driving up charge-off rates to as high as 15 percent for some banks.

“The new regulations will increase the losses,” Mr. Hardekopf said. “They have to make changes to increase their revenue” to turn their credit card lines into sound and profitable businesses again.

Since new regulations are designed to make credit and debit cards permanently less profitable, banks also have responded by closing accounts and cutting back credit for customers who are most likely to default and cause losses — accelerating a broad and historic retrenchment in credit that began with the financial crisis in 2007.

The share of consumers using credit cards dropped to 56 percent last year from 87 percent in 2007, while use of debit cards — which directly access a consumer’s bank account for payment — has grown at double-digit rates, according to Javelin Strategy, a banking research group.

Banks have cut credit limits for more than 58 million customers since 2008, slashing limits overall to $3.3 trillion this spring from a peak of $4.7 trillion at the height of the boom, according to JP Morgan Chase.

Chase will no longer offer credit cards to about 15 percent of the people it had been targeting as potential customers.

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