Prepared Remarks of CFPB Director Rohit Chopra for CBA Live

Good afternoon and thank you for the introduction. One of the primary missions that Congress gave the CFPB is to ensure that consumer financial markets are fair, transparent, and competitive.

I want to focus on that third word, competitive. Competition creates the structure that both demands – and rewards – providing great products that meet real needs. Competition drives lower prices, better service, and progress that moves people’s lives and the economy forward.

Today, I want share some thoughts on competition in one of our most important and ubiquitous consumer finance markets, credit cards, and why the CFPB is sharpening its focus and attention.

Let me rewind a couple years to 2020, when the CFPB issued a report under my predecessor Director Kraninger. The report revealed that, in a pretty short period of time, a handful of large credit card players made some big changes to how they furnished credit card information on consumers' credit reports. Instead of showing the actual payments that consumers made, which is common in the other largest lending markets such as auto finance or mortgages, those companies started obscuring the information a little bit.

And the reason that many people believe this took place is because those issuers did not want to reveal which of their customers were carrying a balance from month to month, and which of them were paying off their balance every month.

We asked those credit card issuers whether they were going to revert back to the full and complete way of reporting. We got some responses that suggested they didn't want to be at a competitive disadvantage, that revealing this information would allow upstart and other challenges to offer consumers lower rates. I don't know if that's necessarily a sign of a competitive market.

More recently, the CFPB issued an analysis and report about Apple and Google's regulations when it comes to tap-to-pay transactions, and the use of near-field communication technology for payments at the point of sale. Many banks have come to the CFPB to tell us why they see Apple's policies as unfair, why the policies lead to higher barriers to developing bank-specific apps and solutions, and how this leads to unfair costs for credit card issuers and consumers.

Last week, the Justice Department filed a lawsuit charging that Apple's practices with respect to tap-to-pay harm consumers, as well as credit card issuers.

Credit card industry issues

Obviously, credit cards occupy a central role in American consumer finance. Families use credit cards to earn rewards on purchases, to get protection from unauthorized charges and fraud, and of course, as a source of liquidity when they need to afford a purchase today and pay for it later. Credit cards can be a tremendously useful and attractive product, and indeed the market for credit cards has grown explosively since the days of Diners Club, BankAmericard, and MasterCharge. That growth was fueled by advances in automated underwriting that allowed banks to extend lines of credit to new customers with confidence, and the introduction of new inventions, from magnetic strips to near-field communication technology. Today more than 190 million Americans use credit cards.

Yet for all the success, it also is true that credit card fees and interest have never been higher for consumers. Total outstanding credit card debt has surpassed $1 trillion, and CFPB data shows that consumers paid more than $130 billion in interest and fees in 2022, including more than $25 billion in fees. And persistent debt is a growing problem: many households are paying more in interest and fees than they pay toward the principal each year.

The fact that prices have risen, or that consumers are struggling, merit a closer look by the CFPB. And recent data and research has raised serious questions about how competition is working, or not working, in the credit card market. Given the size of the market and its importance in consumers’ lives, the stakes are high.

That interest rates are high is not news to anyone in this room, or for that matter to any American household or business. But CFPB research has found that today’s record-high credit card interest rates are more than just a reflection of the Fed’s recent hikes. In fact, the margin between the Prime Rate and the average APR on purchases has sharply increased over the past decade, particularly in the past several years. Compared to the 9.6% APR margin in 2013, major card issuers charged about $25 billion in additional interest in 2023 by raising that margin to 14.3%. That excess interest adds up to about $250 in additional annual charges for the average cardholder with a revolving balance. This shift happened at a time of falling charge-off rates, nor was there an increase in the proportion of subprime cardholders. Indeed, the other trend accompanying the shift is an increase in the profitability of revolving balances.

These higher interest rates are not evenly distributed. Congress has required card issuers to share data about their cards and costs for decades under the Fair Credit and Charge Card Disclosure Act of 1988. Pricing data submitted to the CFPB by 150 banks and credit unions shows that, across all credit tiers, the smaller institutions tend to offer lower interest rates compared to the largest 25 card issuers. The difference is striking, with an average APR spread of between 8 to 10 percentage points. That translates to $400 to $500 in interest savings for a consumer with an average balance of $5,000.

These price differences were not something you would expect to find in a competitive marketplace. There are about 4,000 banks and credit unions across the country, yet despite countless smaller institutions offering essentially identical products at dramatically lower cost, we see nearly all credit card accounts concentrated in a few dozen issuers.

One factor driving this concentration is that it is currently very difficult for consumers to shop for credit cards by comparing interest rates.

Part of the problem is that digital comparison-shopping sites may be steering consumers to favored cards because of kickbacks, a practice that violates federal law. We recently issued guidance to other law enforcement agencies about how to recognize these illegal practices, such as accepting payments from financial firms to manipulate results or suppress options that better fit a consumer’s stated preferences.

But reliable information about interest rates is also just hard to come by. So, we instead see people comparing cards by annual fee, or rewards, or perhaps just signing up for a card from the same bank where they have a checking account, assuming the interest rate they’re charged will be competitive. To help make this process easier, we are assembling a pricing data set for third-party comparison websites and others to use to help consumers find the best deal for them. This will rely on data submitted under existing requirements of the 1988 law. I hope to share more about those plans in the coming months.

As I mentioned a moment ago, many consumers are shopping for cards on the basis of rewards. This makes sense – with signup bonuses and cashback or miles redemptions, credit card rewards can easily be worth hundreds or even thousands of dollars a year for a household.

We are concerned that some providers are using bait-and-switch tactics to make these rewards programs work. Major providers, who must offset the upfront costs of offering these rewards, often bury in their terms and conditions higher interest rates and penalty fees, and can revoke rewards offerings or make redemption of rewards difficult. Our most recent comprehensive credit card report found that consumers with revolving balances had been charged far more in interest and fees than they were earned in rewards. That doesn’t negate the value of the rewards, but it suggests they would be better served by switching to a lower rate – if only they could.

Steps toward a more competitive credit card marketplace

More broadly, we are working to finalize a rule that will jumpstart competition across banking.

Last October, the CFPB proposed a Personal Financial Data Rights rule to accelerate competition and decentralization in consumer finance by making it easier for consumers to switch to a new provider. The rule activates a dormant authority under Section 1033 of the Consumer Financial Protection Act, which gives consumers rights to access their data. It will help innovative firms of all sizes gain customers, by offering better services and more favorable rates.

The CFPB’s proposed rule would require that financial firms offering transaction accounts – like checking accounts, prepaid cards, credit cards, and digital wallets – give the consumer access to their own personal financial data, so they can share or transfer the data to another provider. The proposed rule would also allow consumers to more easily walk away from companies that offer bad terms and service, which itself creates a fresh incentive for companies to treat consumers well. And, importantly, the rule guards against exploitation of personal data. Companies receiving data can only use it to provide the product people asked for, and for nothing else. When a consumer permits their private data to be used by a company for a specific purpose, it is not a free pass for that company to exploit the data for other uses.

We expect these changes will help create more competition, similar to what happened with wireless phone service after the FCC required number portability. Consumers will no longer feel locked into a longtime checking account or credit card, as they will maintain their transaction history when they switch to a new provider that offers a better deal.

The rule will help accelerate the shift to what is known as “open banking,” a more decentralized market structure we are already seeing emerge in some other countries around the world.

Addressing excessive credit card late fees

I will take a moment to talk about another credit card related initiative. Earlier this month, the CFPB finalized a rule to eliminate excessive credit card late fees, help consumers keep more of their money, and hold credit card companies to the original intent of the CARD Act. The CFPB’s rule will apply to larger issuers and limit most late fees to $8, saving consumers more than $10 billion annually in late fees once the final rule goes into effect.

Consumers pay more than $14 billion in late fees every year. Consumers are charged these fees even when their payment is a little bit late or when it’s out of their control. This is on top of extra interest charges, negative credit reporting, and a slew of other consequences. Our rule closes a loophole that allowed large issuers to charge far in excess of their costs – in fact our research shows current late fee revenue is about five times the issuers’ associated costs. The rule only applies to very large card issuers, with more than over 1 million open accounts. We did not find evidence that smaller banks and credit unions are employing the fee churning business model, and in fact they charge much lower fees overall.

Large issuers are free to charge a higher amount if they demonstrate that they need to charge more to cover their actual collection costs. The rule also eliminates an automatic inflation adjustment, which was added by the Federal Reserve Board and is not required by law.

The final rule is the product of years of thoughtful work and research, and reflects the CFPB’s careful consideration of thousands of comments we received on the proposal. Several industry lobbying groups, including the Consumer Bankers Association, have challenged the rule in court, and we will vigorously defend it.

Conclusion

Credit cards can be a tremendously valuable and useful product for a family, and I think all of you in the banking industry should want to make sure that people with credit cards have a good experience. How people experience their credit card or their deposit account is often their primary way of experiencing the banking and financial system.

We need to be able to show American consumers that the banking system is as essential to our economy as the electric grid, the telecommunication system, and our roads and bridges.

If we don't have a strong banking system, the rest of the economy simply will not work. So, I want to encourage you to make sure that we have a very competitive market where consumers have a lot they can do when they vote with their feet.

The actions the CFPB has taken are going to be good for every single innovative and competitive firm in the banking industry. The actions we are taking are just a start. There is more work to do, and we really appreciate all of you who have contributed to this work.

Thank you.