The New Late Fee Landscape: Strategies for Card Issuers
As part of the CFPB’s ongoing “War on Fees,” the agency released its Final Rule that significantly restricts the late fees that consumer credit card issuers may charge, representing a substantial shift in the regulatory landscape. This new rule mandates that card late fees be capped at a safe harbor of $8, a notable reduction from the previous limits of $30 for the first time or $41 for later violations. While the majority of the proposal remains intact, a couple of updates were made that add additional nuance to the implications for card issuers. Adapting to these changes and navigating the new late fee landscape is crucial for maintaining profitability, enhancing the customer experience, and fostering long-term sustainability in the industry.
We will continue to update this page with the latest Insider Insights from our team of experts. Using Comperemedia competitive intelligence tools to monitor up-to-the-minute email activity and engagement, social sentiment, and other direct marketing, we will break down the notable consumer and brand activity and offer predictions for how brands will continue to instill financial confidence in their consumer base.
Updated as of 2:00 pm ET 4.5.2024
The Problem of Deterrence
One of the top concerns from issuers is how fee reductions would impact their revenue and the deterrence of undesirable behaviors, as a fee cap would only cover the administrative cost and not the cost of delinquency. To address this, the CFPB emphasized, “The rule does not change the issuer’s ability to raise interest rates, reduce credit lines, or take other actions to deter consumers from paying late.” This enables issuers to seek other types of recourse to incentivize the right habits and maintain their bottom line.
This priority of deterrence and managing risk, however, can be at odds with the customer experience. According to Mintel consumer data, fees, and interest are the #1 and #3 areas of concern, respectively, with 54% of consumers concerned about increased fees from FIs and 50% concerned about interest rates. Given that quantitative variables are a driver in acquisition and retention, issuers should weigh consumers’ sensitivity towards fees in determining the best course of action and use messaging that manages those concerns.
Large vs. Small Card Issuers
The Final Rule differentiates between large issuers, who have over 1 million open credit card accounts, and small issuers, who are under that number of accounts. The $8 late fee cap only applies to these large issuers and will effectively eliminate the higher safe harbor amount for successive violations, as well as end the current annual inflation adjustment that currently takes place. Small issuers, on the other hand, will benefit from being able to charge a safe harbor threshold with an inflation increase to $32 and $43 for first and subsequent late payments.
Because of this delineation between large and small issuers, portfolio management will become a critical component of remaining profitable. Charge-offs aren’t factored into the critical 1 million accounts that would tip an issuer from small to large, but delinquent accounts are. Small issuers who are on the brink of crossing over 1 million accounts will need to balance portfolio growth with lost revenue. While some brands will strategically pull back on marketing to remain a small issuer, other brands will embrace the cap on late fees and find alternate ways to make up the revenue.
What’s next for credit card issuers
Currently, the CFPB’s rule has been temporarily halted, as trade groups have launched a judicial challenge, and some time will be needed for this to play out in the courts. Brands should proactively undertake scenario planning and account for the possibility of either outcome.
Assuming the Final Rule survives, consumer credit will be impacted – by increasing the cost of credit for all consumers, a loss of access to credit, or some hybrid of the two. The industry will look at pricing, including higher APRs, raising minimum payments, and the creation of new fees. There will also be stricter rules around the closing of inactive or unprofitable accounts, more selectivity in credit offerings, and decreased rewards benefits.
Even if the Final Rule is struck down, the credit card industry is ripe for transformation and issuers who take an evaluative eye to their products will have a differentiating advantage.
For a deeper dive into how issuers are testing strategies via their customer communications, other actionable recommendations, and predictions about how credit cards will evolve, please reach out to your Account Manager to schedule a presentation.
Disclaimer: As this is an evolving story, this article does not constitute and should not be taken as legal advice. Please consult your legal and compliance advisors with specific regulatory policy questions.
