One Citi card has no late fees. It reveals a lot about CFPB's $8 plan.

Daniel Acker/Bloomberg News

Banks have slammed a proposal by the Consumer Financial Protection Bureau to slash credit card late fees to $8, arguing in part that consumers need a strong incentive to stay current on their payments.

But one major card issuer, Citigroup, has long offered a credit card that charges no late fees at all.

The card's time-tested design highlights nuances that have largely been overlooked as the battle over late fees has heated up.

On one hand, the card's staying power suggests that fees may not deter late payments as much as the industry has been suggesting. The flip side is that the Citi card is about as straightforward as it gets, with none of the rewards that have become a staple of the card industry.

If the CFPB cuts late fees to $8, a reduction in rewards may follow, said Ted Rossman, senior industry analyst at Bankrate.com. An $8 ceiling would represent a major cut from the levels that regulators currently allow — $30 for first-time late fees and $41 for subsequent violations. Banks could go above the $8 "safe harbor" with approval from regulators.

"I think it's notable that Citi Simplicity doesn't have rewards, and I think that is probably emblematic of what we might see more broadly," Rossman said. "Not that capping credit card late fees at $8 would kill all rewards, but it might lead to cutbacks."

That would be a welcome change for some consumer advocates, who argue that late fees paid disproportionately by lower-income consumers help fund the glitzy rewards programs that many wealthier cardholders have grown accustomed to.

Late fees should only cover issuers' costs, rather than becoming a "profit center or subsidizing things like rewards," said Chi Chi Wu, senior attorney at the National Consumer Law Center. Citi's Simplicity card shows it's "possible to have no or very low late fees and be profitable," she added.

Citigroup declined to comment for this story.

Bank trade groups have repeatedly warned the CFPB against slashing late fees to $8. In a recent comment letter, the Consumer Bankers Association wrote that the agency's proposal would "essentially eliminate the most effective consumer consequence for paying late." The group said the CFPB did not conduct a thorough analysis of late fees' deterrence effects and ignored other research on the issue.

If late fees drop to just $8, banks will likely raise credit card interest rates, reduce consumers' credit lines or decrease their lending to riskier customers, the CBA wrote. In addition, responsible cardholders "will be cross-subsidizing consumers who do not pay on time" through higher borrowing costs or a reduction in their rewards, the group wrote.

Citi's Simplicity card isn't the only product available that doesn't have late fees. The Apple Card, which is issued by Goldman Sachs, also doesn't charge cardholders for being late on their payments. Nor does a card from the fintech company Petal.

But Citi's card has a longer track record, which suggests it isn't a money-loser.

Citi executives have touted the Simplicity card over the years. Its former card head, Judson Linville, said in 2014 that Simplicity was a "truly simple lend-centric product with no late fees ..."

A few years earlier, regulators had overhauled rules on late fees and other credit card features. In designing the Simplicity card, Citi sought to "embrace these rules in the spirit of transparency and responsible finance," Linville said.

In 2018, another onetime Citi executive, Stephen Bird, touted the Simplicity card as one of numerous Citi credit cards that provided higher returns to the bank than certain other cards.

The Simplicity card has multiple selling points to consumers. It doesn't include an annual fee. It offers a 21-month period of zero interest on all balance transfers — a feature that saves money for those who are incurring large interest costs on their balances elsewhere.

And customers seem to like the flexibility they get from not incurring a late fee. In an online review of the card, one customer recalled having "lost track of everything" during a bout of COVID, and said that Citi was the only institution not to charge a late fee.

But online reviews also note the card's lack of rewards. One customer wrote: "It is serving me well especially since I am retired. Wish it had some rewards with it. Hint hint."

The CFPB says its late-fee proposal would yield substantial savings for consumers. But the agency has also acknowledged that the reduced revenue for card issuers could result in changes to existing products. In its proposal, the CFPB said card issuers might charge higher maintenance fees, raise interest rates and lower rewards as a result of reduced late-fee revenue.

In a letter to the CFPB, a group of Republican lawmakers expressed concern about the knock-on effects of sharply curtailing late fees. The legislators, who included Rep. Andy Barr of Kentucky and House Financial Services Committee Chair Patrick McHenry, wrote that rewards are likely the "first area in which lenders would cut, erasing value to customers." 

While the CFPB recognizes that possibility, the agency "oddly … appears not to be concerned," the lawmakers added.

Just how well late fees work as a mechanism for incentivizing on-time payments is unclear. Consumers face other negative consequences if they don't pay their credit card bills right away, including a potential slashing of their credit limit and lower credit scores once missed payments are reported to credit bureaus.

One recent study found that late fee decreases raise the chances that a customer will pay after the due date. Though the researchers wrote other factors may be at play, their results suggested that some consumers made an explicit trade-off, paying late more frequently after late fees fell more than a decade ago.

In 2009, credit card late fees underwent a major overhaul as part of the Credit Card Accountability Responsibility and Disclosure Act, which one study found saved consumers nearly $12 billion a year.

Prior to the CARD Act, late fees and charges on customers who exceeded their credit limits had jumped from $25 on average in 2002 to $35 in 2008, a separate study found. The CARD Act brought first-time late fees back to $25. Since then, inflation adjustments have allowed card issuers to charge up to $30.

Over the last decade, card reward programs have grown in popularity. The biggest banks in the country paid $35 billion in rewards in 2019, but the rewards aren't evenly distributed, according to a discussion paper published on the Fed's website.

"Regardless of income, sophisticated individuals profit from reward credit cards at the expense of naïve consumers," the researchers wrote.

Americans with super-prime credit scores earn far more rewards, while subprime consumers earn fewer rewards and pay more in interest. The researchers said that imbalance leads to an "annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities."

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Despite their popularity, rewards "are not good for consumers on average," said Jialan Wang, a University of Illinois professor who focuses on credit cards.

That's because the complex rewards systems benefit "credit card gurus" and individuals who are already better off, said Wang, who was previously an economist at the CFPB. 

Other customers don't fully capture the benefits available, or they are weighed down by late fees and interest rate charges, according to Wang, who co-wrote the study that found late fees jumped by $10 between 2002 and 2008.

A move toward simplicity in the U.S. credit card system could benefit more consumers, she said, though she acknowledged that it could also reduce rewards.

"There's no free lunch here," Wang said.