By Geoff Brown
Highline Technologies
Today's credit card industry is facing its biggest regulatory change since The Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) of 2009). The CARD Act allowed the Consumer Financial Protection Bureau to cap the amount card issuers could charge for late fees. The first late fee could be up to $25 with additional late fees up to $35. This wasn't far off the $33 average late fee in 2008 which, by 2019, had decreased by only $2 (to $31).
While the results of this cap were not substantial from a dollar amount, the bigger impacts of the CARD Act were felt in how rates could be changed, capping annual fees, effectively eliminating over-limit fees and other rules.
The CFPB is now proposing a new cap for these fees, this time at a much lower $8. Shortly after this suggested change was announced, President Biden specifically called out junk fees in his recent State of the Union Address, asking Congress to enact this same fee cap into U.S. law. With these issues currently having such a high national profile, it can be a difficult time for those tasked with defending late fees.
However, the report issued by the CFPB was stark (see
Looking at the CARD Act of 2009, its changes seemed much more impactful overall, and yet for the most part, 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.
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, credit card issuers should focus on a few key steps.
Unfortunately, with decreased fee revenue helping to offset 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 egregious products.
With most APRs already at or near regulatory caps of 30 percent, annual fees are the most available tool to leverage. However, some consumers will no longer be able to obtain an unsecured credit card if this rule goes into effect. Issuers should keep this in mind as they make these adjustments.
While not often discussed or acknowledged, "sloppy payers" have secretly been an attractive segment for most card issuers through the years. Perhaps even more surprising than the increased frequency at which high-risk consumers pay fees, is the 32 percent of so-called prime consumers who paid a late fee in 2019.
With the temptation of late fee revenues off the table, card issuers would be properly aligned with their customers in wanting all payments to be made on time. They should improve payment alerts, monitor linked checking account balances and offer new bill payment options.
"Payroll-linking" is also an effective approach for card issuers to consider. Cardholders can agree to have their minimums (or more) paid directly from their paychecks, which can significantly reduce missed payments and losses, giving customers a "set it and forget it" ability to make their monthly payments.
Additionally, this ensures simple cash management mistakes do not result in a mutual problem, which is especially helpful for subprime cards, where the typical minimum payment is on average only $25. This not only aligns with everyone's interests, but it can also reduce the cost of defaults by a greater amount than the lost late fee revenues.
While extremely useful, credit cards can also be expensive and risky to operate, and thus interest and fees quickly become a necessary component. However, in our evolving financial landscape, a credit card alone may not be the only, or best, option for a consumer.
Card issuers shouldn't be afraid to explore other, perhaps more efficient offerings they could provide in addition to traditional cards. Two compelling alternative products that have seen a significant rise in demand are buy now, pay later (BNPL) and early wage access (EWA) options.
BNPL formats, where a customer typically completes a purchase in four payments, are similar to credit cards in many ways. Both receive revenues from the merchants that make the payment options available, but BNPL is a purely digital product that is close-ended, with the merchant as the captive marketing channel. This offers a vastly lower cost, especially for high-risk, small dollar customers, which means the consumer does not need to pay heavy fees and interest.
With EWA, consumers can access their future paid wages today based on the pay they've already earned, but their employer has yet to run through payroll. This gives consumers a small dollar cash flow option at little or no cost if paid by their employer.
The key advantage EWA offers is limiting spending to available income while in turn getting paid first from that income. This dramatically lowers the cost of defaults, which, in turn, means the consumer could then be offered a low cost product.
Secured cards are another older, yet still highly effective product that has seen significant growth recently, most notably with popular options like Chime's Credit Builder Card. However, card issuers should keep in mind that while these products serve a useful purpose for consumers, they are not true credit products but rather credit building tools.
And while secured cards have been shown to increase credit scores, there is growing evidence that this may be somewhat of a mirage. Regardless, these cards generally are not big profit centers on their own and are unlikely to fill the revenue void from lost unsecured card customers. However, secured cards can be a bridge toward moving customers into a more traditional credit or loan product.
With the current scrutiny on consumer fees, it's likely we will see the CFPB's new proposed cap take effect in one form or another. And while credit card issuers are rightfully concerned at the impact it could have on costs and lost revenue, it's also important to note that this regulation is being put in place to protect consumers.
As in past instances, credit card issuers will likely find alternatives to mitigate these losses and generate revenue. However, those that focus on doing so in ways that help and support consumers first are much more likely to be in a better position to meet those regulatory challenges now and in the future, strengthening their customer relationships at the same time. 
Geoff Brown is a co-founder and CEO of Highline Technologies, an award-winning payments fintech unlocking payroll-linked lending and bill payment, boosting financial inclusion, better rates and costs for consumers, and lower risk for the lenders. Reach out to him at linkedin.com/in/geoff-brown-b6561b2.
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