Credit card issuers are finally being brought to task.  A recently passed Senate bill completely changes the rules under which credit card firms will operate in what would appear to be a very pro-consumer move.  No longer are banks and other lenders allowed to change rates arbitrarily, or charge exorbitant fees that are only vaguely explained to card holders on page 27 of the cardholder agreement.  In a very real way, this legislation could alter the revolving credit market for years to come.

The Senate bill has yet to be signed into law but will likely meet little resistance in the House before making its way to Obama’s desk.  Some of the measures covered in this bill include:

• Restricting sudden surges in interest rates
• Banning charges for customers to pay by phone
• Prohibiting Double cycle billing
• Requiring bills to be sent 21 days before payment is due

Consumer activist groups are cheering the new regulations as they encourage more transparency and keep credit card companies from engaging in what many would consider to be shady business practices.  On the other side of the table, however, issuers believe that the new regulations will hinder business and eventually lead to lower amounts of credit available to consumers.  This may make debt consolidation more difficult as fewer options are available to consumers.

This may actually be a good thing as the US is flush with borrowers who often have difficulty in servicing the interest on their accounts, not to mention paying down a significant portion of the principal.  According to the Wall Street Journal, 3/4 of US households use credit cards and while many of them pay off balances every month, there is certainly a large portion who maintain balances and pay relatively high rates of interest on these balances.

The current economic climate has challenged these borrowers to a point where delinquencies and defaults are rising.  In the first quarter 6.5% of credit card loans were delinquent.  This compares to 4.8% in the first quarter of 2008.  It would not be surprising to see this trend continue considering the employment statistics and the declines in consumer spending.

It’s a bit ironic that banks and lenders will be facing higher regulations at the same time their business is being hit with defaults, but at the same time it is difficult to feel sorry for these firms given the sometimes “less than ethical” business practices they use.

From an investment standpoint, it is difficult to get too excited about shorting the banks.  While there may still be carnage left in this industry, the biggest fears have already been realized, and the government has made it clear that they will step in and backstop many of the larger players.  However, at ZachStocks we have found opportunities to short the credit card processing companies like Visa Inc. (V) and MasterCard (MA) at opportunistic times and profit as investors began to realize hype in these names was too inflated.

Looking to the months ahead, I think both stocks (Visa more than MasterCard) are setting up as good short opportunities.  Weakening consumer spending along with unemployment numbers should cause pressure from the consumer side.  But at the same time, I expect this new regulation (along with other measures from the Obama Administration) to squeeze profits.  Remember that banks are going to have to back off many of their marketing efforts with promotions and teaser rates now less profitable.  That means fewer cards issued and likely more challenging contracts for the likes of Visa and MasterCard.

I have yet to implement a position but as this market begins to give up its short-term strength, the picture is looking better for short opportunities.

FD: Author does not have a position in V
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