U.S.: Junk Fees in Banking and Financial Services
Ph.D. in U.S. History, Columbia University in the City of New York
Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford
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“In the financial-services sector, consumers pay steep and often hidden fees because of industry consolidation.” – Joe Biden’s Executive Order on Promoting Competition in the American Economy, July 9, 2021
Junk fees are unnecessary or hidden fees that inflate the cost of goods and services in a practice known as “drip pricing.” Excessive and hidden banking and financial services fees, such as credit card late fees, bank overdraft fees, and non-sufficient funds (NSF) fees, affect consumers’ financial health and spending power.
In July 2021, the Biden administration ordered the Consumer Financial Protection Bureau (CFPB) to enact actions to lower junk fees to promote competition in the U.S. economy. In 2022, credit card late fees reached $14.5 billion, or more than 10% of the $130 billion consumers paid in interest and fees to credit card issuers. That same year, bank overdraft and NSF fees reached $9.1 billion (CFPB 2024: 17).
Credit Card Late Fees
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers. Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.” – Rohit Chopra, CFPB Director.
Banks charge late fees when a consumer misses a paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More due dateThe year in which a medal or coin was minted. On a banknote, the date is usually the year in which the issuance of that banknote - not its printing or entering into circulation - was formally authorised. More, even for a few hours. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), passed after the 2008 global financial crisis, banned credit card companies from charging penalty fees on late payments exceeding their collection costs.
In 2010, the Federal Reserve Board of Governors (FRB) issued an immunity provision to the law allowing card issuers to charge no more than $25 for a customer’s first late payment and $35 for subsequent payments and adjust those rates to inflation. Those amounts have grown to $30 and $41, respectively.
Card issuers have kept raising late payment fees while reducing their collection costs through digitalization. The average late fee for major issuers went from $23 in 2010 to $32 in 2022. “We estimate banks are generating five times more in late fees than it costs to collect late payments. They’re padding their profit margins,” said President Joe Biden in a meeting with his Competition Council.
The Dodd-Frank Act of 2010 transferred authority over CARD Act rules from the FRBNY to the CFPB. After a review, the CFPB has reduced average late fees from $32 to $8 and ended automatic inflation adjustments for issuers with 1 million or more open accounts, representing 95% of total outstanding U.S. credit card balances.
The rule will take effect in May. The Biden administration argues that these fees will help consumers and increase competition in the credit card market. The CFPB estimates that U.S. families will save more than $10 billion in late fees, averaging $220 per year for more than 45 million cardholders paying late fees.
Industry groups have criticized the move. The American Bankers Association (ABA), the U.S. Chamber of Commerce, and three Texas business associations have sued the CFPB on the rule.
- “This flawed final rule will not only reduce competition and increase the cost of credit, but will also result in more late payments, higher debt, lower credit scores, and reduced credit access for those who need it the most,” said Rob Nichols, chief executive of the ABA.
- “The CFPB has exceeded its authority. The agency’s final credit card late fee rule punishes Americans who pay their credit card bills on time by forcing them to pay for those who don’t,” said Neil Bradley, the executive vice president and chief policy officer of the U.S. Chamber of Commerce.
- “[The rule] will decrease the availability of credit card products for those who need it most, raise rates for many borrowers who carry a balance but pay on time, and increase the likelihood of late payments across the board,” said Tim Scott, a Republican Senator for South Carolina.
Bank Overdraft and Non-Sufficient Fund (NSF) Fees
“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paperSee Banknote paper. More checks that were often sent through the mail. Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.” – Rohit Chopra, CFPB Director.
Banks charge overdraft fees when they make a payment from a consumer’s account lacking sufficient funds. The U.S. Congress passed the Truth in Lending Act in 1968. The FRB exempted overdraft loans the following year if banks honored checks when depositors “inadvertently” overdrew their accounts. Then, most families relied on hand-written checks sent through the U.S. Postal Service to make and receive payments, and transactions did not clear instantly. Banks issued loans to cover differences for a modest fee.
With automation and the rise of debit cards in the 1990s and 2000s, banks used the exemption to charge consumers increasing overdraft fees. While most consumer overdrafts are for less than $26, the 175 largest banks charge an average of $35 for an overdraft loan. Nearly 23 million U.S. households pay overdraft fees each year. Overdraft fees have amounted to $280 billion in the past two decades.
In January 2024, the CFPB proposed a rule to curb excessive overdraft fees, setting them within a range of $3 to $14. The rule would require banks to treat overdraft loans like credit cards with clear disclosures. The move would save consumers $3.5 billion or more in yearly fees, or $150 for households paying overdraft fees.
Banking groups are adamantly opposed to the initiative:
- “[This is] the bureau’s latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate,” said Rob Nichols, chief executive of the ABA.
- “[The rule threatens] a lifeline many consumers in financial distress rely on to make ends meet,” said Jim Nussle, chief executive of America’s Credit Unions.
Banks charge non-sufficient funds (NSF) fees when they decline to make a payment from a consumer’s checking or debit account that lacks sufficient funds. As of October 2023, nearly two-thirds of banks with over $10 billion in assets have eliminated NSF fees. The CFPB estimates that consumers save almost $2 billion annually due to eliminating NSF fees.
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