Credit card lenders back off adds-ons as feds crack down
The Record
* Banks reexamine strategy after feds issue millions in fines for deceptive practices.
JPMorgan Chase & Co., Bank of America Corp. and American Express Co. are among credit-card lenders retreating from a $2.4 billion market as regulators seek curbs on deceptive marketing of products including debt cancellation.
Scrutiny from the Consumer Financial Protection Bureau has led to fines against banks including Capital One Financial Corp. and Discover Financial Services, prompting them to curtail sales of so-called add-ons that offer to help customers pay card bills if they get sick or lose their jobs, or monitor their credit.
"We're on a glide path to selling fewer," Discover Chief Executive Officer David Nelms said in a Sept. 27 interview. Nelms, 51, cited higher standards set by regulators including the 2-year-old CFPB.
"You'd have to ask regulators whether they want the product to go away or not," he said. "From our perspective, we think that they add a good amount of value to some of our customers."
American Express also is cooperating with regulators amid an "industrywide review" of the products, said Michael O'Neill, a spokesman for the New York-based lender.
AmEx, the biggest U.S. credit-card issuer by purchases, said Monday that it will pay $112.5 million to settle claims it violated consumer safeguards from marketing to collections in products sold to about 250,000 customers. That case didn't involve add-on products.
The crackdown is CFPB Director Richard Cordray's first enforcement campaign after the Dodd-Frank Act consolidated regulation of retail financial products under one federal agency. With U.S. banks already complaining that regulation has squeezed revenue, the bureau is considering new limits on payday lending and fees for checking overdrafts, and has proposed an overhaul of mortgage practices.
The industry lobbied against Dodd-Frank, and the CFPB in particular, before its passage in 2010. The law also included limits on debit-card swipe fees paid by merchants, wiping out about $8 billion in annual revenue for the biggest U.S. banks.
While most credit-card lenders don't disclose what they earn from add-on products, payment protection alone generated $2.4 billion in 2009, according to the U.S. Government Accountability Office. Card add-ons generated $428.2 million in fiscal 2011 for Discover, a 3.8 percent increase from a year earlier, the Riverwoods, Ill.-based bank said in an annual regulatory filing.
Bill Carcache, an analyst with Nomura Securities in New York, said the Credit Card Accountability Responsibility and Disclosure Act of 2009 started the process of limiting fees — late fees, for example — that issuers are allowed to charge.
"The fees are under pressure and the profitability model of a credit card business is in question," Carcache said in an interview. "The CFPB further reinforces what the CARD Act set out to do."
The CFPB and other regulators accused Capital One and Discover of deceptive marketing that included speaking quickly while soliciting customers and enrolling people without their knowledge. Call centers run by other companies conducted some of the sales.
"We are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services," Cordray, 53, said on Sept. 24. He promised that "more such actions will follow."
JPMorgan Chase & Co., Bank of America Corp. and American Express Co. are among credit-card lenders retreating from a $2.4 billion market as regulators seek curbs on deceptive marketing of products including debt cancellation.
Scrutiny from the Consumer Financial Protection Bureau has led to fines against banks including Capital One Financial Corp. and Discover Financial Services, prompting them to curtail sales of so-called add-ons that offer to help customers pay card bills if they get sick or lose their jobs, or monitor their credit.
"We're on a glide path to selling fewer," Discover Chief Executive Officer David Nelms said in a Sept. 27 interview. Nelms, 51, cited higher standards set by regulators including the 2-year-old CFPB.
"You'd have to ask regulators whether they want the product to go away or not," he said. "From our perspective, we think that they add a good amount of value to some of our customers."
American Express also is cooperating with regulators amid an "industrywide review" of the products, said Michael O'Neill, a spokesman for the New York-based lender.
AmEx, the biggest U.S. credit-card issuer by purchases, said Monday that it will pay $112.5 million to settle claims it violated consumer safeguards from marketing to collections in products sold to about 250,000 customers. That case didn't involve add-on products.
The crackdown is CFPB Director Richard Cordray's first enforcement campaign after the Dodd-Frank Act consolidated regulation of retail financial products under one federal agency. With U.S. banks already complaining that regulation has squeezed revenue, the bureau is considering new limits on payday lending and fees for checking overdrafts, and has proposed an overhaul of mortgage practices.
The industry lobbied against Dodd-Frank, and the CFPB in particular, before its passage in 2010. The law also included limits on debit-card swipe fees paid by merchants, wiping out about $8 billion in annual revenue for the biggest U.S. banks.
While most credit-card lenders don't disclose what they earn from add-on products, payment protection alone generated $2.4 billion in 2009, according to the U.S. Government Accountability Office. Card add-ons generated $428.2 million in fiscal 2011 for Discover, a 3.8 percent increase from a year earlier, the Riverwoods, Ill.-based bank said in an annual regulatory filing.
Bill Carcache, an analyst with Nomura Securities in New York, said the Credit Card Accountability Responsibility and Disclosure Act of 2009 started the process of limiting fees — late fees, for example — that issuers are allowed to charge.
"The fees are under pressure and the profitability model of a credit card business is in question," Carcache said in an interview. "The CFPB further reinforces what the CARD Act set out to do."
The CFPB and other regulators accused Capital One and Discover of deceptive marketing that included speaking quickly while soliciting customers and enrolling people without their knowledge. Call centers run by other companies conducted some of the sales.
"We are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services," Cordray, 53, said on Sept. 24. He promised that "more such actions will follow."
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