On October 25, 2023, the Consumer Financial Protection Bureau (CFPB) released its sixth consumer credit card market biennial report to Congress as required under the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). The report focuses on industry market dynamics, use of credit, cost of credit, availability of credit, and issuer practices. CFPB Director Rohit Chopra remarked, “With credit card debt crossing the trillion dollar mark, we will be working to prevent bait-and-switch tactics when it comes to rewards and to increase refinancing activity so consumers can get lower rates.”
The CFPB highlighted potential areas of concern and stated “the CFPB will continue to monitor assessments of late fees, reliance upon penalty repricing, and debt collection practices, alongside the disclosure of minimum payments in accordance with CARD Act requirements.” Key highlights of the report include:
- Credit Card Usage: Credit card debt at the end of 2022 surpassed $1 trillion, but outstanding balances remain below pre-pandemic levels when adjusted for inflation. Cardholders paid significantly more of their monthly balances with a greater share of transacting accounts, where the cardholder pays the full statement balance each month. Delinquency and charge-off rates have declined since 2019.
- Market Size and Structure: Nearly 4,000 issuers provide cards to over 190 million consumer cardholders. The top ten credit card issuers have 80% of the market share, but the next 20 biggest issuers’ market share is continuing to grow.
- Competition and Profitability: Issuers’ profitability fell in 2020 but spiked in 2021 and remained at or above 2019-levels in 2022 with an average return on assets of 6% for general purpose cards and 2% on private label portfolios. Point-of-sale; Buy Now, Pay Later; and fintech personal loans as well as “pay-by-bank” options continue to compete with traditional credit cards for purchase volume and balances.
- Cost of Credit: Late fees returned to 2019 levels at $14.5 billion, while annual fees grew in 2021 and 2022. Issuers charged more than $130 billion in interest and fees in 2022. By the end of 2022, interest and fees as an annualized percentage of balances, or the total cost of credit, was almost 18% on general purpose cards and over 21% on private label accounts. Many cardholders with subprime scores are paying 30 – 40 cents in interest and fees per dollar borrowed each year. The average annual percentage rate (APR) was Prime plus margin was 15.4%. One in ten general purpose accounts are charged more in interest and fees than they pay toward the principal each year, which indebtedness that could become difficult for some consumers to escape. Annual fees have doubled since 2016 to $6 billion, which increase affected more prime plus and superprime cardholders.
- Rewards: The dollar value of rewards earned by general purpose cardholders exceeded $40 billion in 2022. Transacting accounts are increasingly benefitting from credit card use. The cost of interest and fees almost always exceeds the value of rewards the revolving consumer may have earned. Cardholders’ rewards redemptions have increased, but consumers still forfeit hundreds of millions of dollars in rewards value each year.
- Product Innovation: Installment plans, which permit cardholders to convert a credit card purchase to a lower-cost, fixed-rate loan, comprise a small but growing segment of the market designed to compete with BNPL. “Credit card-as-a-service” platforms from fintechs to traditional banks have streamlined co-brand partnerships to improve user experience and offer novel rewards with smaller retailers. Some issuers are now approving consumers with only soft inquires on consumers’ credit reports; others are underwriting consumers without credit scores using new datasets and modeling techniques outside the traditional credit reporting system. Issuers are providing cardholders with more flexible repayment terms and new payment options, including through a growing number of digital wallets.
- Credit Availability: In 2022, the industry saw significant growth in originations with application volume increasing for general purpose credit cards and decreasing for private label cards. Issuers initiated credit line increases more frequently in 2021 and 2022 than they did prior to the pandemic but decreased lines or closed accounts at rates similar to those seen over the past decade.
- Disputes: Credit card disputes spiked with pandemic-related cancellations and supply chain issues in mid-2020, declined in 2021, but then rose in 2022 as spending grew. Disputed transaction volume for mass market issuers was up 50% from 2019 levels to almost $10 billion in 2022, and chargebacks increased more than 80% from 2019 levels to $5.9 billion.
- Account Servicing: Cardholders are increasingly using digital portals for account servicing with a 75% adoption rate. AI is changing how issuers service accounts, but the use and sharing of consumer data remain a significant concern, particularly among older cardholders.
- Debt Collection: The use of email in collections continued to increase in 2022, with consumers opening about 1/3 of emails. Issuers shifted to text messaging strategies more in 2022 than in prior years with a relatively low opt-out rate at 1.3%. Post-charge-off settlements fell significantly from their peaks during the pandemic.
The CFPB will likely use some of this data to bolster its arguments for reducing credit card late fee safe harbor amounts in Regulation Z when it finalizes its rulemaking for credit card late fees, which was proposed in March. We can expect that any new limits imposed on late fees, which fees account for 60% of the total fees charged annually, will cause a shift to new or increased annual fees, increased APR, and reduced reward programs as issuers seek to retain profitability. While superprime and prime plus cardholders currently pay the market share of annual fees, we can expect issuers to begin charging annual fees to the prime and lower credit score cardholders. In addition to Director Chopra’s remarks, the report addresses the forfeiture of millions of dollars in reward points. These forfeitures for New York residents will be impacted by New York’s new law requiring issuers to provide a grace period for using credit card reward points, which is effective December 10, 2023.