It seems that Bank of America (BAC) has already reneged on the October 6th promise it made to stop raising the interest rates on the credit cards of its existing customer base. Just a week after making this pledge, BofA announced that it would begin introducing annual membership fees, ranging from $29 to $99, to select customers next year.
Combined, these two announcements result in a net win of zero for consumers, and in an unethical bait and switch play on the part of Bank of America. Why? Because, according to regulation, interest rates and annual membership fees fall under the same umbrella. They are both considered finance charges.
While BofA (BAC) postured as if was taking a step towards consumer protection in making the announcement that it would stop raising rates, the introduction of new annual fees to existing credit card accounts will still result in increased finance charges for account holders, even if those finance charges are referred to and assessed by another name. For insight, consider that the addition of an annual fee of $50, on a credit card account with $500 balance and a ten percent interest rate, would double the overall yearly finance charges associated with that card.
Bank of America is using the introduction of these new fees as a tactic to shore up its credit card portfolio in the face of falling profit margins. However, going about it in this way is at best unethical. When you strip away the industry and product specific terminology, BofA’s pledge that it would stop raising interest rates set a reasonable expectation among its customer base that the cost of their credit card accounts with the lender would not rise again.
Additionally, with many consumers closing out their credit cards or transferring their balances due to rate hikes, a promise to stop raising those rates could very well be viewed as a marketing promise – reactive marketing, but marketing non the less. Subsequently introducing, new annual fees violated this promise based on the expectation it presumably set with the bank’s existing customers.
In January of this year, with our help, the New York Times broke a story that called out another credit card issuer, J.P. Morgan Chase (JPM), for violating its marketing promises using a formula very similar to what we now see with Bank of America. After the story ran, Chase was pressured by New York state Attorney General, Andrew Cuomo to change its tactics, and went so far as to extend refunds to customers for the membership fees that it had collected up until the point that the policy was reversed. Unfortunately, almost a year later, there’s been no lesson learned and BofA is engaging in similar behavior.
At the end of the day, all of this points to incompetence on the part of Bank of America’s credit card division. First, BofA made two contradictory announcements, which points to the fact that the lender seems to think that its customers aren’t savvy enough to realize that they’re being had. Secondly, it doesn’t seem that Bank of America has read the CARD Act, which is slated go into effect in February, if not sooner. Chase got in trouble because it increased membership fees for existing customers after it promised that interest rates on those accounts would remain constant. If Bank of America moves along with its plans to introduce membership fees to existing customers into next year, it will find itself in much hotter water than Chase did. This is because after the legislation is enacted raising the interest rates (annual membership fees included) on existing balances will be illegal.
Lastly, with or without Chase (JPM) as an example, BofA’s (BAC) credit card division should have the experience and expertise to know that from a regulatory standpoint the introduction of new membership fees to customers with non zero card balances will be against the new credit card law. It’s about time for entities that are being bailed out with billions of dollars in taxpayer money to stop making rookie mistakes like these.
Disclosure: Author has no positions in the stocks mentioned.
