Law Hits Home as Cards Opt Out of Overlimit Fees

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American Express Co. and Discover Financial Services are eliminating overlimit fees on consumer credit cards, in one of the first concrete examples of how a new law will restrict issuers' abilities to turn a profit.

In so doing, they may lead the way for other issuers to give up on overlimit fees, a relatively small but useful source of fee income, observers said.

"Issuers should take overlimit fee income out of their P&Ls," 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.

Amex started informing cardholders this month that it would eliminate overlimit fees on all of its consumer credit cards with its Oct. 1 billing statements. Desiree Fish, a spokeswoman for the New York credit card company, said Friday that it will continue to make point-of-sale decisions about whether or not to allow cardholders to make purchases that exceed their spending limit, but will no longer assess a fee to those who are permitted to complete their purchase.

"To continue to offer them on those who opt-in would be more expensive," Fish 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."

Discover will also start informing cardholders "soon" that it will eliminate overlimit fees, "as a convenience to customers and as an effort to deliver on the spirit rather than just the letter of the law," Leslie Sutton, a spokeswoman for the Riverwoods, Ill. company, said late Friday. She would not be more specific or comment on whether cost was a factor in Discover's decision.

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.

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

Amex currently charges $29 or $35 per transaction that exceeds a cardholder's credit limit, although not all cardholders are allowed to make such purchases. "When people reach their limit" at the point of sale, "based on their sophisticated risk model, we may allow a sale to continue," Fish said.

"It is a real-time authorization process that is able to look at the individual card member's account based on their credit risk."

She 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."

Like other issuers, Amex is also increasing its late fees and raising the interest rates for cash advances and penalty rates for consumer cards. For instance, balances of $250 or under, rather than $400 or under, will be assessed a late fee of $19 starting on Oct. 1. For balances over $250, the late fee is increasing by one dollar, to $39.

Other issuers, including Bank of America Corp., JPMorgan Chase & Co. and Capital One Financial Corp., said they have not yet changed their overlimit fee policies and would not discuss their specific plans for compliance with the new law. Citigroup Inc. did not respond by press time.

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