By John Foley

NEW YORK – With more than two open accounts for every American, credit cards are practically part of the family. And like any family member, they can bring both joy and misery. An effort by President Joe Biden’s administration to force down the fees that borrowers face when they’re late on payments sounds like a savvy vote-winner. In reality, such blunt intervention is likely to reap scant rewards.

The point of credit cards is to make spending easier, yet in practice their complexity rivals the edgiest financial derivatives. Customers pay copious interest on any balance left over at the end of the month, and fees can rain down if they don’t pay on time. Some cards recalibrate to a higher, punitive rate if several payments go unmet. The fine print is hard to track: more than 40% of U.S. adults who carry credit-card debt from month to month don’t know their interest rate, a Bankrate survey found. The sheer profitability of credit-card lending, which can net banks like JPMorgan (JPM.N) and Capital One (COF.N) returns on equity of 20% or more, speaks to the opacity.

High fees and high returns partly reflect that credit-card lending is unsecured. There’s no home or car to repossess if the customer stops paying. But the pricy terms, plus the product’s ubiquity, make it an easy target. Biden has declared war against what he broadly calls “junk fees,” and in service of that mission, the Consumer Financial Protection Bureau has proposed capping late fees at $8, less than one-third of their current level. Banks can charge more, but only if they can justify it.

It’s hard to argue that late fees don’t disproportionately punish those with less financial sophistication. Beyond that, fake precision abounds. The CFPB’s $8 threshold, which it says covers banks’ main costs, is based on calculations the industry contends are incomplete; the regulator says banks didn’t provide better numbers when given the chance. The American Bankers Association claims the real cost is closer to $46. Nearly two decades ago, the United Kingdom set a number it considered fair that is around twice as high as the CFPB’s.

Banks also fret that a too-low charge would fail to deter consumers, a case too hard to prove. Citigroup (C.N) and Goldman Sachs (GS.N) already offer some cards with no late fees. And there are other ways to prevent lateness, such as reminding customers that delinquency will hurt their credit scores.

Logic and mathematics are unlikely to save banks from intervention by authorities. Politically speaking, unloved late fees sit right in the bullseye. Moreover, the CFPB differs from some financial regulators in that power is wielded by a single individual: Democrat-appointed Director Rohit Chopra. At the Federal Reserve or the Securities and Exchange Commission, say, matters are put to a vote and dissenting opinions published. If Biden wants to appear a man of action, the campaign makes sense.

Financially speaking, it’s less clear-cut. On one hand, cutting late fees would reduce revenue for card providers including JPMorgan, Discover Financial Services (DFS.N), Capital One and Bank of America (BAC.N). At Capital One, late fees account for a little less than $2 billion of revenue, or roughly 5%, a year. Cut that income by two-thirds, and all else being equal, the company’s pre-tax profit would fall by 15% in round numbers. On the other hand, banks have numerous levers to pull.

Banks have communicated to the CFPB that if fees are capped, they’ll increase other charges, or pull back on lending to those who most need the help. Proponents of the CFPB’s proposal say this is just bluster. It’s true that rules introduced in 2010 imposed restrictions on card issuers’ ability to crank up rates and fees, but they still have considerable flexibility. Historical lessons are also murky. The last round of major credit-card rulemaking came hard on the heels of the 2008 financial crisis. Even Michael Barr, a senior Fed official and Biden appointee, argued while a professor at the University of Michigan that lowering fees was likely to push up other rates and fees.

The balance of probability is that banks would barely feel the new rules. For one, the market is far from perfectly competitive. Even Goldman Sachs, one of Wall Street’s most sophisticated banks, has faced teething troubles with its Apple-branded (AAPL.O) credit card, recording higher levels of delinquency than peers, judging by Goldman’s financial filings. In the industry, that’s called “seasoning.” It takes years for bad debt within a credit-card portfolio to settle down, but that span of elevated losses makes it harder to attract new entrants.

There’s also a bigger wrinkle that gives banks pricing power: rewards. The rise of cards that offer points, miles and other discounts, such as the Chase Sapphire and American Express Platinum cards, has changed the calculus of what makes consumers switch, and may make them less sensitive to fees and rates. Capital One booked a $7.6 billion expense for rewards in 2022, compared with $1.6 billion a decade earlier. Just as card users probably underestimate the chance of paying late fees when they sign up, they’re also likely to overestimate the value of positive incentives.

The prevalence, and incomparability, of rewards – and their rising popularity – is just one market distortion the CFPB’s late-fee crackdown wouldn’t change. There’s also the fee charged to retailers every time a customer swipes, which saddles them with costs ultimately reflected in higher prices, but also provides issuers with income that makes rewards possible. One senator already has proposed legislation that would lower those charges and wreak havoc, bank executives complain, on the industry’s economics. If late fees have raised hackles among U.S. lenders, they’re only a taste of what could lie in store.

CONTEXT NEWS

A U.S. government proposal to lower fees paid by credit-card owners who are late with their payments had received over 56,000 public comments by June 1, according to the website of the Consumer Financial Protection Bureau, the agency responsible for the initiative.

The CFPB proposed lowering the “safe harbor” for late fees to $8. Issuers would be able to charge more, but they would have to seek approval to avoid being subject to legal enforcement. Currently, issuers can charge $30 for a first late payment and $41 for late payments thereafter if they happen within the following six billing cycles.

President Joe Biden urged federal agencies in 2022 to crack down on “junk fees,” and has cited the CFPB’s proposal as an example. The White House has claimed the move would save consumers $9 billion in total.

The Federal Reserve estimates that 82% of U.S. adults had a credit card in 2022, while New York Fed data reported 573 million credit-card accounts as of March. – Reuters