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CFPB’s Credit Card Late Fee Rule Could Create Buy Now, Pay Later Windfall

The laws of physics dictate that for every action, there is a reaction.

As Tuesday (May 14) looms, with a new rule from the Consumer Financial Protection Bureau (CFPB) slated to take effect that would drastically lower credit card late fees, several reactions might ripple across financial services.

Not all of them might be desirable. The blowback might be such that credit becomes harder to come by for some of the people who need it most — and digital innovations might be stymied, to the detriment of all customers.

The typical late fees charged by issuers will be lowered from $32 to about $8. The CFPB estimated that the change will save consumers around $10 billion.

The CFPB’s Argument

The CFPB has painted banks as entities that have “exploited” loopholes in existing regulations, and that the new rule eliminates automatic increases in those fees.

In its final rule, the CFPB wrote that regarding the current fee amount, it has been “concerned based on data from certain larger card issuers that this amount is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with a consumer’s ability to make future payments on the account.”

Incentivizing Less Responsible Credit Habits?

The initial impact is that banks’ revenue streams will be reduced at least a bit, but the larger question is what will happen to consumer behavior. During Synchrony’s latest earnings call, Chief Financial Officer Brian Wenzel was asked what the impact of the CFPB rule change might be — late fees, after all, are deterrents to being late — and whether delinquencies might wind up being higher.

“We’ve had internal conversations about the effects of deterrents, and it’s really going to be how we model any potential change in delinquency,” Wenzel said. “What you’re looking at here are individuals who are making a choice not to pay,” due to life events, but in other cases, “they prioritize one payment over another payment. We would have to model that out, and then we’ll certainly get the accounts comfortable with how it is. But again, we’ll have to see because no one really did a lot of testing control at this level.”

CEO Brian Doubles explained elsewhere on the call that the impact of the rule change will start to be noticeable somewhat in the second quarter, but more so in the third quarter.

Offsetting the Impact

The reduced late fee impact looks like it will be felt immediately. PYMNTS Intelligence estimated that high-debt consumers with overdue payments are late on 14 payments, on average, across their credit products, whereas low-debt consumers have seven late payments, on average.

The lowering of the late fees brings forth some knottier questions, such as whether the reduction in the fees might remove some incentive to miss payments only when real hardship intervenes in life. The desire to avoid fees may prompt consumers to reach out to their banks to work out more palatable arrangements for payments that are late or may be anticipated to be late.

Lowering the fees to $8 from $32 may have an adverse effect here, where less responsible credit behavior is the outcome.

As a result, banks might be forced to lower credit limits to try to keep accounts from being in prolonged states of delinquency. Or they might raise interest rates — or even tighten credit standards further.

To offset the impact of billions of dollars in lost revenues, there may be a chilling effect on programs enjoyed by most consumers, especially the ones that encourage continued use of credit, such as loyalty programs.

The negative ripple effect would ultimately be where reduced credit access would boost the ranks of credit-marginalized populations. PYMNTS found that consumers who are credit-marginalized are more than twice as likely as the average consumer to select high-interest credit products to cover unexpected expenses. For instance, 18% of credit-marginalized consumers used cash advance loans, and 14% used payday loans.

There may be a winner by default here if banks continue to tighten their underwriting. Buy now, pay later options may continue to gain favor. Separate PYMNTS data showed that 30% of survey respondents indicated that the low or nonexistent interest rates contributed to their decision to apply for BNPL.