In the Cards: Preserving Profitability in a Post-CARD Act World

October 2010

Overview

Market conditions and demand, legislative reform, and innovation allowed the securitization industry to evolve from its infancy into a mainstay of the financial markets in less than three decades. As investor acceptance increased, the markets continued to grow and innovate. However, at times innovation came at the cost of decreased transparency, perceived declines in quality, and increased risk. The combined effects of weakening credit assessments and a downturn in the housing market and global economy led to a dramatic decrease in new securitization transactions. Although securitization is expected to maintain its key role in global capital markets, the market continues to face challenges as it recovers.

Restoring confidence in the securitization market requires a focus on several core principles:

  • Rebuild investor confidence through transparency, expanded disclosures, and enhanced quality of information.
  • Enhance accountability for all market participants (borrowers, issuers, investors) through robust underwriting, appropriate representation and warranties for compliance with the document terms, and effective governance and oversight of the process.
  • Implement cost-effective oversight to improve accountability in and oversight of the markets.
  • Properly align and balance the risks, rewards, and costs of securitization among all participants.
  • Improve reporting and disclosure requirements by ensuring the financial reporting and disclosure models meet the needs of investors, regulators, and other stakeholders.
  • Re-examine regulatory capital rules to ensure that they strike the right balance for on- or off-balance sheet securitizations, are implemented consistently across the globe, and do not disincentivize the process.

The financial crisis of 2007-2009 and the Credit Card Accountability, Responsibility, and Disclosure Act (the CARD Act of 2009) have had a profound impact on the credit card industry. The Act has resulted in tighter credit for many consumers and caused credit card issuers and their technology partners to incur significant expenditures to comply with its mandates.

In the short term, credit card issuers focused their efforts on shedding risky accounts and altering billing practices, which have impacted revenues. Less attention was paid to the drivers of the cost structure supporting their credit card business. In order to sustain and grow profitability over the long term, credit card issuers will need to address their cost structures and make fundamental changes to their operating models.

Leading practices among companies using new costing methods to drive operating and strategic decisions have resulted in benefits such as:

  • More accurate assignment and tighter control of costs
  • Sharper identification of profitable customers
  • More accurate identification of value-generating products and services

Contact us

John Garvey
Global FS Advisory Leader & U.S. Banking & Capital Markets Leader
Tel: +1 (646) 471 2422
Email

Patrick Giacomini
Principal
Tel: +1 (646) 471 4399
Email

Jim Russell
Tel: +1 (646) 471 2597
Email

Anthony Ricko
Principal
Tel: +1 (978) 985 1749
Email

Andrew Luca
Financial Services
Tel: +1 (646) 335 4649
Email

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