AUGUST 2004

Card Issuers Increasingly Rely on Fees

The importance of fee income has increased dramatically for credit card issuers over the past three years. Major card issuers recently rolled out another (seemingly annual) round of hikes in penalty fees (e.g., late payment and overlimit fees). A customer of most major credit card issuers who is even one day late with his or her payment is likely to incur a fee in excess of $30. Across all major issuers, the average monthly late fee hit $32.01 in May 2004, up from $30.29 one year earlier and $13.30 in May 1996, according to CardWeb.com. In addition, Bankrate.com reports that American Express recently raised the fee that it charges customers who are overlimit (on the revolving card product) to $35 from $29 last year. Bank of America also charges a $35 overlimit fee, as does Citibank and Bank One. According to Cardweb.com, credit card fees rose to 33.4% of total credit card revenue in 2003, up from 27.9% in 2000 and more than double the 16.1% share accounted for by fees in 1996. In 2003 the card industry collected $11.7 billion from penalty fees, up 9% from $10.7 billion a year earlier, according to Robert Hammer, an industry consultant.

Robert McKinley, chief executive of CardWeb.com, told the Wall Street Journal, "As competitive pressure builds on front-end pricing, it has pushed a lot of the profit streams to the back end of the card—to these fees." He added that over the past two years "it has become much more aggressive." This means that card issuers perceive that the finance charge rate on the card is the most important pricing margin for consumers. Consequently, issuers have cut prices on finance charge rates (often using low or zero "teaser rates" which apply for an introductory period of several months) to compete for new customers and reduce attrition. But, at the same time, customers are apparently much less sensitive to "back-end" fees, such as late fees and overlimit fees. These fees are directly linked to how the cardholder handles an account. Perhaps most cardholders do not expect to incur those fees and do not consider them when comparing card offers. One complaint of consumer activists is that fees are often buried deep in disclosure documents where they are easily overlooked.

The good news for customers who keep their balances below their limits and make payments well before the due date is that they can avoid these fees altogether and get a lower priced credit card than was the case a decade ago. Simply put, customers who pay on time and do not exceed their limits no longer subsidize those that pay late and exceed their limits.