By Ray Birch
PETERBOROUGH, N.H.—Should the CFPB’s proposed rule on credit card late fees become final, credit unions should prepare to make less money on their card portfolios, according to one expert who says that although the rule applies only to issuers with more than one-million open accounts, its effects will trickle down to all FIs.
And the most significant, even ironic effect, of all—while the rule targets the largest issuers, it will likely only serve to benefit them in the end, as big banks have greater capacity to absorb the revenue hit than do smaller issuers, which will likely have no choice but to lower their own fees.
In fact, if enacted as is the rule will likely lead some card issuers to become more risk averse, cut back on rewards and possibly sell their portfolios, said Tim Kolk, principal at TRK Advisors.
Driven From the Market
“Obviously, it's going to hit the biggest banks with more than one million accounts. There may be 25 to 30 of these institutions,” Kolk said. “Those are the folks who drive the market. So, it's going to be out there as a reduced fee.”
Navy FCU is the only credit union with more than one-million cards issued.
As CUToday.info reported, the CFPB has 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.
Adjusting the Squeeze
Tim Kolk
Kolk pointed out that when the Card Act and other regulations have been passed previously, the big banks have easily adjusted.
“When one part of a bank’s revenue stream gets squeezed, it looks to accentuate another part of it,” Kolk said. “We saw when the Card Act came through that card issuers raised their effective interest rates pretty substantially. I don't expect this rule, if it is made final, will have the same impact as the Card Act. But it wouldn't surprise me if the banks pop up their rates up a little bit.”
Kolk is projecting the rule will nick issuers’ bottom lines by about 100 basis points on a pretax basis.
“For those institutions on the margin, who might have been slightly profitable before this, they probably won't be profitable now,” he said.
‘Marginal Impacts’
Kolk suggested that some of those shops living on the profitability margin bubble may reduce their risk and limit issuing cards to lower-credit-score consumers.
“I am not sure how many consumers will be affected, just because when you get down to the lower credit scores, where more people pay late fees, they're already having a hard time getting cards,” Kolk noted. “So, at a very high level, there'll be some marginal impacts throughout these portfolios.”
Kolk expects the largest issuers will defray costs by adding or adjusting other revenue streams, as they did when overdrafts and interchange were under fire.
“Everything that happens in this industry trickles down. Sometimes it's immediate and sometimes it takes time,” Kolk reminded. “Credit unions will have to individually decide if they want to knock their late fees down to $8. Those that don't are going to have on their disclosures a fee that will soon look really high to folks. If Bank of America is charging $8 and Credit Union X is charging $20 to $30, this can begin to degrade the credit-union’s long-time fair value message. Over time, all credit unions will have to come down to this new level.
“Inevitably credit unions will have to match the market on this,” continued Kolk. “And they don't have a lot of room, and their profitability is under pressure. And with rewards getting ever more expensive…Every nickel they can't generate hurts their competitive position.”
Credit Unions ‘In a Box’
What can credit unions do? Probably not a lot, according to Kolk.
“Provided they match the market and come down on their late fees, credit unions could raise some other fees a little bit,” suggested Kolk. “However, there's really not anywhere to turn to do that to any effective degree, unless CUs find a way to introduce new annual fees. But they can't do that unless the market does that. Annual fee cards are dead in the middle market area. Frankly, there's not a lot they can do. A federally chartered credit union can’t raise their interest rates past 18%, and they have to be competitive in their rewards offerings. Your federal credit union is in a box.”
The Classic Battle
Ultimately, Kolk said the rule could lead credit unions to a “classic battle.”
“Our revenues are constrained, so, we've got to find ways to manage our expenses or manage our risk,” he said. “You can manage risk a little more carefully. With consolidation, credit unions are getting bigger and their memberships are getting more and more like the general population, and they just can't be that different as a movement than from the banks as they used to be. So, they just have to live with lower profitability. It's kind of how this comes out. They're just going to make less money in their card business, that’s inevitable.”
In the meantime, Kolk said credit unions need to be preparing to address members who will see new advertising from banks that promote their lower late fees.
“Banks are going to make lemonade out of lemons,” he said. “If you're only charging an $8 late fee and you can put that in a headline, why wouldn't you? It won’t be the banks’ first headline, because there's other things that cardholders or applicants care about much more when they decide what card they're going to take or use. But it's certainly not something they'll ignore.”
Potentially More Portfolio Sales
Kolk also believes if the CFPB’s rule is finalized, more CUs will consider selling their card portfolios.
“I've been seeing more and more credit unions look at selling their portfolios, going with an agent program,” Kolk said. “This is just another little straw on the camel’s back that could force a credit union to make that move.”