The drastic cuts to credit card late fees proposed by the Consumer Financial Protection Bureau could force credit-card heavy banks to change the way they do business, analysts and attorneys told S&P Global Market Intelligence.

The proposal would reduce the immunity provision for late fees to $8 for a missed payment and end the automatic annual inflation adjustment. It also seeks to ban late fee amounts above 25% of the consumer's required payments. The proposal is expected to face a bumpy ride as the industry pushes back and likely takes legal action. But if it goes into effect as proposed, it will send shockwaves throughout the credit card industry and force banks to change their other fee structures, reward programs and underwriting practices, industry experts told S&P Global Market Intelligence.

"It will have a pretty dramatic effect," Kevin Barker, an analyst at Piper Sandler, said in an interview.

'Close the gap'

If the rule goes into effect as proposed, credit card companies will look to make up that lost revenue through increasing their interest rates, pulling back on rewards, tightening underwriting, adding more annual fees and changing their pricing models, according to Barker.

Barker said banks could also reduce or stop access to credit for people with lower incomes or inconsistent payments. The proposal could also "create a more concentrated credit card industry" due to the expected economic impact on smaller banks, he said.

Columbus, Ohio-based Bread Financial Holdings Inc., predicted to be one of the top banks exposed to revenue drops, vowed to take action to recover that revenue if the rule were to pass as proposed.

"We're going to work to close the gap," Bread CEO Ralph Andretta said at an industry conference on Feb. 15. "There's a number of ways to close the gap. Certainly, you look at raising your [annual percentage rates] across the board and as appropriate to price for risk. There's always opportunities to put some fees or transaction fees on cards, that's an opportunity."

Andretta added that the change would make the company "draw the line" when giving individuals access to credit.

"I think about the $8, and if it cost me $8 every time I got a speeding ticket, I would pretty much speed all the time, wouldn't make a bit of difference to me on the $8," the CEO said.

However, such actions from large credit card lenders would likely spur opposition from consumers.

"The banks that get a good portion of their revenue from late fees will have to feel like they have to make up that loss," Capital Alpha managing director Ian Katz said in an interview. But raising rates or reducing awards "would be a way to spark protest and opposition from a lot of consumers," he said.

That could drive consumers away from traditional banks and toward financial technology companies, one industry expert said.

"What we may see really happening is nonbank providers of these services stepping into the breach and the banks are harmed," John ReVeal, partner and member of the consumer financial services practice group at K&L Gates, said in an interview.

The financial impact

The drop in revenue for banks could be significant as outstanding credit card fees, delinquent credit card loans, and net charge-offs are rising across the banking industry, S&P Global Market Intelligence data shows.

When the rule was proposed, Compass Point analyst Ed Groshans predicted that in addition to Bread, the banks most exposed to the highest revenue drops are Synchrony Financial, Capital One Financial Corp., Discover Financial Services and American Express Co.

According to data from S&P Global Market Intelligence, Synchrony, Citi and Discover topped the list of the top U.S. banks by outstanding credit card fees, which includes all fees, not just late fees.

Jefferies analyst John Hecht predicted in a note that the proposal could reduce late fees by about 75%, which would cut American Express's total revenue by about 1.2% and up to 5.2% of total revenue for Synchrony.

In response to requests by S&P Global Market Intelligence, American Express, Synchrony and Discover declined to comment on the CFPB proposal, and Capital One did not respond. In an emailed statement, Bread Financial said, "At this point in time, we do not have any comment other than to say we are aligned with the American Bankers Association and remain committed to supporting fair consumer finance regulations."

The proposal comes at a time when credit card delinquencies and net charge-offs are steadily climbing.

According to Market Intelligence data, the proportion of delinquent credit card loans to total credit card loans rose to 2.45% in the fourth quarter of 2022 from 2.17% in the third quarter. Over the same time frame, the dollar amount of the delinquent loans grew by more than $4 billion, to $24.70 billion from $20.27 billion.

Credit card net charge-offs increased to $6.07 billion in the fourth quarter of 2022 from $4.65 billion in the linked quarter, while credit card loans' proportion to gross loans and leases rose to 8.25% from 7.79% quarter over quarter.

Total credit card loans jumped to $1.009 trillion in the fourth quarter of 2022 from $935.42 billion in the third quarter of 2022.

Preparing for battle

The banking industry will not let the CFPB proposal pass without a fight, industry experts said.

"If the CFPB does finalize the existing rule, I would anticipate litigation on this, both from a due process standpoint and whether the reduction of a safe harbor that has been historically sufficient is appropriate," Mayer Brown partner Eric Mitzenmacher said in an interview. The attorney expects both industry groups and individual card issuers to fight back.

One big issue likely to be raised is the fact that the agency has not yet convened a panel to look at the impact it would have on small businesses, under the Small Business Regulatory Enforcement Fairness Act, according to Barker.

"By skipping that step they're opening themselves up to litigation," the Piper Sandler analyst said. "You've got to thoroughly review it."

One argument from the industry is that the proposal "lacks a viable deterrent structure" that would steer customers away from paying late, BTIG Director of Policy Research Isaac Boltansky wrote in a note.

The American Bankers Association, or ABA, and Consumer Bankers Association, or CBA, agree that the proposed rule does not encourage consumers to pay their credit card payments on time.

"Late fees are a tool that is used in the market to mitigate risks and encourage responsible lending behavior," said Dan Smith, executive vice president and head of regulatory affairs at CBA. The ABA believes it would result in more late payments, higher debt for consumers and lower credit scores.

Though the road forward is bumpy, that may not slow down the CFPB's work. The agency is likely to move swiftly and potentially could issue a final rule this year with few changes to the proposed rule, said Chris Willis, partner and co-leader of the Consumer Financial Services Regulatory Practice Group at Troutman Pepper.

"My belief is that they're going to try to move the rulemaking forward quickly," Willis said in an interview. "When you have rulemakings from the CFPB, the final rule tends to look a lot like the proposal. And I would expect that to be the case here."

President Biden drew attention to this issue when he mentioned the credit card late fee proposal — as part of an effort to eradicate "junk fees" — during his State of the Union address on Feb. 7. Some believe the mention to be just "political theater," but Raymond James analyst Ed Mills disagrees.

"We are in the 'legitimate threat' camp," Mills wrote in a note. "This time it's different. Chopra has the attention of the President, and he will deliver."