Online banking apps, “buy-now, pay-later” services and other fintech innovations will push banks to lower or eliminate “junk fees” even if the CFPB forgoes new regulations, financial trade groups told the regulator.
The Consumer Financial Protection Bureau is conducting a regulatory review of what it refers to as “exploitative junk fees” that banks and financial services providers often attach to checking accounts, credit cards and other products, hiding their true costs.
The comment period on the CFPB’s review closed April 11, with the fintech industry pushing for the bureau to promote competition that would, in turn, lower or eliminate fees.
The CFPB is already developing a rule that could boost competition by making it easier for consumers to switch banks and other financial service providers, but there may be some limits on its authority that could hamper its ability to challenge fees directly.
“Many of our member companies launched their businesses to target such fees, increase pricing transparency, and promote consumer-centric fairness and competition,” the Financial Technology Association said in a comment letter.
Banks commented that the CFPB is providing a misleading picture of their fees. Banks already comply with laws like the Truth in Lending Act that require fee disclosures to consumers. They said they also operate in a highly supervised environment, unlike some fintechs.
But there’s little question that established banks are facing increased competition from fintech startups that tout lower fees and other benefits to consumers.
Online banking apps like Chime have heightened the pressure on banks to lower or eliminate overdraft and other fees, the Fintech Technology Association said. Earned wage access products—which allow people to access portions of their paychecks early—have made it easier for users to smooth out monthly cash flows and avoid late, overdraft and other fees , the group said.
Meanwhile, the rapid growth of buy-now, pay-later services at major retailers like Amazon.com and Walmart have provided stiff competition for credit cards, allowing consumers to avoid interest payments and potentially pushing banks to lower late fees, the FTA letter said.
The fintech industry isn’t free from CFPB scrutiny either. The bureau also has an ongoing review of buy-now, pay-later products amid concerns about a lack of uniform disclosures on late fees, loan repayment and other issues. The CFPB is believed to be looking into earned-wage access products as well.
The fintech association urged the CFPB to foster an environment that allows for “greater competition, fairness, and fintech innovation.”
The bureau is currently working on a rulemaking required by Section 1033 of the Dodd-Frank Act that would give consumers more rights to control their personal financial data, and make it easier to move to a new service provider if they don’t like fees or other terms.
In addition to bank fees, the CFPB also mentions resort fees and service fees attached to concert and sports tickets as junk fees. But the bureau’s ability to go after such fees is unclear.
Banks Cry Foul
Banks say they are being unfairly targeted by the CFPB.
The Truth in Lending Act and other consumer protection laws and regulations have created a highly supervised environment where consumers are clear on what they’re paying for, the Bank Policy Institute, a banking trade group, said in a letter to the CFPB.
“Banks compete aggressively for consumers’ business, and any fees they charge are disclosed consistent with a regime mandated by Congress and administered by the CFPB,” BPI President and CEO Greg Baer said in a statement.
The clear disclosures banks are required to provide customers, as well as competition from fintechs and other challengers, have benefited consumers, the Consumer Bankers Association said in its letter to the CFPB.
“Fees that prove unpopular in connection with those accounts – such as monthly fees or charges for teller access – are often reduced or eliminated through competition,” CBA General Counsel David Pommerehn, said in a letter. “In recent years, this same dynamic has driven and continues to drive many institutions to eliminate or substantially curtail overdraft fees.”
Bank of America Corp., Wells Fargo & Co., Truist Financial Corp. and other banks have announced steps to ease off overdraft charges and ditch non-sufficient fund fees. Citigroup Inc. in February became the first major U.S. bank to fully eliminate overdraft fees.
Banks also questioned the data the CFPB used in its discussion of junk fees. The bureau’s request for information said that “a substantial amount” of bank revenue comes from fees, including $15.4 billion in overdraft and non-sufficient funds fees, $1 billion in account maintenance fees, and $14 billion in credit card late fees in 2019.
The American Bankers Association said overall fee income accounted for around 4% of bank revenue in 2019. During that year, banks earned $705 billion in interest income and $264 billion in non-interest income from sources like trading and payments and funds transfers, the industry group said.
There are questions about just what the CFPB can do to address fees it determines are junk. The bureau is barred from setting fee or interest rate caps, but it can use its Dodd-Frank Act powers to go after unfair, deceptive and abusive acts and practices (UDAAP) to address fees it deems problematic.
But industry groups say such a move would violate congressional intent.
“The CFPB should not attempt to rely on its general UDAAP authority to impose substantive limitations on fees, but should defer to Congress’s judgment regarding when, if at all, particular fees should be subject to substantive regulation under the federal consumer financial laws,” a letter from 11 banking and credit union trade groups, including the American Bankers Association, the Consumer Bankers Association, the Bank Policy Institute.
Credit Card Focus
While the CFPB can’t directly eliminate fees, the 2009 Credit CARD Act gave it oversight of late fees. Under the law, credit card issuers are only allowed to assess late fees that are “reasonable and proportional” to the violation of a card’s terms.
The law also gave the CFPB the power to set a “safe harbor” for late fees that can act as a de facto limit. Currently, the safe harbor rate is set at $30 for the first late payment and $41 for subsequent late payments within six billing cycles.
The bureau could lower those limits, and Chopra has indicated that might be in the offing.
Banks could elect to go beyond the CFPB’s fee thresholds by arguing that higher fees are “reasonable and proportional” under the CARD Act, said Jeff Sovern, a professor at St. John’s University School of Law.
But it might not be worth the fight, he said
“Consequently, credit card issuers would probably lower their late fees to whatever the Bureau says the safe harbor amount is,” Sovern said.