Today, President Obama is expected to sign new legislation that will place limits on the fees and interest rates charged to consumers using credit cards (see WSJ article). While we can argue the benefits and unintended consequences of such legislation (doesn't it seem like we are using the term "unintended consequences" a lot lately), from a trading and investment perspective, there is an expectation that revenue generated by the fees and interest rates - which are now being scaled back - will begin to dry-up for many credit card companies. Subprime borrowers and others holding balances are the cash cows for credit card companies, given that those that don't really need credit tend to use the cards more for convenience, or as a way to gain points and a month of "free" float before paying off their balance in-full.

Estimates have the credit card industry losing $10 billion in revenue from overall interest income. In addition, companies such as Bank of America, Citigroup, Discover, and Capital One Financial are estimated to get between approximately 27-30 percent of their business from subprime customers. Others potentially hit by the new legislation include General Electric - the biggest issuer of private-label cards in the U.S., and Target, which issues its own cards to customers. Unfortunately, Citigroup also issues about 22 percent of all private label cards - not that they need another reason to lose revenue.

While the market still needs to shake out this latest development, it seems that taking away a large source of revenue, and making it more difficult for companies to price their risk, cannot be good for the credit card companies. The general impact on retail sales, increased costs to credit-worthy customers (annual and monthly fees), and the availability of credit for everyone, also seem to be things that cannot be ignored.

For the first time since 1993, credit card companies were unable to sell bonds backed by customer payments (see Bloomberg article). Top-rated credit card-backed securities maturing in three years are selling at spreads of 475 basis points over Libor, compared to a spread of only 50 basis points less than a year ago. Given higher unemployment, leading to potentially higher credit card use and an inability to pay, lenders are expecting higher default rates for 2009. American Express is already accessing the Fed commercial facility program, as well as cutting 10 percent of its work force. Bank of America, JPMorgan, and Citigroup all rely on the debt market to fund their credit card portfolios, and could also subsequently be impacted by higher spreads and lower liquidity.

As reported at the International Herald Tribune, the use of credit cards is increasing overseas. Thirty years ago Turkey had fewer than 10,000 credit cards, yet today it has more than 38 million, resulting in outstanding card debt of nearly $18 billion. Across Asia, Latin America, and Central Europe the number of card transactions is up 20 to 30 percent a year, more than twice the growth in the United States.

The increased use of cards has been somewhat of a double edged sword. Increased transactions have spurred an increase in consumer spending, but of course, bills eventually come due. Countries such as South Korea have seen defaults surge, and other rapidly growing credit markets, such as Turkey and China, also have analysts worried. But for now the global demand for cards is still increasing, and subsequently helping Visa and MasterCard report record revenues, not to mention offering their shareholders some positive returns.