Issuers of store-branded credit cards are facing new regulatory scrutiny over big retroactive interest charges that can hit borrowers at the end of a promotional period.
Deferred-interest card loans often charge borrowers 0% interest during an introductory period, but then retroactively reset to a much higher rate if the balance is not paid in full by a specific date.
The Consumer Financial Protection Bureau raised concerns about such loans in a report issued earlier this month. On Friday, eBay Inc. disclosed in a regulatory filing that the CFPB has asked it to turn over documents and provide testimony regarding Bill Me Later, a service offered by the company's PayPal unit.
Bill Me Later, which consumers can use to make purchases at thousands of online retailers, functions like a deferred interest credit card. Customers who spend at least $99 don't have to make payments for six months, and are not charged interest, as long as they pay off the balance in full by the end of that period.
Other companies that could be affected by the regulatory scrutiny, because they issue store-branded, or private-label, credit cards, are Citigroup (NYSE: C), Alliance Data Systems (ADS), General Electric (GE) and Capital One Financial (COF).
In a conference call with analysts last week, Capital One Chief Executive Officer Richard Fairbank said that his company has only a small level of exposure to the deferred-interest card loans. But he also suggested that certain competitors with greater involvement are more vulnerable.
"It's a pretty significant and pretty widespread practice in the private-label space overall," Fairbank said.
Deferred interest products are particularly prevalent at retailers that rely on large-dollar purchases, such as furniture and electronics, says Sanjay Sakhrani, a credit card industry analyst at Keefe, Bruyette & Woods.
In a 2012 report, Cardhub.com found that Amazon, Apple, Best Buy, Office Depot and Wal-Mart were among the retailers that offered deferred interest.
Earlier this year, Capital One sold its Best Buy credit card portfolio to Citigroup, and there has been speculation that regulatory pressure prompted Capital One to sell those loans. Capital One would not comment Tuesday on whether the governmental scrutiny was a factor in the sale.
A Citi spokeswoman acknowledged that the Best Buy portfolio has deferred interest, but stated that "a large majority" of Citi's private-label customers pay off their balances within the promotional period and avoid finance charges.
An eBay spokeswoman said that eBay, PayPal and Bill Me Later "take consumer protection very seriously, and are cooperating with the CFPB's investigation."
The "buy now, pay later" promise of deferred-interest plans has long drawn the ire of consumer advocates.
"The trap is that they sock consumers with huge retroactive interest charges going back to the date of the purchase if the consumers are short by even a few dollars in paying off the entire purchase by the end of the so-called 'interest-free' period," the National Consumer Law Center stated in a recent press release.
In its Oct. 2 report, which evaluates the impact of the 2009 credit card reform law, the CFPB echoed those concerns. But the report also pointed out potential consumer benefits from deferred-interest loans, and it did not promise any action right away.
"The Bureau intends to continue to study these issues and assess whether additional action is appropriate to promote a more fair and transparent market," the report stated.
The CFPB report also reiterated the agency's longstanding concerns about credit card add-on products, such as payment protection plans and credit score monitoring. Such products have been the subject of enforcement actions by the consumer bureau against Capital One and Discover Financial Services (DFS).
In light of the regulatory scrutiny, Discover has stopped selling its payment protection plans, though CEO David Nelms said in an interview Monday that the company does plan to offer the product again.
"We expect to offer and restore marketing when we're ready," Nelms said. "I think we are not to that point yet."
The CFPB report also raised questions about whether card issuers' disclosures with respect to their rewards programs are sufficiently clear and transparent. "Rewards offers can be highly complex, with detailed rules regarding the eligibility for sign-on bonuses, the value of earned points, the rate at which they are earned, and the rules governing their forfeiture," the consumer bureau stated.
When asked about the CFPB's findings, Discover's Nelms drew a distinction between fees and rewards, the latter of which represents money being given to the consumer. "And so I would think that there's less concern about the value," he said.
But Nelms also acknowledged the CFPB's concern that the ins and outs of rewards offers can sometimes be difficult for consumers to understand. "I expect to continue to make changes and enhancements," he said.