Page 31 - GS230402

Education

The impacts of the Looking at the CARD Act of 2009, its changes seemed
much more impactful overall, and yet for the most part,
CFPB's new proposed the industry adjusted quickly, bouncing back in only a few
short years. It is likely the same would happen with any
new restriction on late fees.
card fee cap However, regardless of the amount, hitting customers

with late fees when they are already struggling is likely
to leave a bitter taste in their mouths, possibly souring the
customer relationship at best, and at worst, pushing them
deeper into trouble. To help mitigate these scenarios, cred-
it card issuers should focus on a few key steps.

Adjust credit policies and pricing
Unfortunately, with decreased fee revenue helping to off-
set associated costs and risks, certain high-risk customer
segments will likely no longer be offered the same credit
lines. Additionally, increased pricing on these products
can help issuers make up lost revenues without more egre-
gious products.

With most APRs already at or near regulatory caps of 30
percent, annual fees are the most available tool to lever-
By Geoff Brown age. However, some consumers will no longer be able to
Highline Technologies obtain an unsecured credit card if this rule goes into ef-
fect. Issuers should keep this in mind as they make these
oday's credit card industry is facing its big- adjustments.
gest regulatory change since The Credit Card
Accountability Responsibility and Disclosure Invest in tools that help keep customers on track
T Act (Credit CARD Act) of 2009). The CARD Act While not often discussed or acknowledged, "sloppy pay-
allowed the Consumer Financial Protection Bureau to cap ers" have secretly been an attractive segment for most card
the amount card issuers could charge for late fees. The issuers through the years. Perhaps even more surprising
first late fee could be up to $25 with additional late fees up than the increased frequency at which high-risk consum-
to $35. This wasn't far off the $33 average late fee in 2008 ers pay fees, is the 32 percent of so-called prime consum-
which, by 2019, had decreased by only $2 (to $31). ers who paid a late fee in 2019.

While the results of this cap were not substantial from a With the temptation of late fee revenues off the table, card
dollar amount, the bigger impacts of the CARD Act were issuers would be properly aligned with their customers
felt in how rates could be changed, capping annual fees, in wanting all payments to be made on time. They should
effectively eliminating over-limit fees and other rules. improve payment alerts, monitor linked checking account
balances and offer new bill payment options.
The CFPB is now proposing a new cap for these fees,
this time at a much lower $8. Shortly after this suggested "Payroll-linking" is also an effective approach for card
change was announced, President Biden specifically called issuers to consider. Cardholders can agree to have their
out junk fees in his recent State of the Union Address, ask- minimums (or more) paid directly from their paychecks,
ing Congress to enact this same fee cap into U.S. law. With which can significantly reduce missed payments and loss-
these issues currently having such a high national profile, es, giving customers a "set it and forget it" ability to make
it can be a difficult time for those tasked with defending their monthly payments.
late fees.
Additionally, this ensures simple cash management mis-
However, the report issued by the CFPB was stark (see takes do not result in a mutual problem, which is especial-
https://bit.ly/40bnuV9). Of the late fees collected over the ly helpful for subprime cards, where the typical minimum
review period, 53 percent were paid by subprime consum- payment is on average only $25. This not only aligns with
ers, with 70 percent of those being "deep subprime" con- everyone's interests, but it can also reduce the cost of de-
sumers, who paid $138 in late fees per open credit card. faults by a greater amount than the lost late fee revenues.
Unsurprisingly, these fees are a huge part of what makes
credit cards profitable in higher risk segments. So, what
happens if the $8 fee cap goes into effect?

31