Credit card companies are seeing their share prices slide after the Consumer Financial Protection Bureau announced it plans to cut late fees to $8, a tougher stance than many investors expected.
Synchrony Financial was down 5.34% to $34.7, Capital One was off 3.29% to $115.08 and Bread Financial lost 9.43% to $37.16 in early afternoon trading. Discover Financial Services and American Express both fell a bit more than 1%.
The
"In the range of possible outcomes, this skews toward the worst-case scenario end of the spectrum for the credit card industry and is more onerous than consensus suggested," Isaac Boltansky, a policy analyst at BTIG, wrote in a note to clients.
The agency says the proposal could reduce late fees by as much as $9 billion a year, a move that CFPB Director Rohit Chopra says is necessary since the current penalties are "excessive." The agency's current rules let card lenders charge $30 for late fees and $41 for subsequent violations.
The "safe harbor" cap would drop to $8 under the proposed rule, though card companies would be able to charge more if they could prove it was needed to cover the cost of collecting debt. Lenders would also no longer be allowed to tack on inflation-based increases each year, a process that the agency said is not "reflective of how collection costs change over time."
Under the proposal, the CFPB would "monitor market conditions" and consider changes to its $8 cap "as necessary," the agency said in a news release.
The rule's impact would be "sizeable" for some credit card companies, but there is "a long way to go," with the possibility of offsets to the revenue losses, according to Jefferies analyst John Hecht. The rulemaking process can sometimes take years, and the final outcomes are subject to lawsuits, he said in a research note.
But the CFPB's action could cut revenues by 7% at Synchrony, 4.5% at Capital One, 3.6% at Discover and 1.2% at American Express, Hecht projected.
Bread Financial, which focuses on retail store cards and whose borrower base more subprime, is also likely to take a hit. Store cards "historically rely more on late fees," partly because borrowers' smaller balances mean penalties have a greater impact, wrote Brian Foran, an analyst at Autonomous Research.
Megabanks such as JPMorgan Chase and Citigroup also have large card businesses, and the latter company has store partnerships with retailers such as Best Buy and Sears.
But "as with everything for the mega banks," the impact "quickly dilutes down to a very low single digit exposure given the breadth of the business," Foran wrote.
The rule is unlikely to take effect this year, so the revenue impacts would come in 2024 or later, Foran noted. In the meantime, the credit card industry "will probably have most of 2023 to work on potential offsets to other areas of revenue," Foran wrote.
Potential approaches include charging higher annual percentage interest rates up front and reducing spending on promotions, he wrote.
Industry trade groups quickly came out Wednesday against the CFPB's proposal.
The announcement is "the latest example of the Bureau seeking to advance a political agenda that will harm, rather than help, the very people they are responsible for serving," Consumer Bankers Association President and CEO Lindsey Johnson said in a statement.
"Millions of Americans rely on credit cards to make everyday purchases and cover emergency expenses," Johnson said. "It is deeply unfortunate and puzzling that policymakers would take action that could ultimately limit consumers' access to these valued financial products at a time when they are needed most."
Rob Nichols, president and CEO of the American Bankers Association, said in a statement that if the proposal takes effect, the industry will be "forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts and raising APRs for all consumers, including the millions who pay on time."
He also said the rule would "have a significant adverse impact" on a large number of smaller community banks and credit unions, many of which "would be forced to exit the credit card market altogether."
The ABA made that case in a
Jim Nussle, president and CEO of the Credit Union National Association, said in a statement that the trade group "strongly opposes this proposal, as any reduction in late fee safe harbors will have a significant negative impact on many small, community-based credit unions."
