Card Issuers Must Prepare for Reductions in Late Fees

The new Consumer Financial Protection Bureau (CFPB) rule, cutting the maximum credit card late fee from $32 to $8, could have a huge impact on card issuers’ bottom line. Analysts predict that the move could cost issuers as much as $10 billion in revenue. Expected to go into effect in May, the rule is part of the Biden administration’s crackdown on what it has come to call junk fees. It will apply to card issuers with over one million open accounts. According to the CFPB, more than 45 million individuals incur late fees on credit cards annually. Collectively, Americans’ credit card debt has topped $1.1 trillion, a new record.

A Dubious Junk Fee

The war on junk fees has already targeted areas like live event tickets and apartment rentals. The White House has defined these fees as “hidden, surprise fees that companies sneak onto customer bills, increasing costs and stifling competition in industries across the economy.” But as a recent Impact Note from Javelin Strategy & Research points out, credit card late fees don’t really fall into this category. “This definition does not adequately describe a late fee,” wrote Brian Riley, Director of Credit & Co-Head of Payments at Javelin Strategy & Research, in Late Fees: A Regulatory Hot Button, Not a Junk Fee. “Consumers may not like to pay late fees, but when the fees exist, credit card issuers comply with disclosure mandates.” Credit card issuers have been required to disclose all fees, including late fees, since the passage of The Truth in Lending Act of 2007.

Warning to Smaller Lenders

Still, that won’t prevent the late fee rule from going into effect. To prepare for it, credit card issuers must be aware of the impact to their revenue and expense lines. “The middle market and small lenders should be particularly attentive to the fee reduction, as they navigate liquidity challenges and credit quality deterioration,” Riley said. He recommends that lenders take the following three steps:

• Tighten lending and avoid marginal FICO score consumers, at least until the economy settles.
• Look at existing cardholder credit lines; explore options to reduce risk through surgical credit line decreases.
• Accelerate the collection process to reduce account handling costs and mitigate risk. Move up dunning notices, intensify calling strategies within the boundaries of the Fair Debt Collection Practices Act, and reduce back-end operations expense to offset non-interest income loss.