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INNOVATION: After CARD Act, Levying Petty Fees Would Be a Mistake
Credit card issuers are holed up in conference rooms nationwide with one directive on their agenda: figure out how to make up for lost revenue as a result of the Credit CARD Act.
The CARD Act, which goes into limited effect on Feb. 22, will alter the way credit card companies do business. Some of the highlights (lowlights, to card issuers) of the act are:
- Bans Retroactive Rate Increases: Bans rate increases on existing balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payment.
- Requires Opt-In to Over-Limit Fees: Consumers will find it easier to avoid over-limit fees because institutions will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
- Restrains Unfair Sub-Prime Fees: Fees on subprime, low-limit credit cards will be substantially restricted.
- Limits Fees on Gift and Stored Value Cards: The act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.
The White House estimates that Americans pay around $15 billion in penalty fees annually, so it is not surprising that card companies are still looking to fees to bridge the gap from rate increases and the like. In an interesting note to clients, First Annapolis, the consultancy, suggests that card issuers will heap on the fees:
[W]e are beginning to see signs of alternative-fee approaches as an offset, including the introduction of paper-statement fees, and we expect more activity in this area throughout the year.
Paper-statement fees?!? That’s the best the card executives can do. I’ll say this: credit card issuers will only be shooting themselves in the foot if they head down the path of petty fees. And if that $15 billion of credit card
fees become, say, $25 billion, you can count on the activist Obama administration taking heed.
So what to do? The truth is fees are the answer, but not the petty kind. Firstly, there is just no avoiding annual fees, even if “most industry participants are taking a cautious approach to [annual fees to] avoid mass attrition of their best customers,” according to First Annapolis. I doubt annual fees will fully offset the revenue declines from the CARD Act, but they will help. More importantly, however, card issuers need to find “non-petty” fees. As of 2009, the annual fee in the United States for American Express’s Centurion Card — more commonly known as the Black Card — was $2,500, with a one-time $5,000 initiation fee for the first year. Amex can charge such fees because the services associated with the Black Card are worth it. As tough as it may be, credit card issuers need to find those kernels of value for their card holders. When they do, the fees will flow.
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