Banks nervously await new credit card law

NEW YORK (CNNMoney.com) -- Banks and other credit card issuers are nervously awaiting the new credit card law set to go into effect on Monday. Many are anxious to determine just how big of a profit hit they stand to suffer as a result of the CARD Act.

Judging by early estimates, it could be quite costly.

Late last year, JPMorgan Chase (JPM, Fortune 500), the nation's largest credit card issuer, warned it expected its credit card business to lose as much as $750 million this year as a result of the new legislation.

Executives at rival Citigroup (C, Fortune 500), which issues cards to consumers from Maine to Mexico, warned last month the revenue lost by its domestic business could tumble anywhere between $400 million and $600 million.

All told, the new law is expected to cost the industry as much as $5.5 billion in lost revenue this year and more than $50 billion through 2015, according to the credit card advisory firm R.K. Hammer.

Much of that decline, experts said, is due to the fact that issuers are severely restricted by how and when they can raise a cardholder's annual percentage rate.

Under the new law, lenders are not only prevented from raising rates on a customer's existing balance, they are also required to wait 60 days before raising rates on delinquent customers.

Hoping to compensate for some of the lost revenue, credit card companies have introduced a dizzying number of new fees and raised existing ones since the bill was signed into law last May.

Regional banking giant Fifth Third (FITB, Fortune 500), for example, announced last June it would begin charging a $19 fee on accounts that were dormant for 12 months.

Such efforts may help the banks. This year, the industry is expected to generate $86.4 billion in fee revenue from consumers, according to R.K. Hammer, nearly $7.5 billion more than it earned during 2009.

"In general, card issuers have been very good about finding ways to get paid for their services," said David Long, an analyst at Chicago-based investment firm William Blair & Co.

But card issuers could also get a boost from another unlikely source: the economy.

Massive job cuts have lifted banks' credit card-related losses to historic levels in recent months as out-of-work Americans struggled to stay current on their payments.

There have been recent signs of improvement in the U.S. job market though. Just last month, the national unemployment rate fell to 9.7%, dipping below 10% for the first time in three months.

Should unemployment levels continue to decline, banks would get a much-needed break on losses they have endured for more than a year now. There are already indications this may be taking place.

Early-stage delinquency rates, a commonly relied upon indicator of future loan losses, declined or held steady at Bank of America (BAC, Fortune 500), Capital One (COF, Fortune 500) and nearly every other single major credit card issuer last month, according to monthly credit trend figures released earlier this week.

"The fact that delinquencies are coming down is a positive sign," said Scott Valentin, managing director at FBR Capital Markets.

Loan losses however are only one piece in a much larger puzzle that credit card companies have to solve as they try to reconcile the CARD Act with their current business model.

Issuers will continue to experiment with new methods aimed at reviving the profits they once enjoyed. But much of their time will also be spent assessing what consumers really want in a credit card, including whether recently instituted practices like annual fees will ultimately be palatable to cardholders.

"They are trying to customize products under the new rules," said Valentin. "It will take time."