When credit card companies institute new fees or raise their interest rates, most people concentrate on how the change impacts consumers.
While this is indeed a relevant, crucial concern, it is also somewhat shortsighted.
Fee implementation and interest rate increases can make things difficult for a card holder, sure, but it’s what these fees or interest rates reveal about that card’s issuer itself that is perhaps more telling. This is indeed the case with Bank of America and its plan to increase annual revenue by close to $180 million through the application of $59 membership fees to 5% of its credit card accounts beginning in May.
The financial impact of these fees on those required to pay them is only part of the story. The rest is how these fees break the intent of the new credit card law and how they indicate a concerning lack of underwriting sophistication on the part of Bank of America that perhaps foreshadows future struggles from the financial giant’s credit card division.
The CARD Act of 2009 was implemented, in large part, to increase transparency within the credit card industry and to eliminate bait-and-switch tactics and other predatory practices that once misled and took advantage of consumers. While many credit card companies have taken to and flourished within this new credit card landscape it unfortunately appears as if some credit card companies have exhibited a commitment to exploiting loopholes within the law rather than making substantive changes that will foster long-term success under its rules. Bank of America, in certain respects, appears to be one such company.
While Bank of America’s membership fees do not technically break the law, they do violate the intent of the CARD Act provision that makes it illegal for credit card companies to raise the interest rate on an existing balance unless the account holder is at least 60 days delinquent.
You see, interest rate increases and new fees are both defined as finance charges when applied to consumer accounts with revolving debt. And since Bank of America will be using risk indicators like high credit utilization, late payment trends and below-average FICO scores to determine which of its customers will receive the new fees, indebted accounts are likely to be predominantly targeted. This means that Bank of America might as well be increasing the interest rates on existing balances because there is no effective difference between doing so and using risk-based re-pricing to strategically implement membership fees. Both increase the cost of debt for a customer segment unable to simply switch issuers because of the very existence of their balances.
Bank of America’s membership fees are thus unlikely to survive. This is particularly true since the Federal Reserve has exhibited a newfound reformatory focus since the CARD Act took effect in February 2010, resulting in the recent passage of amendments that will close two loopholes within the law. In addition, Elizabeth Warren, the acting head of the Consumer Financial Protection Agency, has pledged to continue in the Fed’s watchdog footsteps and has specifically expressed her determination to enforce not only the letter of the CARD Act, but the intent and spirit as well.
This begs the question: What are Bank of America’s prospects for the future?
As of right now, the answer to this question has to be that they are bleak because not only is the company already at an underwriting disadvantage, as evidenced by the fact that its credit card division lost more money than that of any other major bank in 2009, it also appears to be confused. On the one hand, it has extended certain credit card protections beyond what the law requires. On the other, its membership fees seem to reflect an organizational desire to evade the law’s intent.
This type of organizational direction is quite troubling, and if substantive changes are not made soon, not only will Bank of America find itself on the wrong side of further federal regulations but the gap that exists between it and the competition will continue to grow as well. Therefore, instead of turning to a quick fix, Bank of America must approach its fundamental problems with a focus on improving underwriting practices and operational efficiencies in order to foster long-term growth.
Odysseas Papadimitriou is the founder and Chief Executive Officer of Card Hub, a website dedicated to helping consumers compare credit cards and prepaid cards.