Credit card issuers charged $12 billion in late fees in 2020, according to a recent report from the Consumer Financial Protection Bureau.
That is lower than the $14 billion in late fees consumers paid in 2019, as stimulus dollars flowed into consumer bank accounts during the pandemic-fueled economic slowdown that began in the spring of 2020. CFPB Director Rohit Chopra said he expects revenue from late fees to jump as inflation and credit limits increase.
“Many credit card issuers have made late fee penalties a core part of their profit model,” he said. “Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost.” The agency earlier this year said it would begin investigating the fees in an effort to ensure “robust and fair competition in the credit card market.”
Chopra’s stinging comments come as 90 percent of U.S. consumers say they find overdrafts valuable, according to a recent Morning Consult national study of 2,210 adults undertaken on behalf of the American Bankers Association. Three in four who had paid an overdraft fee in the past year were glad their bank had covered that payment, rather than declining or returning it. Eighty-three percent said their bank is transparent about disclosing fees, and more than 60 percent say that account fees charged by their bank are reasonable. A majority of consumers even said they would oppose rather than support a government proposal to prevent banks from offering overdraft protection (54 percent to 26 percent, respectively).
Many of the largest U.S. banks have already significantly changed or altogether ended their overdraft fees: Bank of America no longer charges such fees and instead declines transactions when accounts could be overdrafted. Huntington Bank has a 24-hour grace period, and PNC’s Low Cash Mode offers no non-sufficient funds fees and a maximum of one $36 overdraft item fee per day.
Still, the CFPB says 18 of the top 20 credit issues are charging at or near the maximum late fee level allowed for under the immunity provisions set by the Federal Reserve Board of Governors in 2010. Subprime and private label cards are seen as especially vulnerable to late fee charges: The average deep subprime account is charged $138 in late fees per year, and those accounts are more likely than super-prime accounts to carry smaller balances. According to the CFPB, deep subprime cardholders pay late fees that are a higher percentage of their balances (11 percent compared to less than 1 percent for super-prime accounts.)
Some in Congress have already moved to curtail or eliminate overdraft fees. U.S. Sens. Cory Booker (D-N.J.) and Elizabeth Warren (D-Mass.) reintroduced legislation last August that would ban overdraft fees on debit card transactions and ATM withdrawals, and limit fees placed for checks and recurring payments. Acting Comptroller of the Currency Michael Hsu says new rules and credible enforcement threats are needed to bring the overdraft reforms his organization seeks. He noted that the OCC has undertaken its own review of bank overdraft programs and identified several options to modify or recalibrate their programs, including: Requiring customers to opt into overdraft programs and providing a grace period before charging them overdraft fees; allowing for negative balances without triggering an overdraft fee; offering consumers balance-related alerts; and taking other steps to curb the practice.