Card issuers Synchrony Financial and Bread Financial stand to be the most impacted by a proposal from the Consumer Financial Protection Bureau to cap late fee charges.

Executives for those two companies, which issue private label credit cards, expressed disappointment with the bureau’s proposed $8 late fee cap during conference appearances this week.

An $8 late fee wouldn’t deter consumers from making late payments, and the potential change means the companies may have to revamp their pricing models, the executives said. That's mainly because they tend to cater to subprime customers who more frequently make late payments.

Bread Chief Financial Officer Perry Beberman, during his appearance Tuesday at the KBW Fintech and Payments Conference, noted the point of a late fee is to prompt customers to make their payments on time. Eight dollars is “a venti latte,” he said pointedly, comparing the fee to the cost of a cup of coffee.

Bread, which is a bank, will seek to recoup that expense elsewhere, the CFO said. “Ultimately, there’s a cost to credit, and banks will find a way to claw that back,” Beberman said.

The CFPB in February made the proposal to amend the Credit Card Accountability Responsibility and Disclosure Act (Card Act) of 2009 to effectively cap credit card late fees at $8 per payment, and ban those fees from being over 25% of the minimum payment. The cap would reduce the amount American families pay in late fees each year by as much as $9 billion, the bureau said.

An $8 late fee “was at the low end of what anyone was expecting, or probably even lower than what anyone was expecting,” said Bank of America Securities Analyst Mihir Bhatia said.

Public comments on the CFPB’s proposal are due by April 3, and that short window of time for comment was notable, too, because the CFPB usually allows more time for input, Bhatia said.

The executives for Stamford, Connecticut-based Synchrony and Columbus, Ohio-based Bread noted issuers are working collectively through trade groups such as the American Bankers Association to push back on the proposed change. Trade groups this week asked for an extension of the comment period, American Banker reported. 

Bigger impact

For Synchrony and Bread, which issue cards on behalf of retailers or brands such as Lowe’s and AAA, the late fee change could have a significant impact because that income makes up a more significant portion of their overall revenue. 

While late fees make up about 9% of revenues for each of the top five card issuers, on average, that figure is almost 20% for Bread, and 16% for Synchrony, Goldman Sachs Analyst Ryan Nash said his team has estimated.

By contrast, at Discover Financial Services, late fees make up between 3.5% and 4% of the company’s overall revenue, that company’s chief financial officer, John Greene, said at a recent conference appearance.

Furthermore, late fees account for about 60% of earnings at Bread and 40% at Synchrony, Nash said. “Bread and Synchrony, just because of the nature of their business, are far and away the most impacted,” he said. 

Private label credit cards tend to be more of a discretionary product, and typically aren’t the first lines of credit consumers are making payments on if they’re in a position where they have to choose, analysts said.

Additionally, late fees are more common among issuers at the lower end of consumer credit, analysts said. Bread and Synchrony have seen charge-off and delinquency rates climb higher in recent months, inching closer to pre-pandemic levels. 

“Typically, the more sub-prime you are, the more late fees you’re going to be getting,” Bhatia said. “Their cost of collection is a lot higher.”

‘Offsets in other areas’

To soften the blow of that impact, “we’ll work through strategies to mitigate it,” Beberman said.

For Bread, that could mean making risk-based pricing adjustments, or retail share agreement changes with its brand partners, he said. The late fee change could end up limiting credit for customers, “because you’ve got to get paid for the risk,” he added.

Synchrony, which is talking with its brand partners about the potential change, wants to maintain its current level of approvals, “but in order to do that, there may have to be offsets in other areas,” Synchrony CEO Brian Doubles said during his Tuesday appearance at the KBW conference with CFO Brian Wenzel.

Executives also stressed that the change could have unintended consequences for consumers. Without late-fee deterrence, it could mean more consumers’ accounts become delinquent, which could affect their overall credit health and make auto or home loans more expensive, Doubles said. 

“I don’t feel like those things were maybe fully understood or contemplated,” Doubles said.

The proposed change would benefit those who’ve paid late, “and I would hate to see that cost transfer to the consumers in the same credit bracket who pay on time, but you can easily see how that could result from this,” Doubles argued. “I think that’s just a good discussion for us to have in a very transparent way with the CFPB and the industry, frankly.”