By Michele Ford, Senior Research Analyst
In February 2023 the Consumer Financial Protection Bureau (CFPB) proposed a rule to ban exorbitant credit card late fees. According to current regulations, credit card companies can charge up to $41 for missed payments. The amended provision would cap the fee on missed payments at $8, citing this amount would be sufficient for most issuers to cover collection costs.
The Card Issuer Perspective
According to CFPB, late fee penalties are a core part of the profit model for credit card issuers. Therefore, a reduction in late fees would likely impact their bottom-line. Furthermore, interest income and fee revenue are factors in an institution’s ability to offer rich rewards programs to credit card customers. Unfortunately, many debit card rewards programs were terminated as issuers adjusted to interchange regulations following the Durbin Amendment in 2010. It is possible issuers could be faced with balancing a loss of revenue while still providing valuable, rewarding credit card products.
The Customer Perspective
While late fees may be viewed as an incentive for customers to pay their credit card bills on time, an individual may inevitably miss a payment at any given time due to an unexpected expense or other financial hardship. Customer delinquency, when reported to credit bureaus, can lead to lower credit scores and inhibit future purchasing power. Competiscan has seen evidence that card issuers are mindful of these scenarios, as they will sometimes waive late fees as a courtesy and send customers a notice detailing the action and issuing an account credit. Unfortunately, even proactive efforts from credit card companies are not always enough to prevent late payments from occurring. Interestingly, we see a parallel between the current debate over late fees and overdraft fees, a penalty many banks have recently amended or eliminated.
How Banks Limited Overdraft Fees
Due to feedback from both consumers and regulators, many banks began eliminating overdraft fees a few years ago. Ally Bank, Capital One, and Citibank are three institutions that no longer charge for overdrafts. Other banks opted to reduce or cap overdraft fees (Bank of America, KeyBank, Regions), offer a grace period on overdrafts (TD Bank, PNC Bank, Wells Fargo), or raise the ceiling on overdraft amounts or enable a “buffer” option (Truist, U.S. Bank). For instance, popular fintech Chime allowed overdrafts up to $200 with its SpotMe feature. Notably, Chase developed Overdraft Assist, which did not penalize customers for overdrafts of $50 or less. The firm also included a grace period for amounts of $50 or less that were paid by the end of the next business day. These examples provide a solid model for potentially reducing credit card fees.
How Banks are Addressing Late Fees
Some banks are already taking action to help consumers manage their credit card debt by avoiding late fees. Competiscan has observed a number of marketing practices, like upcoming payment reminders, auto-pay promotions, or general reminders about late fees. For example, an email from American Express recommended that customers use AutoPay in order to bypass late fees. In a Bank of America email campaign offering a 1.99% introductory rate, there was a note reminding customers to “make at least your monthly minimum payment during the promotional period, so you don’t incur late fees.” Citibank advertised $0 late fees in a direct mail message for the Citi Simplicity Card.
At the same time, Competiscan has not observed upward movement in the disclosed late fee amounts. Based on Competiscan’s Q4 2022 data, the average maximum late fee disclosed in credit card offers remained under $40, showing little change year over year. This leads us to speculate that greater financial literacy on the part of consumers could help address the issue of late payments.
The Role of Financial Literacy
If the CFPB is successful in eliminating or limiting credit card fees, it would offer several benefits to consumers, including the opportunity to build greater financial stability, more purchasing power, and the potential of improved credit scores. However, financial literacy is a critical element in a consumer’s ability to break any potential debt-cycle tendencies. Competiscan has noted some financial institutions taking on more responsibility in assisting customers in gaining financial literacy. Self Financial, a fintech operating in the credit-building space, offered a best-in-class example of how to incorporate financial literacy within customer lifecycle marketing.
In an email released ahead of a customer’s first payment date, Self provided four important facts about late payments. First, the message explained the firm’s grace period and the late payment amount should the payment not be made on time. Second, the communication outlined the next steps if the payment was not received within 30 days or even 80 days – clearly explaining the impacts the delinquency could have on both the account status and their credit score.
Competiscan will continue monitoring credit card issuer communications to customers regarding late fees. In a perfect world, the CFPB’s latest push for credit card reform will benefit both customers who may be burdened by a cycle of late fees, as well as issuers who may depend on late fee revenue to fund certain programs.