By Ray Birch
BIRMINGHAM, Ala.—The CFPB’s proposed rule on credit card late fees will likely create problems for card issuers as they scramble to make adjustments, but credit unions could also enjoy a window of opportunity if the proposal is finalized, according to one analyst.
“While this may look difficult right now, it may present some competitive opportunities for credit unions,” said Bill Hardekopf, CEO of BillSaver.com. “While they may think it's a difficult time, there are opportunities regarding card rates and possibly rewards. Competitively, credit unions, for a period of time, may be able to take advantage of this.”
Hardekopf used the average late fee as an example.
“I know these fees can be all over the board, but let’s take $32,” he said. “Any time you take the late fee down from $32 to $8, that's a lot of revenue that credit card issuers and banks are going to lose.”
As CUToday.info reported, the CFPB has now published its proposal on credit card late fees in the Federal Register. The proposal would reduce the credit card late fee safe harbor to $8, down from the current $30 for a first violation and $41 for a subsequent violation within the next six billing cycles. The new rule applies to issuers of more than one-million active accounts. While Navy FCU is the only credit union that surpasses that threshold, the effects are expected to be felt across the market.
Not About the Cardholders, But the Stockholders
Hardekopf pointed out that almost all major card issuers and banks are publicly traded institutions.
Bill Hardekopf
“When you're publicly traded, you have stockholders to report to, and stockholders care about dividends and the growth of their stock,” he reminded. “So, if you lose revenue over here in field A, you're going to have to make up for it in field B, C or D in some way. Banks are going to try and make up for that lost revenue. Now, whether that's raising fees in some way, whether that's raising interest rates in some way, it will be a variety of things that banks may do in areas outside of credit cards. I think just about anything is fair game when you take the revenue and decrease it tremendously.”
Coming Back to ‘Get Them’
Consumers, while they might be “rejoicing” with the decrease in late fees, it's going to “come back to get them” in some way shape or form, insisted Hardekopf.
‘“It might even be decreased rewards, maybe that's the plan,” Hardekopf said.
Just as other payments experts have told CUToday.info, Hardekop believes big banks will have an easier time adjusting to the mandatory fee reduction than smaller FIs, thanks to their scale.
“The bigger banks are at an advantage,” he said. “Smaller banks, and credit unions, are definitely at a disadvantage.”
Another Issue to Watch
Meanwhile, Hardekopf believes there is another rissue at play that also deserves attention before the CFPB’s proposal can be finalized.
“Politics can befuddle, especially in an election year. It certainly looks good for politicians to say, ‘Look what we've done with these junk fees or late fees’,” he said. “It's a feather in their caps. However, I don't think they fully realize that banks are going to make it up in some other way. There might be a short-term positive effect for consumers, but this will eventually catch up to consumers in some other way, as I said.”
As other analysts have told CUToday.info, the pressure to lower card late fees will eventually trickle down to credit unions, andHardekopf agrees.
“Again, it may take it may take more time for it to hit the smaller institutions, but it is going to happen,” he said.
Opening the Window
Since the biggest issuers will be affected first—and 95% of cards in circulation are issued by a handful of companies--Hardekopf believes that’s where credit card rate hikes are most likely to implemented..
“That is something that will be on the table and can certainly happen,” he said. “And, usually when one does this, others follow. That would certainly make up for some lost revenue, especially with credit card debt being as high as it. Any time you raise interest rates that's going to have a pretty big effect on additional income.”
Will the smaller players have a window of opportunity to win new accounts and increase balances when the banks begin to make up this money with higher rates and lower rewards?
“It’s a fluid situation,” Hardekopf said. “Those smaller institutions may not follow with credit card interest rate hikes and that may give them a competitive advantage. While there may be a reduction in income for those smaller institutions, this rule may present some competitive advantages for smaller FIs. In addition to having lower rates if the big banks raise interest rates, the large issuers may also cut back on rewards. That will make smaller institutions’ rewards programs look better to consumers.”
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