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August 10th, 2009

Card Companies Drop Overlimit Fees



(hat tip: The Consumerist)

Both American Express and Discover plan to eliminate their overlimit fees on consumer credit cards. While Discover has promoted the new practice as a convenience to its customers, the experts say it’s just one of the first examples of how the new credit card reform will limit the card companies’ profitability and change the landscape of the industry (emphasis added):

“Issuers should take overlimit fee income out of their P&Ls [profits and losses],” said Philip J. Philliou, a former Amex executive and a partner in the Philliou Selwanes Partners LLC consulting firm. “Under the best of circumstances, it’s a much more limited income stream than in years past, and this additional hurdle of assessing the fee” under the new law “begs the question of whether it’s efficient and practical” to do so.

Under the law, issuers must require consumers to opt-in “for over-the-limit transactions if fees are imposed.”

“To continue to offer them on those who opt-in would be more expensive,” [Desiree Fish, a spokeswoman for AMEX] said. “We just don’t rely as heavily on those fees, and it’s not going to be as much of a financial impact for us as it would have been to put in that whole opt-in situation.”

Since overlimit fees contribute such a small percentage to the companies’ profits, the decision was an easy one. Nearly all credit card companies have begun preparing for the new rules — many of which are designed to restrict their fee income (emphasis added):

The card industry has been bracing for reduced profitability and increased costs as a result of a law President Obama signed in May, which will restrict issuers’ ability to raise interest rates and assess penalty fees by February. As a result, many issuers have anticipated those restrictions by raising interest rates and fees on their existing cardholder accounts this summer.

[Ms. Fish] would not discuss specific costs, although industry members said that overlimit fees are a relatively small portion of issuers’ fee-based revenue. Robert Hammer, the chief executive of the card advisory firm R.K. Hammer, said that “of all the penalty fees that we track, late fees are 85%,” and overlimit fees contribute to the remaining 15%. But “even though it’s a small piece of the revenue stream, I don’t think that others are going to be gleeful about giving it up.”

So far, according to American Banker, no other credit card companies have announced that they will eliminate overlimit fees.

Just as this is going on, it’s interesting to note recent information published by the Financial Times that said banks in the U.S. are set to make $38.5 billion in overdraft fees this year. For roughly the same fee that credit card companies charge for overlimit fees, banks reap over 75% of their service fees from overdrafts.

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