PNC, Wells Fargo take action on card late fees. Will others follow?

Bloomberg

PNC Bank has quietly slashed its credit card late fees to $8, and Wells Fargo is offering a new credit card without any such fees, in moves that suggest the industry is slowly yielding to the Consumer Financial Protection Bureau's efforts to slash the charges.

Industry groups are continuing to battle the CFPB in court over its proposal to cut late fees, arguing $8 is not a large enough penalty to deter tardy payments. Most credit card companies haven't budged from about $32 for the first violation and $41 for subsequent ones.

But the moves by PNC and Wells Fargo point to early signs of capitulation by the industry.

The earliest mover on cutting late fees was Synchrony Financial, which analysts say is more reliant on those charges than its peers. The Stamford, Connecticut-based credit card company dropped its late fees to $8 in April, though it's making up for the revenue hit partly by raising interest rates and adding a $1.99 monthly fee for paper statements.

The industry is still holding out hope that the late fee rule will get "knocked out" in court and the CFPB will come up with a "more reasonable number," said Crystal Kaldjob, a partner at the law firm Morrison Foerster. But card issuers are also increasingly grappling with the demise of substantial late fee revenue.

"There's probably a resignation that we won't go back to business as usual," Kaldjob said.

Still, the majority of card issuers have not reduced the charges since six trade groups sued the CFPB in March to halt the agency's rule. In May, a federal judge preliminarily sided with the industry groups, halting the May 14 implementation date.

CFPB Director Rohit Chopra has said the drop in late fees would eliminate $10 billion in revenue. Card issuers collected $4 billion in late fees at the end of 2022, nearly double the amount in 2015, Chopra said in prepared remarks Wednesday before the Senate Banking Committee. That figure is expected to fall to $1.5 billion per quarter, or $6 billion per year, if the late fee rule takes effect.

"Credit card companies will still be able to penalize customers, and they will be able to charge a fee exceeding $8 if they can show that it's reasonable," Chopra said.

Industry executives have long argued that $8 is too small a penalty to prevent some customers from paying late. They also contend that their current late fee procedures are well disclosed and follow CFPB-imposed requirements.

PNC's move to slash its late fees to $8 across the board will not have a massive financial impact on the super-regional bank, whose footprint in the credit card market is smaller than that of megabanks.

The company did not respond to requests for comment on why it cut its late fees to the CFPB's desired level.

Bill Demchak, the CEO of PNC Financial Services Group, was asked about credit card late fees at a Brookings Institution conference in March. He said that the Biden administration labels legitimate charges as junk fees, and described that practice as "wrong."

Demchak hasn't been shy about criticizing industry fees in the past. Just after the 2020 elections, Demchak said that banks needed to get rid of "gotcha fees" such as overdraft charges that came as a surprise to customers who had money in other accounts.

Banks have a right to charge fees as long as they're fair and disclosed adequately, Demchak said in March.

"We shouldn't charge a fee because you didn't understand it," Demchak said. "To me, that's a gotcha fee. … I think that's very different [from] charging legitimate fees for legitimate service. And I think one of the issues that is playing out, at least in this administration, is an attack on any fees in banking, which ultimately leads, in my view, to bad outcomes."

Wells Fargo didn't respond to requests for comment on why its new credit card has no late fees at all.

The web page for Wells Fargo's new Attune credit card prominently says "no late fees."

The rewards structure for the no-late-fee card is generous — it offers 4% cash back on gym memberships, sporting events, public transportation and other purchases — in contrast with a no-frills credit card that Citigroup has long offered. The Citi card does not charge late fees, but it also does not offer points or rewards.

The industry's litigation against the CFPB has taken many turns, with the U.S. Court of Appeals for the 5th Circuit recently placing an administrative stay on a Northern District of Texas court's order transferring the industry's lawsuit to the U.S. District Court for the District of Columbia.

Last week, the CFPB filed its opposition to the stay, which expires on June 18. The CFPB has argued that because the trade groups that oppose the rule are based in Washington, the case should be moved out of Texas.

Ed Groshans, a senior policy and research analyst at Compass Point Research & Trading, said he expects the court's stay will remain in place regardless of whether the case is eventually reviewed by a district court in Texas or in Washington, D.C.

"The industry seems to have a very valid argument that they will likely win on the merits, and the stay should remain in effect," Groshans said. "Our assessment is based on the statutory requirements to determine late fees, the data used by the CFPB to set the $8 late fee, and arbitrary card issuer cutoff promulgated only in the final rule."

The cutoff that Groshans referenced means that the rule would only apply to the largest 30 to 35 credit card issuers, which account for more than 95% of total outstanding balances. Limiting the rule to the industry's largest issuers was not in the CFPB's proposed rule but was added in the final rule, leading the industry to argue that the CFPB failed to convene a small-business review panel and did not allow for comment on the impact of exempting small banks and credit unions.

The fact that card issuers would potentially lose $10 billion a year in revenue is another factor that could tilt the appeals court in favor of the industry's claims, Groshans said.

The 5th Circuit, which ruled in 2022 that the CFPB's funding structure was unconstitutional, is widely viewed as hostile to the agency. Analysts think a three-judge appeals panel is likely to agree with industry trade groups that the CFPB did not explain how it reached the conclusion that an $8 late fee was appropriate. The industry groups claim that the omission is "arbitrary and capricious," in violation of the Administrative Procedure Act.

The legal back-and-forth has led to an unusual level of "fascination" among credit card companies over court mechanics, said Kaldjob, the Morrison Foerster lawyer.

Consumer lending

Synchrony hikes interest rates on credit cards to offset late-fee rule

April 24, 2024 6:35 PM

Reducing late fees is part of a wide-ranging effort by the Biden administration to crack down on unfair or hidden fees. The lowered late fees are a victory for the Biden administration, which has made the new late fee restrictions a centerpiece of its fight against "junk fees" that's been ramping up during this election year.

Amid the legal jousting, banks that issue cards on behalf of retailers are actively negotiating changes for such store-branded cards. Both parties are thinking through different scenarios, whether the late fee is $8 or somewhere north of that, Kaldjob said.

Kaldjob, who helps negotiate contracts for both banks and merchants, said that rather than writing different scenarios into contracts, both sides are being "transparent" about the rule's potential impacts. That includes the possibility of needing to cut off some customers with lower credit scores who otherwise would have qualified for cards.

Synchrony, whose business revolves around those partnerships, got ahead of the late fee rule months ago by negotiating with its retail partners.

The bank started rolling out changes in December, Synchrony CEO Brian Doubles said in a quarterly earnings call in April, where he said that interest rate hikes and other fees would help make up for the lost revenue.

"Our goal from the beginning has been to protect our partners and continue to provide credit to the customers that we do today," he said. "And unfortunately, that's impossible to do without these offsets."