From The Wall Street Journal
Less than a year after the passage of new laws limiting banks’ ability to impose certain fees on credit and debit cards, Bank of America Corp., Discover Financial Services, J.P. Morgan Chase & Co. and other lenders are using different tactics to boost their fee income.
Some are raising minimum payments on certain customers’ accounts in order to increase late penalties. Others are ramping up credit-protection insurance programs and charging customers for coverage without permission. Still others are pushing aggressively into high-fee prepaid cards, which are exempt from most of the new rules.
Banks already have rolled out a slew of new fees since the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009. Among other things, they have revived annual fees; shortened billing cycles; levied new charges on cards with low credit limits; increased balance-transfer, cash-advance and foreign-exchange fees; and begun aggressively marketing “professional cards” not subject to the restrictions of the Card Act. (For more on these, see “The New Credit Card Tricks,” July 31.)
The Federal Reserve responded on Oct. 19 by announcing proposals that would ban hefty activation fees and prevent issuers from raising interest rates on promotional card offers until a borrower is more than 60 days late.
The Card Act is expected to weigh heavily on bank profits. Lenders could lose an estimated $11 billion in fee income next year alone, according to Robert Hammer, CEO of R.K. Hammer Investment Bankers, an adviser to card issuers.
Profits from debit cards also are in jeopardy. Earlier this year, the Senate passed a law ordering the Federal Reserve to limit “interchange fees,” the levies banks charge to merchants each time a card is swiped. Last year, banks collected $22.8 billion in such fees on debit-card transactions, according to CardHub.com, a consumer information site.
The Fed hasn’t yet announced how much it will reduce the fees. Analysts say even a moderate reduction could hurt lenders.
J.P. Morgan Chase announced this week that it is moving away from debit cards. Starting in February, the lender won’t issue debit reward cards to any of its new customers, according to Charlie Scharf, head of retail financial services at the bank.
The recent foreclosure mess could further damage bank profits as a legal storm gathers over allegations that some employees signed foreclosure-related documents without having reviewed them. Bank of America and J.P. Morgan declared a moratorium on foreclosures earlier this month while checking documents for accuracy, though both have since restarted their foreclosure proceedings.
“In this environment fee income is ever more important,” says Gail Hillebrand, a senior attorney with Consumers Union.
Customers, therefore, should be on guard from the outset, say consumer advocates. Before signing up for a new card offer, borrowers should find out whether services like payment protection are automatically included. And once borrowers start using a card, they should pore over their statements each month in search of billing changes. If they notice a higher minimum payment or a new fee, they should contact the card issuer immediately, say consumer advocates.
Some lenders, including J.P. Morgan Chase and Bank of America, have upped minimum payments for some borrowers, according to CreditCards.com, a card-comparison site. The goal, say analysts: to maximize late-fee income.
Under the Card Act, late penalties are restricted to $25 or the minimum payment amount, whichever is lower. By raising minimum payments, card companies also can increase their late fees.
Sudden jumps in the minimum payment can increase the likelihood that borrowers will be late on payments. “Rising minimum payments can cause borrowers to default and help generate greater fee income for issuers,” says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has studied the impact of the Card Act on lenders’ practices.
David Highland, who lives in Telluride, Colo., and runs a small lodging company, says he saw firsthand how banks are raising minimum payments. Last summer, he says, Bank of America increased his required monthly payments to 2% of his total balance from 1% despite the fact that he hadn’t missed a payment.
“It’s a squeeze,” Mr. Highland says. “It looks to me like they are trying to tip over vulnerable borrowers.” He has since paid off the balance.
A Bank of America spokeswoman says it doesn’t comment on individual borrowers. She adds that the bank hasn’t raised minimum payments on its consumer cards in the past year, and that the payments are based on balances, late fees and finance charges.
Tom Nedelsky, who owns a Santa Cruz, Calif.-based construction company, says his minimum payments on two Chase credit cards went to 5% from 2% in August 2009—boosting his payments to $1,185 from $493.00.
“We never paid late and we were never given an explanation,” Mr. Nedelsky says.
Chase doesn’t comment on individual borrowers, but spokesman Paul Hartwick says that “for the overwhelming majority of customers, our current minimum-payment calculation is the greater of $10 (or the total amount if the balance is less than $10), or 2% of the balance, or the total of 1% of the balance plus interest and late fees.”
Lenders also are ramping up their payment-protection-insurance programs. The promise: For a monthly fee, a credit-card issuer will suspend finance charges and minimum payments if a borrower loses a job or gets sick. Costs for the protection vary by card issuer, but are routinely about 80 cents to 90 cents per $100 of credit card debt.
There aren’t hard numbers tracking payment-protection offers, but bank analysts say lenders are pushing the product more aggressively. “There is a growing movement on the part of the banks to enroll more people in payment-protection programs,” says Dennis Moroney, research director at advisory firm Tower Group.
“Major credit-card companies are ramping up offers for credit protection,” adds Ben Woolsey, director of marketing and consumer research at CreditCards.com.
Some lenders may be imposing the fees without borrowers’ permission. Raymond Christopher, a 36-year-old owner of a car-repair business, says he was surprised to find a fee for credit protection when he checked his Discover card statement in August. He says that on further investigation, he learned that he had been charged $1,200 in protection fees since January.
The higher a cardholder’s balance, the more he must pay for payment insurance. Discover charges 89 cents per $100 in balance—so a person with a $15,000 balance would pay $133.50 a month for payment protection.
Mr. Christopher, who lives in Fredonia, N.Y., says he called Discover to protest the fee because he never signed up for the insurance in the first place.
“I was told that I signed up on my wife’s birthday, which would have been impossible since I was strictly forbidden from even talking on the phone that day,” Mr. Christopher says. “There’s no way I signed up.”
David Paris, a New York based attorney, in July sued Discover in California federal court on behalf of cardholders enrolled in Discover’s payment-protection plan without their consent.
“Thousands of people have been pushed into this program,” Mr. Paris says.
Discover doesn’t comment on individual borrowers, but spokeswoman Laura Ginigiss says, “It’s not in Discover’s interest to sell a product that doesn’t enhance our relationship with our card members.”
Some lenders are tightening the eligibility requirements for credit protection as well. In February, James W. McKinney of Benton, Ill., signed up for payment protection through HSBC Holdings PLC after being solicited by phone. The problem: Mr. McKinney, a disabled war veteran, was unemployed and therefore ineligible for HSBC’s payment-protection insurance.
In October, Mr. McKinney joined other borrowers in a class-action suit against HSBC in Illinois federal court.
HSBC declined to comment.
Some major lenders, including Capital One Financial Corp., the sixth-largest credit-card issuer, are turning toward “prepaid” cards. Pitched as no-hassle, bill-free alternatives to debit and credit cards, prepaid cards are especially attractive to college students—and their parents.
Issuers like them for another reason: Not only are prepaid cards not subject to most Card Act restrictions—they also are exempt from interchange-fee restrictions.
Capital One launched its prepaid card last October, five months after the signing of the Card Act. “Prepaid debit cards are a natural extension of our diversified financial-services business,” says Pam Girardo, a spokeswoman for the lender. “Our prepaid card is a transparent product that offers good values for consumers.”
Other big lenders are likely to follow. “We are absolutely going to see banks expand their prepaid card offerings,” says Odysseus Papadimitriou, CEO of CardHub.com.
Investors are betting that prepaid cards will be a hot market. NetSpend Holdings Inc., a large issuer of prepaid cards, went public on Oct. 19 at $11.20 a share and has risen to $15.98. Rival Green Dot Corp. went public in July at $36 and now trades at $52.98.
But consumers might not benefit from a push toward prepaid cards. Consumers Union, an advocacy group, examined prepaid cards in September. It found that more than half came with activation fees as high as $39.95.
Many prepaid cards also charge borrowers a fee to load money on the card, and then another fee to check balance information or use the card at an ATM. And if borrowers want to escape the steady stream of fees, they usually have to fork over another fee. Western Union Co.’s prepaid card charges $10 to close out an account with a check.
Inactivity fees, banned from credit cards under the Card Act, range from zero to $9.95 for prepaid cards dormant for 60 days.
While banks must get debit cardholders’ permission before they can ding them with overdraft fees, prepaid cards carry no such restriction. Overdraft fees, called “shortage fees” on prepaid cards, are charged when a cardholder’s purchases exceed the available cash on the card. NetSpend mentions this fee in the fine print of its terms and conditions.
A Capital One spokeswoman says its prepaid card doesn’t charge activation, inactivity or insufficient-funds fees, or for balance inquiries. It charges a monthly maintenance fee of $4.95 for customers who don’t load at least $500 onto their cards each month.
“While these cards may look like other plastic, they are far different and more dangerous to cardholders—especially college students,” says Ms. Hillebrand of Consumers Union. “These cards are so larded with fees that almost all the available credit can evaporate before a cardholder even uses it.”
—Aparajita Saha-Bubna contributed to this article.