The credit card fees debate: What’s in it for consumers?

Credit Card Fees Debate: Exploring the Controversy and Implications

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Credit Sesame discusses the credit card fees debate and what it means for consumers.

The debate over credit card fees pits two deep-pocketed lobbying groups against one another in a heavyweight media bout. In one corner, you have the retail industry led by major players such as Walmart and Amazon. In the other corner, you have the banking industry led by the likes of Bank of America and Citibank.

Politicians are cheering for each side. However, it is not really a partisan issue. Both parties benefit from contributions from retail and banking. At the same time, both parties have their populist factions who are eager to grab headlines by supposedly fighting on behalf of consumers.

However, the question of what is best for consumers is complicated. While fees are never popular, there is some doubt as to whether consumers would actually benefit from limiting credit card fees. Most likely, some consumers would benefit while others would be harmed. But who is harmed and who is helped, and how?

What fees are under discussion?

Two types of fees are under discussion:

  1. Credit card late fees. These fees affect consumers directly and are assessed when you miss a payment deadline. According to the Consumer Financial Protection Bureau (CFPB), the average first-time late fee for general-purpose credit cards is $26. The average for repeated missed payments is $35. The CFPB is weighing a proposal to limit first-time late fees to $8.
  2. Interchange fees. These are also known as “swipe fees.” Merchants pay these fees every time a credit card company processes a transaction at a merchant’s business. Merchants want a cap on how much credit card companies can charge for processing transactions.

These fews represent billions of dollars in revenues. Nobody likes paying fees and the public is not sympathetic to the ups and downs of credit card company revenues. Hence, these fees have become known disparagingly as “junk fees.”

The attack on “junk fees”

The Biden Administration has made the attack on so-called “junk fees” one of its signature issues. It’s easy for consumers to relate to this favorably. Recent years have seen a proliferation in extra charges tacked onto various bills. Things that a business would normally include in its cost of doing business are now added as direct charges to consumers. That helps the profit margins of merchants and service providers. Plus, it allows them to boost those profit margins without increasing their advertised prices. For consumers though, it’s a sneaky form of inflation. They may think they have paid the price, only to find a significant amount of other charges tacked on at the end.

It’s easy to see why attacking junk fees would be a popular issue. Beyond the politics, it seems as though there are legitimate consumer-protection reasons for cracking down on these fees.

However, it’s up for debate whether credit card fees are really junk fees. They are not charged automatically; they are charged for specific actions. There are also serious questions as to whether attacking credit card fees is in the best interests of consumers.

What consumers have to lose

Looking at each type of credit card fee, it’s not clear whether attacking those fees would really benefit most consumers.

Late fees

Late fees certainly bring in revenue for credit card companies. Total late fee volume routinely exceeds $10 billion dollars a year across all credit cards.

However, late payments also represent a cost and a risk to the credit card companies. Like any business, they depend on getting paid on time. When they don’t, it delays their cash flow and increases their processing costs. Late payments also represent a significant risk to credit card companies since customers ultimately default on a portion of those behind-schedule payments.

If late fees are restricted, credit card companies may have to increase charges somewhere else. Many credit cards are available with no annual fee. More cards might have to start charging an annual fee if late fees are restricted. Also, credit card companies would be less likely to issue cards to the customers who default the most. This would restrict availability to subprime and deep subprime customers in particular.

The unfair thing about these negative impacts is that most credit card customers pay their bills on time. Credit Sesame analyzed data on late fees from the Consumer Financial Protection Bureau and found that just 27% of accounts had one late fee in 2019. Restricting late fees might benefit just over a quarter of credit card customers, but the remaining three-quarters may have to pay the price in increased fees elsewhere.

In win-or-lose terms, the customers who failed to make payments on time would be the winners. Customers who did nothing wrong would be the losers.

Interchange fees

Capping interchange fees threatens an even worse outcome for consumers than capping late fees. The winners in that deal would be more likely to be merchants than consumers.

A good test case for what might happen if credit card interchange fees were capped is the outcome when the same thing happened to debit card exchange fees. These were capped as part of the 2010 Dodd-Frank Act.

A few years later, the Federal Reserve Bank of Richmond did a study to see how merchants reacted when debit card interchange fees were capped. The key issue is whether they passed any of the money they saved on those fees along to customers.

The Richmond Fed found that after interchange fees were capped:

  • 77.2% of merchants kept prices the same and pocketed the savings for themselves.
  • 21.6% of merchants raised prices to consumers.
  • 1.2% reduced prices.

As was the case with debit cards, the proposal to cap interchange fees on credit cards is justified in terms of a benefit to consumers. History, though, shows that the benefit is likely to be negligible.

It’s worth remembering that credit card companies provide a service in exchange for the interchange fees. Here are some of the things credit card companies provide when they process a transaction for a merchant:

  • Data protection
  • Anti-fraud protection for customers
  • Electronic transaction processing
  • The financial risk of the transaction – the merchant gets paid immediately while the credit card company still has to collect from the customer
  • Reduced need for merchants to carry cash on premises
  • Low or no-fee credit cards
  • Rewards programs

Any or all of those benefits might be reduced or eliminated if credit card companies could no longer charge merchants as much for processing transactions.

The cost vs. benefit

Credit card companies make profits from the cards they issue to consumers. As a consumer, the best way to limit what you pay is to make your credit card payments on time and in full every month. That way, you can get all the benefits of a credit card with no interest and no late fees.

In contrast, proposals to reduce certain credit card fees carry a lot of unknowns. It’s not certain that most consumers will save much money as a result of credit card fee reductions, but it’s likely that some of the benefits of credit cards will be put in jeopardy. At a time when Americans are depending on credit cards more than ever before, that’s a big risk to take.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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