A Dazzling Array of Credit Card Fees: Evidence of an Industry in Transition (2005)

INTRODUCTION In a well-documented article that appeared in Business Week, Emily Thornton explores a powerful social phenomenon with which all of us are all too familiar. The article entitled Fees! reminds us that America used to be the land of the free. Now, it's the land of the fee (Thornton, 2003). With methodical precision she identifies proliferating fees from a variety of industries and provides industry estimates of their financial impact. For example, hotel fees for such things as housekeeping bring in about $100 million per year (Thornton, 2003). The new regulatory assessment fee of 99 cents per month adds about $475 million in annual revenues for AT&T (Thornton, 2003). Even governmental organizations use increasing fees to generate needed revenues, and [c]ash-strapped states will pull in $2.6 billion in new revenues this year by raising more than 200 different fees on everything from fishing licenses to fingerprint processing to driving with new tires (Thornton, 2003). But when it comes to expanding fees, [n]obody beats the banks and other financial services companies ... (Thornton, 2003). Banks will get $30 billion this year from customers paying extra for bounced checks, using automated teller machines, and other added charges. Credit card issuers will rake in an estimated $20 billion in extra charges such as late-payment fees, which have been rising (Thornton, 2003). CREDIT CARD INDUSTRY If a desire exists to generate revenues through the use of fees, the credit-card industry is the perfect industry in which to do it. Eighty percent of all households have at least one credit card, (and) with well over one billion cards in circulation, the average household has about a dozen credit cards. About sixty percent of cardholders carry credit card debt from month to month, (and) the average credit card debt for households that carry a balance is more than $10,000 (Consumer Federation of America, 2003). Since 1997, credit card issuers have nearly doubled the amount of credit they offer to consumers, to more than $3 trillion dollars--about $30,000 per household. Revolving debt, which is almost entirely card debt, increased from $554 billion to $730 billion between 1997 and 2002 (Consumer Federation of America, 2003). As a further evidence of the size and strength of this industry (and the potential for generating fees), the credit card industry reached a couple of major milestones in the year 2003. For the first time in history, Americans bought more stuff in stores ...with cards than with cash (Brooker, 2004). Also, the use of credit cards has now reached approximately $2 trillion of transactions a year. That roughly calculates to 20% of the GDP (Brooker, 2004). And considering the fact that the consumer segment of society is about 70 percent of the nation's GDP, it means that credit cards now account for about 27 percent of the total consumers' portion of our nation's economy. THE UNDERLYING FORCES In the credit-card industry (as well as other major industries), there is an interesting and powerful set of forces at work. On the one hand, stockholders, directors, and senior management continue to demand more profitability in consumer markets, but countering this is a wealth of information and sophistication that consumers have as they evaluate options and vote with their money. Because of increasing information that is available (including that which is contained on the Internet), consumers are more price and value conscious than ever before. With more comparison shopping, it makes it difficult for businesses to raise the stated prices for their goods and services. Consequently, many businesses have turned to fee-setting as a means of increasing revenues and profitability. There is significance in the size and importance of the credit-card industry and in the motivating forces, but there is yet another reason why credit-card providers are among the elite in the successful use of fees and it relates to the nature and complexity of the process. …