Resistance to the CFPB’s late fee rule exposes banks’ bigger problems

Koto Amatsukami – stock.adobe.co

Earlier this month, the Consumer Finance Protection Bureau announced the decision to limit credit card fees.

Within hours, the American Bankers’ Association blasted the CFPB’s decision, saying that “today’s flawed final rule will not only reduce competition and increase the cost of credit but will also result in more late payments, higher debt, lower credit scores and reduced credit access for those who need it most.” 

Predictably, the American Bankers Association, the U.S. Chamber of Commerce, Fort Worth Chamber of Commerce, Longview Chamber of Commerce, Consumer Bankers Association and Texas Association of Business then filed a lawsuit. 

Hidden fees have become so standard that the industry has lost perspective on what a consumer-centric model looks like. The focus on protecting easy revenue that threatens some Americans’ financial opportunities has the industry leading with the wrong questions. Instead of asking whether we are doing the best we can for the American consumer — and looking at ways to be more efficient, consumer-centric and transparent — the largest banks in the country are consumed with how they can continue to conduct business as usual. And that’s just plain wrong.

Consumer credit plays an important role in our society and we’re lucky to have a well-developed banking and financing system that offers these financial products, but I’d like to present a challenge to the industry at large: Can’t we all do better for consumers?

There is no question that credit card issuers need to — and should — make a profit. 

According to data from industry research firm R.K. Hammer, credit card companies realized $176 billion in income in 2020. Interest income made up 43% of industry income in 2020. Interest is typically fully divulged upfront, so while 43% is staggeringly high, it is spelled out every month. 

As we can see, Americans already pay dearly for access to credit. But layering escalating fees on top of interest rates is disingenuous. 

Why are the proposed limits so concerning? Is it because the big institutions don’t want to show their hands to the American public, because it would mean they would need to actually compete fairly to serve those customers? What is the issue with being transparent, exactly? 

Let’s be direct about it. Fees most impact those who can least afford them. So, banks talk a big game about being inclusive and offering everyone access to credit, but in actuality, they’re hitting the American consumer when they’re down. 

In its announcement, the CFPB noted that since 2010, issuers have generally been charging consumers more in credit card late fees each year — growing to over $14 billion in 2022, and representing more than 10% of the $130 billion issuers charged consumers in interest and fees.

Consider that for a moment: Consumers paid more than $13 billion in late fees, over many years, when interest rates were at or near zero.

I believe that the vast majority of Americans do pay their bills on time whenever possible. Overcharging them for late payments doesn’t change their behavior; it just lines the pockets of the company collecting the fees.

If you have an excellent credit card product and want to run a great business, do it. But do it openly and fairly. Bake your costs into your interest rate and let consumers make an informed choice. Instead of rooting for the status quo, with fee income rolling in through various fees, compete by serving the customer better and by building a trusting relationship with them. Reduce or eliminate what you can.

Respect their intelligence and give them the information they need to make the best decisions for their circumstances.

This means that many in the consumer financial industry will need to innovate by introducing new products and services, leveling up their customer care or even examining their operational costs to find ways to be more efficient. And for everyone, that’s a good thing.

The industry may or may not win this round. However, until the big players reconsider their positions, the American public will continue to lose. That is why I am so excited about fintech companies. Fintech — across all dimensions ranging from buy now/pay later to installment loans and credit cards to other financing methods — is about companies trying to bring innovation, excellence and a new sense of responsibility and engagement to consumer lending.

While the fee limits may or may not hold, I am confident that in the coming years, the pressure on big banks will come not only from the CFPB but also increasingly from Americans choosing to work with companies, fintechs or consumer lending companies that want to work for them. 

Charging fees or hiding behind unclear terms are strategies that have cost consumers billions yearly, serving only to enrich companies. The future of consumer finance must be more personalized, transparent and efficient for consumers because customers deserve more than squabbling over excessive fees that should never have become so high in the first place.