Credit card companies may have to begin looking elsewhere to keep up some of the revenue growth that they have been enjoying from late fees and other penalty charges.
The so-called nuisance fees are under fire from irate consumers who have turned litigious, and some analysts are warning that the major card companies have come to rely too heavily on noninterest income.
Fees have been driving up revenues throughout the banking industry, and the card business is no exception. But fees for not keeping minimum balances or for bouncing checks have been tolerated, while fees for credit card payments that did not arrive on time have prompted potentially costly class actions.
Citigroup Inc., Providian Financial Corp., and the First USA subsidiary of Bank One Corp. have all been sued this year by credit card customers who say they were billed unfairly.
Now that some major card issuers earn nearly half their revenue from fees -- from rule infractions and from products like credit insurance that require monthly payments -- some analysts say the time has come to rethink the industry's profit model. In the long run, an economic downturn could cause delinquent payments to skyrocket, triggering a wider customer revolt against fees.
"Credit card fees have stood as a bulwark against high credit losses for U.S. credit card companies, acting as a natural hedge against rising credit losses," said Tanya Azarchs, director at Standard & Poor's financial institutions ratings group in New York. "What is driving the card fees is the need to offset the rising chargeoffs in the environment we had over the last three years, as well as dropping annual fees."
Analysts' suggestions include returning to annual fees as a steady income source, one that, if it could be sold to the public, would reduce the pressure to impose penalty pricing.
Credit card bankers say the risks and problems are being exaggerated. Interchange income and interest from card loans are still the most important sources of revenue, and that will not change, they say.
Late and over-limit fees are "becoming a smaller and smaller proportion of our total fees," said David J. Petrini, executive vice president and chief financial officer at Providian, of San Francisco. "Our business model never has been, and never will be, built around penalty fees to our customers."
Providian is the defendant in four lawsuits -- all seeking class-action status -- filed by consumers who say they were billed unfairly. Persistent complaints to consumer advocacy groups prompted the San Francisco district attorney's office to open an investigation this year; no charges have been filed, but the district attorney's office said Monday that the investigation continues. The company came forward with a "customer satisfaction" pledge to try to make amends.
Mr. Petrini said the bulk of Providian's fee income is derived from interchange, fees for cash advances and annual fees paid by subprime and secured-card customers.
The risk of angering and possibly losing a customer for a $29 fee is not worth the $250 Providian estimates it can earn if a customer stays on for six more months, Mr. Petrini said. "It is much more important to us to make sure our relationships are stickier and that we're meeting our customers' needs through the credit life cycle," he said.
Providian said it traced some of the contentious billing problems to a software glitch, and took a $20 million charge in the second quarter to pay refunds to cardholders.
Most card companies have been raising fees for late payments and other services to offset declining revenue from low annual percentage rates and the loss of annual fees. Over the past five years, late-payment fees have grown from $15 to $29 in some cases, and grace periods have shrunk from one month to none at all. …