The Large Bank Monopoly on Credit Cards

→ What’s Happening

CFPB Report Reveals Large Banks Charge More

• Recently the Consumer Financial Protection Bureau published the first set of results from its “Terms of Credit Card Plans” survey, which looked at the difference in credit card terms and rates between large banks and small banks/credit unions*
• The results revealed that the median interest rate for all large banks was 28.2% versus a median rate of 18.15% from small banks, and nine of the largest issuers of credit cards have at least one product with an APR of 30% or higher
• In addition, large issuers are more likely to not only require an annual fee (27% as opposed to 9.5% of small issuers), but also have a higher annual fee ($157 versus $94)
• The CFPB will continue to release data on credit card pricing and availability every six months, with the next release slated for later in spring 2024

→ Our Thoughts

Credit cards operate on a pretty simple premise: every month, cardholders can borrow money up to a certain amount, with the understanding that that money will need to be paid back in full at the end of each month. If the money can’t be fully repaid, then a minimum payment can be made and the unpaid debt carries over to the next month. Unfortunately, credit card companies make money based on the assumption that cardholders will NOT pay back their monthly bills in full. This is where APR comes in – annual percentage rate – which refers to the amount of interest cardholders pay on the outstanding balances of their accounts: a percentage of the amount that is NOT paid back in full at the end of the month is added to the total, and that compounds every month, unless the entire amount is paid back.?

According to the CFPB’s report, credit card debt in the United States has been increasing every year since 2011. In 2022 the average cardholder carried $5,288 in total debt, which is not an insignificant amount especially when you start considering the APR that goes along with that. Suddenly the difference between 28.2% and 18.15% becomes extremely stark ($1,491.22 versus $959.77 added). Falling into credit card debt is an incredibly slippery slope, and once you’re in it, most people would agree that it’s very difficult to get out, especially with outrageously high APR coming from the most prolific credit card issuers. Just one month of making a minimum payment instead of a full payment could end up spiraling into thousands of dollars of debt.

In the past year we’ve reported several things published by the Consumer Financial Protection Bureau and realize it's helpful to understand what exactly the CFPB is and why it exists. According to their website, the CFPB is “a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive.” The CFPB was officially formed in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in response to the 2008 financial crisis. Under the CFPB, for the first time a single entity has the “oversight authority to make sure consumer financial markets work for all of us.”?

So when the CFPB reports that there’s a large discrepancy between the credit card interest rates of large banks versus smaller institutions, we believe it’s worth paying attention to. According to recent data from the "Terms of Credit Card Plans" survey, although around 4,000 financial institutions in the U.S. issue credit cards to consumers, in 2022 the top 10 highest issuers accounted for 83% of all credit card loans. Only 5 or 6% of all credit card loans came from the collective 3,800 smaller issuing institutions that participated in the survey. How is this happening? The CFPB argues that it’s not just a lack of competition, but actually “anti-competitive behavior” occurring in the current credit card market. That means those big issuers make it hard to find other cards that may have lower annual fees and interest rates.?

In response to these sobering findings, the CFPB said they are working to jumpstart competition in the market by developing rules that help consumers switch providers when they find a better option, make pricing more clear, penalizing illegal rewards conduct, and working against deceptive marketing and practices. All those things sound really good, but like we stated in a previous newsletter, only time will tell if these legislative endeavors can become reality in a meaningful timeframe. So for now, the best bet we have for change is to make it known that this is happening and there are better options out there, if consumers are willing to look for them.?

*the survey includes data on 643 general-purpose credit cards from 156 issuers (84 banks and 72 credit unions) offered from January through June 2023. 430 cards were available nationally, while the remaining were only offered regionally or in a single state.