In a blog post on Jan. 19, the Consumer Financial Protection Bureau (CFPB) announced that given the significance credit cards and credit card debt represents for many households, it will turn its attention to ensuring what it calls a more fair, transparent and competitive credit card market.
The CFPB uses credit card debt in 2021 to justify its newfound interest in this market. Yet, current levels of debt, adjusted to inflation, stand at 2016 levels according to its own data. Even this rise in debt comes after a two-year period in which credit card outstanding balances were paid down, including the largest six-month reduction in U.S. history ($811 billion in 2Q20 down from $926 billion in 4Q19). Thus, the level of credit card debt alone may seem insufficient to raise concerns.
The CFPB also warned that “compared to other forms of widely accessed credit, credit cards have interest rates that are relatively expensive for consumers.” According to CFPB data, from 2015 to 2019, the average assessed interest rate on credit cards increased by more than 20% (from 13.7% to 16.9%).
These rates may have encouraged the Bureau to act in this market because “even small improvements in this market can have significant impacts on American families.” Yet, according to the Federal Reserve Board data, 48% of survey cardholders in 2020 reported that they never carried an unpaid balance during the preceding 12 months, a 2%-point increase from 2019 levels. Additionally, the percentage of consumers enrolled in automatic payments, this is to eliminate late fee charges, increased 2% in the last 3 years. Therefore, at least half of the cardholders seem to be using credit cards as a convenient way to fund a purchase at the point of sale, and paying those balances on time.
Of course, it is undeniable that a more transparent and competitive market will always benefit consumers, and all providers of credit echo that sentiment. From the CFPB’s perspective, it aims to achieve that by focusing on three elements:
First, the CFPB wants to identify what it considers to be possible unfair or anticompetitive practices. The CFPB doesn’t describe those practices but, as an example, it refers to an investigation in 2014 where credit card companies started withholding information to make it more difficult for other issuers to offer competitive rates. The CFPB may not be the most suitable agency to look at potential anticompetitive practices in the industry as Federal Trade Commission (FTC) and Department of Justice (DOJ) have the expertise and the tools for doing this. However, the CFPB may be helpful in supporting new regulations if that is the goal. It is worth noting that the CFPB blog post does not suggest that new regulation is the solution.
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The second line of action is to make it simpler for consumers to compare, switch or refinance credit card outstanding balances. The CFPB is proposing a solution based on open banking, using the same provision, the Dodd-Frank Act Section 1033. The CFPB may propose new rules to give consumers more control of their financial data which they could do by imposing a data sharing mandate. That would make it more efficient for financial institutions or credit card providers to access consumers’ data and offer them personalized deals without a hard credit check which could hurt a consumer’s credit score. The idea of open banking is not new for the CFPB; since the appointment of its new head Rohit Chopra last year, the bureau has made several remarks about how open banking “will make harder for banks to trap customers into an account for the purpose of fee harvesting.” The idea of extending open banking solutions to credit cards could be part of the same policy strategy.
Read more: CFPB Lays Groundwork for Open Banking’s US Push
The third line of action the Bureau is thinking about is to scrutinize fees related to these credit products including late fees, cash advance fees, balance transfer fees, foreign currency fees. The bureau does not specify how it would do that and it only states that it will consider ways to help consumers to cut down on these fees. Ironically, perhaps one of the few alternatives in the market to increase competition in the credit card market are buy now, pay later (BNPL) solutions, a credit alternative also under scrutiny by the CFPB for what it characterizes as the potential harmful effects that form of credit could have on consumers.
Read more: CFPB Probes Big Five Buy Now, Pay Later Providers Over Data Use, Debt Accumulation
