What’s Happening in the War on Fees
By: Tyler Brown
APRIL 16, 2024
Bank fees are on regulators’ radars, with a number either considering or recently issuing rules covering credit cards, overdrafts, nonsufficient funds, and swipe fees. They’re also a topic of discussion in Congress, which is considering bills to regulate credit card swipe fees. As we highlighted in our recap of the American Bankers Association (ABA) Washington Summit, the banking industry is pushing back. But they face a multi-pronged threat to a key source of income, and success is far from assured.
Five top issues around fees in banking are:
1. Final rule on credit card penalty fees. The Consumer Financial Protection Bureau (CFPB) issued its final rule in March on credit card penalty fees, amending Regulation Z (which covers credit cards) to lower the safe harbor for credit card late fees to $8, among other restrictions, for financial institutions (FIs) and their affiliates with 1 million or more open credit card accounts. The Chamber of Commerce, ABA, and others sued the CFPB in March to block the rule, which is still tied up in court. The banking industry has argued that late fees are a crucial incentive for customers to pay their credit card bills on time, that lowering those fees will make credit more expensive for consumers, and that the CFPB didn’t adequately evaluate the rule’s consequences.
“The CFPB’s untested and unvalidated assumptions about credit card late fees are wrong, particularly with regard to the deterrence effect of late fees, and these flawed inputs are resulting in the development of flawed policy.” — ABA et. al Comment Letter to the CFPB
2. Proposed rule on overdraft fees. The CFPB proposed in January a rule to amend Regulation E (which covers checking accounts, savings accounts, and wallets) and Regulation Z to cap fees for overdraft services at banks with more than $10 billion in assets and treat overdraft services as a lending product. A benchmark fee between $3 and $14 is under consideration. The banking industry has pushed hard against the proposed rule, partly on the grounds that the CFPB didn’t first assess “the economic impact of the proposal on community banks and credit unions” and that a price cap on overdraft services would reduce consumers’ access to short-term liquidity.
“[T]he Bureau has identified no market failure requiring additional regulation of overdraft services. And its effort to close so-called regulatory “loopholes” relies on a complex and contorted reinterpretation of the Truth in Lending Act (TILA) that finds no support in the statutory language.” — ABA et al. Comment Letter to the CFPB
3. Proposed rule on nonsufficient funds (NSF) fees. The CFPB in January proposed a rule covering FIs of any size that would prohibit nonsufficient funds fees charged “on transactions that are declined instantaneously or near-instantaneously,” typically related to debit card, ATM, or certain peer-to-peer (P2P) transactions, under Unfair, Deceptive, or Abusive Acts and Practices (UDAAP). A justification the CFPB offers is that NSF fees disproportionately hit “financially vulnerable households.” The ABA has noted that declined transactions will not trigger an NSF fee without an “opt-on” for overdrafts.
“The Bureau should not write rules addressed to hypothetical problems, and instead should use its resources to educate consumers on how to manage their accounts, taking advantage of all the tools and apps available to them.” — ABA Comment Letter to the CFPB
4. Credit Card Competition Act. Legislators in the House and Senate have introduced versions of a bill that would prohibit issuers with over $100 billion in assets from limiting the payment networks that can be used for credit card transactions. The banking industry has argued that if the Credit Card Competition Act becomes law, it will depress interchange revenue and limit rewards for consumers. (Visa, Mastercard, and merchants have tentatively settled the routing issue among themselves.)
“The [Credit Card Competition Act] is an anti-consumer, anti-competitive, and cynical attempt by the largest global merchants and biggest grocery chains to obtain a subsidy for themselves at the expense of smaller competitors and consumers.” — ABA et al. Letter to Congress
5. Revised debit card fee cap. The Federal Reserve has proposed lowering the debit card interchange fee caps articulated in Regulation II, more than a decade after they were implemented as required by the Dodd-Frank Act, which required fees that were “reasonable and proportional” for issuers with more than $10 billion in assets. The proposed rule would lower the cap from $0.21 plus a 0.05% ad valorem fee and $0.01 fraud prevention adjustment to $0.144 plus a 0.04% ad valorem fee and slight increase in fraud-prevention adjustment to $0.013. It would also codify updates to the cap every 2 years. The banking industry is strongly opposed, arguing that it is based on “flawed and incomplete” data and is not what Congress intended.
“In a global, two-sided market, as government regulation caps the price for the largest players, the price offered to those outside the cap is naturally dragged down.” — ABA et. al Comment Letter to the Federal Reserve Board
Overall, there’s likely to be a lot of turbulence regarding fees in the near term. It’s worth pointing out, though, that there’s been a market solution to banking fees underway. Neobanks like Chime, which makes low or no fees part of its value proposition, have pushed banks to lower or eliminate overdraft and NSF fees (which in the context of the NSF rule may end up moot). Bankers that did not respond to the competitive threat related to NSF and overdraft fees can kill two birds with one stone as they revisit their strategies. The rules on penalty fees, interchange, and routing don’t have easy answers.
US OPEN BANKING 2024
CCG Catalyst’s research report on Open Banking 2024 is an update to our previous Open Banking Report “US Open Banking: Defining the Concept and Capitalizing on the Opportunity”.
领英推荐
With the long-awaited release of the Consumer Financial Protection Bureau’s proposed open banking rule, the US is one step closer to requiring that financial institutions securely share certain financial data with third parties at their customers’ request.
This report looks at how we got here, the rule’s implications, practical considerations, and what to do next.
Key Findings of the Research
The Payments Stack is a Tech Issue and a Management Problem
APRIL 18, 2024
By: Tyler Brown
Payment Hubs and Instant Payments
The top reason banks globally would invest in payments system modernization would be to reduce cost, ranked first by 48% of respondents, according to research by Finextra. Another 26% ranked limiting system risk first. They’re part of the same problem: The age, complexity, and fragility of financial institutions’ (FIs’) legacy tech stacks make maintaining them an ordeal, let alone upgrading or replacing technology. In North America, in fact, limiting system risk was organizations’ top priority, ranked first by 33% of respondents, according to the research. “Deployment of new technology or significant upgrades of current systems” was the most popular budget priority.
These issues long predate modern payment rails, and massive disruption in payments technology is giving FIs a nudge to modernize. Most US banks use decades-old batch-based payment processing technology, according to Payments Journal. But with more rails — particularly instant payments — and the arrival of the ISO 20022 messaging standard, FIs need to make their payments stacks comprehensive, adaptable, and efficient. With modern, application programming interface (API)-native, cloud-based payments stacks, they have a fighting chance at moving on from fragmented, outdated systems.
Payment hubs, in particular, are on the leading edge of payments infrastructure modernization. They’re designed to solve integration, orchestration, and administration problems that grew out of payments modules added one-by-one over the years. With separate systems for ACH and wires, for example, FIs don’t have an easy time routing payments in ways that make the most sense for the customer or the FI. And ownership for the rails may be inefficiently split up between different departments. Payment hubs consolidate rails, formats, and channels, eliminating one-by-one connections to payment processors.
Key features of payment hubs include preprocessing, like handling fraud, sanctions, and liquidity checks; intelligently routing transactions to the ideal payment processor or network; optimizing costs based on the needs of the transaction; and support for all rails relevant to an FI’s operating environment. In the US, those rails include ACH, wires, FedNow, and RTP provided by The Clearing House.
The key point is that, as FIs contemplate payments modernization, developing a strategy behind those efforts (versus updating solutions piecemeal) is critical. Additionally, structural issues with the organization need to be considered. Money movement is a complex, holistic function across many business units. Calling each rail a separate product, managed by a separate team, doesn’t make sense when the concept of money movement is shifting from payment rails to intelligent routing based on need and cost.
As a bank’s senior management asks itself how to address relatively narrow topics, like connectivity to FedNow, it also needs to talk about bigger issues related to payments modernization and how those fit into the bank’s broader technology roadmap.