A major credit card issuer has found a certain risk prevention measure not worth the trouble.
JPMorgan Chase & Co. is backpedaling on a $10 monthly fee it began charging some cardholders in January. The fee has generated a wave of consumer complaints, news coverage and lawsuits. The New York banking company said last week that it would stop charging the fee next month, and that it would credit any amounts collected to the customers' accounts.
Across the industry, issuers have been trying to weather the recession by raising interest rates, closing accounts and cutting credit limits and rewards. These efforts have fed a public backlash against financial institutions and galvanized lawmakers to push for reforms that would go beyond what regulators have done.
Observers said JPMorgan Chase's reversal indicated a belated realization that, even though all issuers are trying to hedge risk, the monthly fee was a step too far.
"They insulted their customers. Their customers got angry, and now the tide is turning," said Duncan MacDonald, a former general counsel of Citigroup Inc.'s Europe and North America card businesses.
JPMorgan Chase had informed the affected cardholders in November that they would have to pay the fee to maintain the terms on their accounts, and that their monthly minimum payment was being raised from 2% of the balance to 5%.
The cardholders had received a guaranteed low interest rate for transferring their balances to JPMorgan Chase and "made little progress in paying down these loans," the company said. They made up "less than one-half of one percent of our customers."
Those who opted out of the new terms were told their interest rate would be raised instead.
Stephanie Jacobson, a spokeswoman for JPMorgan Chase, said in an e-mail last week that the decision to end the fee was "based on customer feedback." She would not elaborate.
Cardholders will be notified of the decision this week. JPMorgan Chase will keep the minimum payment for these customers at 5%.
MacDonald and others said that in light of the public outcry over executive bonuses at firms like American International Group Inc., regulators are more mindful of public resentment and are probably exerting more pressure on issuers to back away from tactics that anger consumers.
"You're constantly trying out a new pricing mechanism, and most of the time … you got away with it. But in light of what's happened with the AIG mess, Chase has just said, 'We cannot deal with this firestorm if it gets away from us,' " MacDonald said.
Furthermore, "the OCC is feeling the heat," he said. "It wouldn't surprise me if they were saying to Chase, 'Not only do it for yourself, but do it for us. We don't want the heat.' "
Rick Wittwer, who oversaw collections and recoveries as an executive for Washington Mutual Inc.'s cards unit and Providian Financial Corp., said regulatory or public pressure were the likeliest explanations for JPMorgan Chase's retreat.
Either "the regulators changed their mind, or they didn't like the way they implemented it, so they got negative feedback from the regulators," he said. "Or the amount of complaints that came in were so high that [chief executive] Jamie Dimon said, 'Look, you've got to change that.' "
Though issuers will have to comply with new federal rules governing card practices by July of next year, they are facing the possibility of even tougher legislation that could "cause major havoc," Wittwer said. "The regulators right now are under severe pressure, because of what's happened. On the credit card side, when delinquencies and chargeoffs rise so high, they have to go back and look at what did they allow to happen."
A spokesman for the Office of the Comptroller of the Currency would not discuss the matter.
The $10 monthly service charge is the target of about a dozen lawsuits that are seeking class-action status and are awaiting a decision from the U.S. Judicial Panel on Multidistrict Litigation, which assigns multiple suits about the same matter to a specific court.
"The 'customer feedback' they're talking about is the … class-action lawsuits that have been filed in multiple states," said Robert S. Green, a partner at Green Welling LLP in San Francisco, which filed some of the suits.
A complaint Green Welling filed in California claims that, by charging the fee and raising the monthly minimum payment, JPMorgan Chase "reneged on promises used to induce credit card holders to transfer balances from other credit card accounts."
Also, the issuer used its "unilateral implementation of these onerous terms to coerce cardholders to agree to a higher rate of interest or to pay the loan balances in full," the suit says. "In doing so, Chase consistently misrepresents the facts applicable to these accounts and violates the Truth-in-Lending Act."
Plaintiffs' lawyers involved in the suits said that they are still pending, and that the fee's elimination is not part of an official settlement.
Jacobson said she would not discuss pending litigation.
Jason Solotaroff, a partner at Giskan Solotaroff Anderson & Stewart LLP, said the fee's elimination "doesn't really solve the problem" that led the New York firm to file its suit against JPMorgan Chase.
"The $10 charge is certainly wrong, but the increase in payment is really what's devastating to our class-members."
For some consumers, the $10 fee was the worst offense.
Curtis Arnold, one of the affected cardholders and the founder of QuinStreet Inc.'s CardRatings.com, called the reversal a "wise decision" for JPMorgan Chase. "This was a PR nightmare for those guys."
He also protested the $300 increase in his monthly minimum payment. However, "from a consumer-advocate standpoint, you can't complain a lot about that," he said, because a higher monthly minimum will help cardholders pay down their balances more quickly.
After being a JPMorgan Chase cardholder for more than 15 years, Arnold said, the "egregious" $10 fee would make him "pretty gun-shy" about opening another account there.
"They've become so risk-averse that their bottom line has gone out the window," he said. "That's all they're trying to do, is hedge against risk."