Credit card companies may have to begin looking elsewhere to keep up some of the revenue growth that they have been enjoying from late fees and other penalty charges.

The so-called nuisance fees are under fire from irate consumers who have turned litigious, and some analysts are warning that the major card companies have come to rely too heavily on noninterest income.

Fees have been driving up revenues throughout the banking industry, and the card business is no exception. But fees for not keeping minimum balances or for bouncing checks have been tolerated, while fees for credit card payments that did not arrive on time have prompted potentially costly class actions.

Citigroup Inc., Providian Financial Corp., and the First USA subsidiary of Bank One Corp. have all been sued this year by credit card customers who say they were billed unfairly.

Now that some major card issuers earn nearly half their revenue from fees -- from rule infractions and from products like credit insurance that require monthly payments -- some analysts say the time has come to rethink the industry's profit model. In the long run, an economic downturn could cause delinquent payments to skyrocket, triggering a wider customer revolt against fees.

"Credit card fees have stood as a bulwark against high credit losses for U.S. credit card companies, acting as a natural hedge against rising credit losses," said Tanya Azarchs, director at Standard & Poor's financial institutions ratings group in New York. "What is driving the card fees is the need to offset the rising chargeoffs in the environment we had over the last three years, as well as dropping annual fees."

Analysts' suggestions include returning to annual fees as a steady income source, one that, if it could be sold to the public, would reduce the pressure to impose penalty pricing.

Credit card bankers say the risks and problems are being exaggerated. Interchange income and interest from card loans are still the most important sources of revenue, and that will not change, they say.

Late and over-limit fees are "becoming a smaller and smaller proportion of our total fees," said David J. Petrini, executive vice president and chief financial officer at Providian, of San Francisco. "Our business model never has been, and never will be, built around penalty fees to our customers."

Providian is the defendant in four lawsuits -- all seeking class-action status -- filed by consumers who say they were billed unfairly. Persistent complaints to consumer advocacy groups prompted the San Francisco district attorney's office to open an investigation this year; no charges have been filed, but the district attorney's office said Monday that the investigation continues. The company came forward with a "customer satisfaction" pledge to try to make amends.

Mr. Petrini said the bulk of Providian's fee income is derived from interchange, fees for cash advances and annual fees paid by subprime and secured-card customers.

The risk of angering and possibly losing a customer for a $29 fee is not worth the $250 Providian estimates it can earn if a customer stays on for six more months, Mr. Petrini said. "It is much more important to us to make sure our relationships are stickier and that we're meeting our customers' needs through the credit life cycle," he said.

Providian said it traced some of the contentious billing problems to a software glitch, and took a $20 million charge in the second quarter to pay refunds to cardholders.

Most card companies have been raising fees for late payments and other services to offset declining revenue from low annual percentage rates and the loss of annual fees. Over the past five years, late-payment fees have grown from $15 to $29 in some cases, and grace periods have shrunk from one month to none at all.

Total fee income -- which includes interchange fees and ancillary product sales as well as nuisance charges -- represents too high a proportion of total income at several major card companies, according to Standard & Poor's. For the first half of 1999, fees accounted for 49% of revenue at Providian, 42% at Capital One Financial Corp., and 39% at Discover Financial Services, a division of Morgan Stanley Dean Witter & Co.

First USA reported its fee contribution at 20%, but that organization includes income from late and over-limit fees in its interest income, masking its true value, Ms. Azarchs said.

No credit card issuer is immune from economic pressures. The good news is that consumer loan delinquencies reached a four-year low in the second quarter, according to statistics compiled by the American Bankers Association. The ABA said 3.33% of credit card accounts were at least 30 days delinquent on June 30, down from 3.58% three months earlier. Card delinquencies peaked at 3.72% of accounts in the fourth quarter of 1996.

Serious delinquencies -- card payments that are late by 90 days or more -- have also fallen. At the end of the second quarter they represented 1.86% of card debt outstanding in banks' portfolios, down from 1.29% in the first quarter and from 1.36% on June 30, 1998, according to Veribanc Inc., a bank research firm in Wakefield Mass.

Consumers' stronger financial positions prompt more of them to pay off balances in full, but they also reduce the interest income card companies depend on.

If chargeoffs increase, as they probably would in a recession, issuers are "going to have to find something else besides fees to offset" losses, Ms. Azarchs said.

Warren Heller, research director at Veribanc, said chargeoffs and delinquencies have not been this low since 1996, but warned that the latest results should be taken "with some caution," since the second quarter might prove anomalous. Mr. Heller and other experts say fee income is an increasingly fragile post to lean on. In an economic downturn, consumers who used to pay the fees grudgingly might move into the delinquent column.

A cardholder sued the Citibank division of Citigroup this month for allegedly making it difficult to avoid a late-payment fee, since the cutoff time on the due date is 10 a.m. The suit, filed in the U.S. District Court for the Eastern District of Texas, in Texarkana, asserted that Citibank rigs its system to profit from late fees and raise interest rates as punishment. Citibank said it requires an early deadline so that it has enough time to process payments. Other issuers have early cutoff times too. Consumer complaints prompted First USA to move its deadline from 8 a.m. to noon, said Robert McKinley, president of RAM Research Corp. of Gettysburg, Pa.

First USA is the defendant in three lawsuits over fees and pricing. In one of these class actions, the consumer plaintiffs said First USA complied with its promised introductory rate of 6.5% before raising it to 15.99%. After that, the accounts were suddenly repriced to a floating annual percentage rate that climbed above 22%. A First USA spokesman would not comment.

Mr. McKinley said the fact that about 42% of credit card users do not revolve balances makes interchange income from card transactions more important. He suggested that issuers stop offering low teaser rates and omitting up-front fees.

Card companies should get "rid of the grace period, focus more on other fee-based services, or enhance the value of the card so you can charge an annual fee again," he said.

Using nuisance fees to boost revenues is "bad for the industry overall" because it "invites not only lawsuits, but ultimately regulation," Mr. McKinley said.

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