DFS Discover Financial Services

Starting Sunday, credit-card issuers could lose over $3 billion in revenue annually, as new federal laws on late-payment fees kick in.

The rule, which on average cuts late fees to $25, could fuel higher minimum payments required on plastic as companies deploy new tactics to claw back some of the lost revenue. The estimated decline in revenue comes from CardHub.com, a credit-card comparison website.

The new rules "restrict the ability of card issuers to impose late fees," said Rick Fischer, a partner at law firm Morrison & Foerster.

Odysseas Papadimitriou, chief executive of CardHub.com, estimates that in 2008, before the new regulations, issuers collected around $11.4 billion in late fees. He expects this revenue to drop 29% to around $8.1 billion, as the new rules governing late payments on card balances go into effect. Calculating the financial impact is difficult because few card companies disclose how much revenue is derived from imposing fees and other penalties on customers who fall behind on their bills.

The new rule states that from Aug. 22, late payers will be charged $25 or the minimum payment due by the cardholder, whichever is lower, eliminating the typical $39 fee that card companies currently levy. Card issuers are allowed to charge $35 in late fees to repeat offenders within a six-month period.

The rule is one plank of a raft of new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009. These new regulations are expected to cost the card industry about $11 billion a year in lost revenue for five years, according to Robert Hammer, who runs R.K. Hammer, a credit-card consulting firm.

Discover Financial Services (DFS) Chief Executive David Nelms said in June rules curbing late payment fees will have an $80 million to $90 million impact on the company's income before taxes over a 12-month period. Bank of America Corp. (BAC) said last month the card issuer would take a roughly $1 billion hit, after taxes, on what it earns from interest and fees in 2010 because of the new regulations.

The laws have made some important changes. Starting Sunday, card companies will also be required to review every six months accounts whose interest rates have been increased. The average advertised interest rate for credit cards in the U.S. has risen to 13.7% from 11.64% in May 2009, before the legislation was passed, according to Bill Hardekopf, chief executive of LowCards.com, a Web site that tracks the industry.

To make up for some of the lost revenue from this and prior regulatory changes, some card issuers have already employed new tactics: higher fees on balance transfers and cash advances, increased charges for overseas transactions and new or higher annual fees on cards. Another tactic they could deploy on the heels of the new rules around late fees: raising the bar on the monthly minimum payments due on credit-card balances. Up until now, these minimum payments have ranged from $10-to-$15, according to Pew Charitable Trusts, a nonprofit group.

"I think it's possible we'll see banks raise their minimum payment levels closer to $25 or $35," to match the new late fee limits, says Nick Bourke, director of the Safe Credit Card Project at Pew.

A Discover spokesman said minimum payments for some cardholders, especially those transferring balances from other credit-cards, have risen since last year as the company switched to variable from fixed interest rates for its card balances. Earlier this year, Discover increased its cash advance fee from 3% with a $5 fee minimum to 5% with a $10 fee minimum.

American Express Co. (AXP), known for its affluent borrowers and generous rewards, is raising the annual fee on its co-branded Starwood Hotels cards to $65 from $45, starting October. Capital One Financial Corp. (COF) hasn't changed its minimum payment requirements since Jan. 2009, said a spokeswoman. It increased cash advance fees to 24.9% from 22.9% last year. Bank of America also hasn't changed its minimum payment requirements. It is testing an annual fee ranging from $29 to $99 on less than 1% of its cardholders. A JP Morgan Chase & Co. (JPM) spokeswoman said its minimum payment calculations haven't changed in over a year. The lender raised its maximum balance transfer fee to 5% from 2% in 2009. A Citigroup Inc. (C) spokesman was unavailable for comment.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

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