Yet More Ways Banks Hate You

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You didn't really think bank fees would go away, did you?

As has happened so many times over the past two years, the law of unintended consequences has come home to roost, this time in the credit card industry. After landmark credit card reform legislation passed, billed as a way to turn the tables on predatory lenders and save credit card holders from getting nickeled and dimed to death, some optimistic consumer advocates hoped that things would be better for borrowers.

But things haven't quite turned out that way.

Financial innovation at work
Instead, banks did what realists expected them to do: They found ways around some of the limitations that credit card reform imposed on them, and discovered new ways to boost their fee income back to pre-reform levels.

An article in The Wall Street Journal over the weekend went into some of the novel methods that various card issuers have devised to boost revenue:

  • JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) have raised their minimum payments. Some argue that they're trying to force cash-strapped borrowers to miss those payments, incurring hefty late payment fees in the process.
  • Discover Financial (NYSE: DFS  ) and HSBC (NYSE: HBC  ) have increased their efforts to sign up cardholders for payment-protection plans -- high-priced insurance programs that promise to cover minimum payments in the event of job loss, illness, or disability.
  • Prepaid cards may seem like a convenient way to make gifts or help kids learn the ins and outs of using plastic. But they've also become a big hit among issuers, because they aren't subject to the same restrictions that regular credit and debit cards are. Not only has Capital One (NYSE: COF  ) ramped up its card offerings, but brand-new companies such as Green Dot (Nasdaq: GDOT  ) and NetSpend Holdings (Nasdaq: NTSP  ) have soared since their respective IPOs in July and October.

Financial companies are making every effort to maintain their profits from credit cards and related businesses, and investors are putting their money on those companies to succeed.

Big surprise!
None of this should come as a shock to anyone. In fact, the bigger surprise is why so many people seemed not to realize that this was inevitable. In a quarterly release earlier this year, Bank of America said it believed credit card reform would cost it roughly $1 billion in 2010, with changes to service charges and other fees costing another $2 billion, and debit card changes potentially adding another $2.3 billion in lost revenue. Card fees make up a big chunk of banks' annual net income, and investors will demand that banks take action to minimize the damage to their bottom lines.

Nor are these measures the last ones that credit card borrowers will be hit with. Annual fees will likely become even more widespread than they are now, with issuers trying to push low-cost benefits as reason to ante up for premium cards. On the other end of the spectrum, rewards cards, which pay their holders in cash, airline mileage, or other perks, could well see their benefits cut or their rewards offset by fees or other restrictions.

Coming home to roost
The bad news for responsible credit card users is that they may well end up bearing more of the overall cost of using cards. Before reform, those who paid off their balances every month essentially got a free ride off those who paid those usurious interest rates month in and month out. Now, it's becoming increasingly clear that when it comes to imposing fees, banks will be an equal-opportunity lender.

If you want to take advantage of credit card issuers, doing everything you can to avoid stepping into fee traps remains your best strategy. Given how ubiquitous credit cards have become, bowing out entirely simply isn't an option for most people. The only alternative is not to tolerate moves from card issuers that increase your costs.

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Fool contributor Dan Caplinger is proud that his banks hate him. He doesn't own shares of the companies mentioned in this article. Discover Financial is a Motley Fool Inside Value selection. The Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy has an 850 credit score.

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2010, at 11:16 AM, jpanspac wrote:

    That's odd. One of the big gripes against banks before the reform legislation was that they set their minimum payments too low in order to rack up more interest income. Now you're complaining because they're raising the minimum payments? Unbelievable.

  • Report this Comment On November 09, 2010, at 5:22 PM, rd80 wrote:

    I had read somewhere that the reason banks were raising the minimum payments was that FinReg sets a ceiling on late fees based on the minimum payment, i.e. the higher the min payment, the higher the late fee that can be charged.

    I could be wrong.

  • Report this Comment On November 09, 2010, at 7:13 PM, Gorm wrote:

    God, but I must be old! I can remember when banks didn't have to nickel, dime and manipulate their customers and markets to meet earnings expectations. As long as you paid the dividend, increased it occasionally and met your market needs responsibly you were GOOD!!

    Then comes along Defined Contribution programs, expectations surged that banks needed to get 2% ROA, 20% ROI. And what did that get us today?

    Banks don't lend, don't meet market expectations, don't pay dividends, have grown too big for anyone's good, are arrogant and TBTF. Clearly, this is one evolution that hasn't progressed positively.

    BUT there are always credit unions. Gee, how long before they get corrupted?


  • Report this Comment On November 10, 2010, at 11:59 AM, jrj90620 wrote:

    The bad news for responsible credit card users is that they may well end up bearing more of the overall cost of using cards. Before reform, those who paid off their balances every month essentially got a free ride off those who paid those usurious interest rates month in and month out.>

    You sure are right about that statement.I was getting 5% reward on all supermarket,drug store and gas purchases on my Chase CC.I paid it off every cycle.Now they lowered it to 3%.I have a Shell/MC CC that was giving 5% on Shell gas credited every month and now I have to spend $400 before I get the reward credited.So,I'm getting less because all the idiots aren't going to pay as much in fees.

  • Report this Comment On November 10, 2010, at 7:45 PM, jm7700229 wrote:

    Whenever Congress moves to protect the consumer from himself, it results in higher costs to the responsible people. Save your money while you are working and you get to pay income tax on your social security. Spend all your income and pay no tax on social security. Buy a house you can afford and make a substantial down payment, and watch as your more profligate neighbors walk away from their mortgages, destroying the value of homes in your neighborhood. Buy health insurance for forty years and watch your rates climb to cover those people who would rather have a BMW than an insurance policy. Half the people in the US who file a return pay no Federal Income Tax. Those are the people that Congress targets for "benefits."

  • Report this Comment On November 12, 2010, at 1:08 AM, rlcato wrote:

    You know, late fees are charged in a new way: instead of $30 or $40 by the statement due date in the proceeding month, now it's added on in $10 weekly increments 'after' the 'payment' due date so you won't be hit with a large penalty at the end of the next payment due date but adjusted in weekly cycles. One day late, $10; 8 days late, $20 etc.

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