iStock; Rebecca Zisser/BI
Good news! Some of those annoying fees on your credit card may soon be getting smaller. Bad news! Banks and credit-card companies are almost certainly trying to figure out where else they squeeze money out of you.
The Consumer Financial Protection Bureau announced last month that it had finalized a rule capping credit-card late fees at $8 for the first violation, cutting them down from the typical $32. Later that month, Mastercard and Visa reached a $30 billion settlement with US merchants agreeing to cap credit-card interchange fees — fees charged to retailers every time you swipe your card at their stores — for a handful of years.
Much of the industry's reaction to the late-fees limit has been of the sky-is-falling variety, with the Bank Policy Institute, an advocacy group, declaring that such charges are "essential to efficient functioning of the market." The response to the interchange-fee settlement has been a bit more muted: The Electronic Payments Coalition, which represents Visa, Mastercard, and other credit-card companies, said it was OK with the swipe-fees cap. This sanguine approach, however, is likely in no small part because the agreement is much less aggressive than legislation floating around in Congress. Taken together, it's clear that many companies in the credit-card business would rather not be dealing with this situation.
For consumers, the changes could be a decent deal. By the CFPB's calculation, late fees cost American families $14 billion a year, and it says the rule will save people some $10 billion annually. The swipe-fee cap will save merchants some money for a while, which could, in theory, be passed on to their customers, though it's unclear how much that will happen in practice.
Banks will always be able to find other places to recoup revenue for things like this
But there's good reason to think that, in the long run, these changes may not be an unambiguous win for credit-card customers: Financial firms are very good at getting money out of people. There are all sorts of levers card issuers can and will pull to try to recuperate any lost revenue streams elsewhere. Where one door closes, a window opens — one many consumers may be surprised to see on their next credit-card statement.
"Banks will always be able to find other places to recoup revenue for things like this," Matt Schulz, the chief credit analyst at LendingTree, told me. "I would imagine that we will see other fees increase over the next little while."
In the wake of the Visa/Mastercard settlement, analysts at UBS wrote in a note to investors that lost revenue due to caps on credit-card late fees and swipe fees, as well as impending changes to lower debit-card swipe fees, would send companies such as JPMorgan Chase, American Express, and Synchrony Financial looking for offsets elsewhere. There are a number of areas financial-services firms can turn to so they can make that money back, they said, including charging more interest and layering in various additional fees on items such as getting printed statements. They also said they thought there would be more fee-based card products, as in cards with annual fees.
"As the economics evolve, we would not expect the banks/card issuers to sit idle," the analysts wrote.
Mark Elliot, the chief customer officer at LendingClub and a banking-industry veteran, noted that annual interest rates for credit-card debt are extra high right now, which could make it harder for companies to ratchet them up even further, though not impossible.
"We've seen a lot of research that most customers are not even as aware of what the rate is on their card as they probably should be, so the card companies could increase that," he said.
Companies could look to downgrade credit-card rewards, which would save them money by not having to pay them out, though everyone is a little hesitant to alienate rewards customers. There are other places where banks and credit-card companies can look to pay for rewards like hotel points, miles, and cash back, such as upping foreign transaction fees or transfer fees or drawing from elsewhere. The Visa/Mastercard settlement allows retailers to add a surcharge for people with fancier rewards cards, which often come with higher swipe fees, but it's not clear how many merchants will do that. They don't want to drive away customers, especially more affluent, higher spenders, which rewards-card holders tend to be.
"Most merchants don't want to put themselves in the position of being the bad-guy tax collector on Visa and Mastercard's behalf," Doug Kantor, the general counsel at the National Association of Convenience Stores, said.
According to the Merchants Payments Coalition, Mastercard is now planning to increase different credit card fees soon, it's "network assessment" fee.
Banks and credit-card issuers have already been discussing in earnings calls their plans for what to do on fee clampdowns. With regard to the late-fee cap, Citi's chief financial officer, Mark Mason, said in its January call that the bank was planning to make up the lost revenue with various "offsets and mitigants," though he didn't specify what those were. The same month, Capital One CEO Rich Fairbank said the CFPB rule, once implemented, would have a "significant impact" on its profits and losses in the near term but that the company could deploy "mitigating actions" to eventually counteract it.
We've seen a lot of research that most customers are not even as aware of what the rate is on their card as they probably should be, so the card companies could increase that
Of course, things do not have to be this way. Banks have financial incentives to make a public fuss whenever any revenue stream is threatened, though it's not clear how big of a threat this actually is to their business or just what magnitude of changes they would need to make up the revenue. Whatever the reality, if they yell loud enough that some regulatory or legislative change will destroy their business, it ups the chances that said change will be reversed or never go through in the first place. And, on a fundamental level, many financial firms don't need such high profits to stay afloat in the first place, as much as their shareholders may demand them.
How many levers companies like JPMorgan Chase and Capital One can pull may also depend on competitive factors, Ira Rheingold, the executive director of the National Association of Consumer Advocates, said. Companies do have to contend with one another in terms of what types of annual fees they can get away with or interest rates they can charge. "I think there are some fundamental incentives that will keep them from going too crazy," he said.
The scenario does appear to be somewhat of a whack-a-mole situation — one fee is axed here, another fee appears over there. Amanda Jackson, the director of consumer campaigns at Americans for Financial Reform, said the only way to actually end this frustrating fee game was for the government to step in, as it's attempting to do with the late-fees limit, and set rules that apply to a wider swath of charges.
"We need regulations with true reforms that allow for billions to be saved," she said.
So next time your credit-card bill lands at your door, you may want to take a closer look at it to see whether any surprise extra charges wound up in there — and to see what your interest rate is.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.