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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.
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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