Make a credit card payment late to Barclaycard UK and the cardholder is charged a late fee of £12. It is not to be recommended but need not hammer the cardholder’s credit score. Barclaycard, as with other UK issuers, offers a grace period before it reports the consumer to the credit reference agencies. If the cardholder was up to date the previous month and pays the late payment within 14 days of the due date, the consumer’s credit score is not affected. In a typical month, over 2 million UK cardholders will miss a repayment so it affects a relatively small percentage of cardholders. £12 is pretty standard in the UK as a credit card late fee and is charged also by NatWest and American Express. It is not unduly onerous and is not a political issue or an issue for the courts.
Now contrast the UK with the US
This is where it gets interesting. It is also becoming a heated topic of debate, is becoming very political and will likely end up in the Federal court.
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The Consumer Financial Protection Bureau has finalised a rule with the aim of reducing the average credit card late fee from $32 to $8. The CFPB estimates the move will save consumers $10bn in late fees.
As one would expect, US banks and card issuers do not take kindly to political interference in general and fixed pricing in particular.
Within hours of the announcement, the scale of the challenge facing the CFPB was apparent. There will be a concerted attack on the CFPB in the press. The gist will be that the rule change is bad for consumers as the banks will just make up the lost revenue elsewhere.
One can summarise this argument as the CFPB is incompetent, will not help the segment of the market it professes to be looking after as a result of the likely unintended consequences of the rule change. We can expect to hear of threats to the future of loyalty programmes and rewards. There will be the argument that the rule change will mean an increase in interest rates for all cardholders that pay interest.
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By GlobalDataLate fees make up 15% of credit card profitability
Credit card fees in the US is already a hot topic, with as many as 45% of consumers revolving their balances from time to time. Moreover, it is estimated that late fees comprise about 15% of credit card profitability.
So, the card issuers bottom line will not just be impacted here-it will take a major hit. That means the likes of Capital One, Bank of America, Chase and Synchrony will not take this lying down. Indeed, the rule change if passed, impacts every issuer with over 1 million open accounts.
Synchrony partners with retailers and others to provide branded cards and immediately warned that its fee revenue could drop by $800m from its fourth quarter 2023 levels should the rule become effective. Indeed, it forecast that its earnings per share could fall to $0.25, a drop of $0.15
The Bank Policy Institute is already on the case, arguing that the CFPB used junk economic analysis in crafting the rule. Then there is the Consumer Bankers Association. It argues that the proposed rule change will benefit a small minority of frequent late-payers by offsetting the costs of their late payments by increasing costs amongst the 74% of cardholders that pay their bills on time.
We have been here before. Capping overdraft fees removed $4bn in bank revenues in 2022 compared to 2019 levels.
The might and deep pockets of the US Chamber of Commerce has been mobilised. It is threatening an imminent legal challenge. It is already on manoeuvres against the Biden administration relating to Basel III. Specifically, it argues that the Basel III Endgame rules will increase US banks’ capital requirements to such an extent that they will be unable to lend to small businesses.
Now it gets political
Now let’s turn to the politics of the issue. The Republicans have had issues with the CFPB since it was established. House Financial Services Committee chair Patrick McHenry argues that a move to cut late card fees is an example of the Biden administration weaponising financial regulators. Meantime, Tim Scott argues that current late fees are lawful and contractually agreed upon payment incentive that promote financial discipline and responsibility. He says that he will use the Congressional Review Act process to fight the implementation of the rule.
Biden has railed against so-called junk-fees throughout his presidency. He may well reference the proposed rule change as part of his drive to costs for consumers in his State of the Union address. That comes as soon as tomorrow so we do not have long to wait to hear how Biden tries to sell the rule change. It would be a surprise if all of the potential legal and political challenges do not delay this issue for the rest of the year.
$32 is too high as an average late fee-indeed some issuers charge $40 for a second missed payment. $8 is too low and was always likely to represent a red rag to the card issuers. A figure starting with a 2 would represent some form of common sense and compromise. It would not materially impact card issuers. It would provide a measure of comfort to late payers. And it would avoid the issue becoming such an issue that it adds weight to those who wish to abolish the CFPB. But it is hard to see any potential for possible compromise in the current US political environment.
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