But the credit card allows you to get, in a sense, an instant loan in a way that you could never do it before.
Right. The credit card is really two products, and maybe more, wrapped into one. But it is a payment mechanism, and it is used by people as a payment mechanism, and a very convenient one. And in any given month, over half the people don't even tap the credit side of it, but it also is a line of credit attached to it so that if you choose, you can tap a line of credit.
Over the last 25 years, it's been a business that's really exploded. I mean, the fastest growing part of the financial services industry?
I don't think it's the fastest growing, I haven't really seen comparisons. For example, mutual funds, you could argue, have grown faster. It has been a very fast-growing part of the financial services sector. The use of credit cards has grown dramatically, the number of people that use credit cards has grown dramatically, and a big factor has been what's called the democratization of credit, and that is low- and moderate-income people now quite often have credit cards, and that wouldn't have been the case, say, 30 years ago.
Well, I know when you come down on the train, you can see what credit cards have done. What has it done to Wilmington, Del.?
It's interesting that there are some areas of the country, some you might not expect, that have had real economic booms, because they have become credit card centers. Wilmington, Del., is a very interesting story. It was kind of your classic industrial town, with chemical companies and that type of thing, and really might have had a lot of trouble economically had it not been for credit cards. But it became, I think, through the foresight of some of their political leaders on a bipartisan basis, kind of the credit card capital of the world. And one interesting fact is, credit cards were really invented in the United States. It is a worldwide product, and it is a product that gives us jobs here at home as really the home base of the credit card industry. So if you go to downtown Wilmington today, you will find a lot of modern buildings, with very good non-polluting jobs, filled with people, and by people that are in the credit card business. ...
How profitable is the credit card business?
The credit card business is profitable. You can really see the numbers because the Federal Reserve Board actually is required -- this is a bit unusual -- to do an annual study and report to Congress on the profitability of an industry. Compared to other banking products, it is generally more profitable -- not in all of them, but in a lot of them. But to put that in perspective, one, the truth is, banking is not a greatly profitable business. If you wanted to get rich fast, you wouldn't go into the banking business, and so you're comparing it to products that are moderately profitable.
And then, as the Federal Reserve study points out, you would expect a credit card business to be somewhat more profitable than the rest of the industry or parts of the industry because it's riskier. It is an unsecured loan. The returns on credit cards and the profitability tends to vary a lot with the economy, and so you would expect the returns to be a little higher.
I thought it was the most profitable sector in the banking industry.
I think it depends on how you define sectors, but another way to look at it is how the stock market values the credit card business, and this is very interesting. The stock market does not think it is a very profitable business. If you look in the stock tables and look at the price-earning ratio, which is a way to judge it, you will see that the stock market thinks the profitability of this industry, adjusted for the risk, is less than average.
Because the risk is unsecured loans?
I think part of it is the risk, and so you can have an industry where the profits can go up and down a lot. Part of it is it is a very, very competitive industry, where the product is to some degree in business terms a commodity, and credit card people work very hard to compete with each other, but to some degree a credit card is a credit card.
Right. Understood. But wasn't last year [one of] record profits for this industry, and they're expected again this year?
For the banking industry?
For the bank, for credit cards in particular.
Yeah, but compared to what? I mean, for the banking industry we've been having record profits, but it's compared to the banking industry. And again, if you look at the profitability of the banking industry compared to other industries, and the stock market evaluation of the banking industry and of credit cards --
Are you trying to tell me that bankers are pleading poverty, that they're not --
No, no, no, no. What I'm saying is, it's not an unusually profitable business compared to other businesses.
MBNA's profits last year, one and a half times that of McDonald's.
Well, McDonald's didn't do too well last year, and MBNA is a big company, if you look at returns on equity and returns like that. But I think the interesting thing is the stock market evaluation of the credit card business is that it is not going to be a super-profitable business in the future.
For the banks, major credit cards' banks are amongst the most profitable companies of the top 20 for Fortune magazine. I know that there are different ways to gauge profitability, but it seems they're doing quite well.
They're doing quite well; I would agree with that. What I'm just saying is, it is a highly competitive business, and if you look at returns and profitability compared to other industries, it's not way out there at all.
Citibank [is] more profitable than Microsoft, Wal-Mart, and the executives are highly paid.
Right, right. These are really big businesses, and they do make money. Citigroup is a combination of a whole bunch of products, including investment banks and insurance, and it is also one of the world's biggest companies.
All I'm just trying to establish is that this is not a business that's going to go out of business, and it's a business that has made a lot of money over the last 25 years because it's been expanding.
It's been expanding. There have been some ups and downs. I will say that if you talk to business experts, in the long run, they're not so sure that this is going to be the greatest business in the world if the executives in that business and the leaders in that business don't adjust to the market.
Because the market's becoming saturated?
It's a highly competitive -- "mature" is the word that's used in business circles -- market. It has been through a growth phase, but it's now to the point where it's a fairly mature business, and you find some of the credit card companies that were very successful because they stuck to the credit card business, they're now saying, "Well, we need to look at other parts of the financial service business to make sure we have the kind of growth we've had in the past."
And they're consolidating?
There's consolidation going on in the credit card industry like a lot of industries. There's 6,000 issuers still. It's a very, very competitive industry, but if you're a very small issuer, just the back-office costs, the costs of the computers and that type of thing, are such that it's a lot easier to have those costs covered if you have a million accounts going through it than if you have 10,000 accounts going through.
So that explains why five of the companies control about 63 to 65 percent of the industry.
That's right. ... It's the economics of scale. The industry has consolidated. It's still a very, very competitive industry, as the Federal Reserve Board's annual study points out, and there will be some limits on its future consolidation, because at some point, you reach a point where antitrust officials will step in. So there's been consolidation; there will be more, but there will be a limit on it.
How important is the role of information sharing in the credit card business, financial information sharing?
Really, the reason we have the credit system we have today, even beyond credit cards, is strongly due to the fact that we have a nationwide credit reporting system, where within this system that has developed at great cost, we can make loan decisions very quickly and have enough information to feel like we're making a good loan decision. It's a very valuable service. It keeps cost down; it makes credit more available.
It's interesting that we have a very similar economy to Europe in many ways, but they don't have the kind of credit reporting system we have here, and if you look at their mortgage loans, they're more expensive in terms of interest rate, much higher downpayments. If you move from one country to another in Europe, you have to, to some degree, start over with your credit record. ...
If I were to move from Washington, D.C., to Washington state, I could hit the ground and immediately get a credit card, get a car loan, rent an apartment using my credit history, or buy a house, because we have this nationwide system.
My understanding is that we are basically the only country other than the United Kingdom that really trades information like this.
I think that's basically true. We are well ahead of other countries in terms of our nationwide credit reporting.
And that the industry also depends on us being, if you will, the only country also that has no cap on interest rates when it comes to consumer loans.
We generally don't have caps on interest rates in this country. I don't know the situation everywhere else in the world.
That's one part of this that's really interested me, because usury is a traditional value, if you will, in Judeo-Christian tradition, as well as a Muslim tradition. And yet it's disappeared in the last 25 years because of the Marquette decision [Marquette National Bank v. First of Omaha Services Corp. (1978)] in legislation.
We used to have usury ceilings in virtually every state, and we didn't really have national usury ceilings. And they went away for a variety of reasons. I think just in terms of basic economics, a usury ceiling is a price control. The interest rate is the price of credit.
But traditionally it was to stop loan sharking, if you will.
Right. But in this country, we have a strong bias against controls on prices. We don't have the government set prices. And we do that for a very good reason, because it tends to mess up the economy. That's the kind of thing they do in command and control economies, and it didn't work very well in East Germany and the Soviet Union to have price controls.
But getting away from the general to the specific, in the case of a usury ceiling, what it tended to do is two things, neither one of which were good. It tended to cut out the availability of credit to low- and moderate-income people, and because of other problems in our society and our history, it disproportionately hit minorities, who tended to be disproportionately represented in the low- and moderate-income groups. And so an interest rate on a loan goes up with the riskiness of the loan. And so if you had a really binding interest rate, what you basically were saying is, "OK, loans will not be made to this group," when you have another public policy that says to lenders, "No, no, no, we want you to lend more to this group." And then what would happen is, well, if they couldn't get loans from those that paid attention to the law, where did they go? They went to the loan sharks anyway. So for that reason, you saw usury rates basically phased out in the states slowly but surely. ...
Weren't they put there to protect people so that they couldn't get charged over a certain amount? And isn't the industry to a certain extent already policing itself a little bit, because you see 24.99 percent, let's say, in New York state because 25 percent is criminal usury?
Well, I think usury ceilings were put in to protect people, and that was the theory, and they were put in to help people. They were good motives. But the end result usually was, if they were binding -- it depends on where you set them -- but if they were binding, they ended up cutting out people from legitimate providers of credit, who otherwise could [not] get credit.
If you say to a lender, "I am not going to let you charge the rate you need to charge to cover your risk," that lender will say, naturally, "Then I won't lend to those people that were in that risky pool." And so then where do they go? They either don't get a loan, or they go to somebody that doesn't pay any attention to what the law says. And so the feeling was, let's get rid of these ceilings, because while the intention's good, they're counterproductive. I think also what happened is you had credit markets that became very, very competitive, and so to some degree you could say the competition is going to work to keep the interest rates where they should be.
So instead of having a legal cap, your faith is in competition to keep the rates under control.
The other thing that's happened is that the industry has also been able, through the courts and Congress, to deregulate fees. Is that correct as well?
I don't know that the fees were ever all that regulated. They may have been somewhat at the state level for finance companies --
Or that the state can't regulate credit card fees at this point.
So you really have an open marketplace.
We have by and large an open marketplace.
Who are the most profitable customers for the credit card industry?
I don't know exactly who the most profitable customers would be, and it would probably vary depending on how you price your credit card. There are some credit cards that are priced clearly for very high-end customers that have a high annual fee and a lot of great mileage and free tickets and things like that. You have others that really are priced probably for the lending purpose, and so I would think it varies a lot depending on what your particular market niche is.
But people in the industry tell us that revolvers, people who borrow money basically with their credit card, that's where the profits are.
I don't think that's where all the profits are. I think what's happened is if you go back to the beginning of the credit card business in the '60s and '70s, it was like Henry Ford's Model T: You could get any color you wanted as long as it was black.
In those days, you could get any credit card terms you wanted as long as it was a $25 annual fee and an 18 percent interest rate. And what's happened, as you would expect with competition, is the card companies have come in and identified different niche markets and have different products designed for different niches. So they don't offer me the same type of credit card they might offer somebody just coming into the job market. But I think it is generally understood that those that use the revolving part of the credit card are kind of the sweet spot.
That's where you make your money.
That's not the only place, but it is where you make a good amount.
That's where your profit center is. And the statistics are all there, that basically it's interest, and it has become over the last number of years, over the last eight years or so, that its fees that have become a bigger and bigger portion. And it raises the question: The fees were originally designed as sort of traffic tickets to get you to pay on time. Now they're a revenue enhancer?
To some degree, yes. It's not untypical of what goes on in our economy these days. It's often referred to as the disaggregation of pricing. ... I'll give you plain examples. You and I used to pay a monthly phone bill that covered everything. Now when you call up the operator and ask for a phone number, you get charged. You used to pay a hotel bill that would cover your local calls; now you pay a charge. One of my favorites, or least favorites, is when you order tickets to the theater or to a sporting event. I just got some football tickets, and they included a handling charge for giving me the tickets. So it is, somewhat throughout our economy, ... that there are fees. ...
Have you ever read the contract that's sent to you with your credit card?
Yes. But I'm a lawyer. (Chuckling)
Do you understand it?
I do understand it. I think it would be very hard for a lot of people to understand. I think it's fairly typical of consumer contracts that you get with any product these days, and I think it's a constant battle and something we need to work on to make the disclosures in the contracts as clear as we can.
Now I will say that in the credit card industry, our disclosures are very explicitly set forth in law and in regulation. And they are subject to regulatory oversights, so much more so than in most consumer contracts, ours are heavily regulated. But it is a constant battle to try to figure out how you make disclosures and those types of things in plain English so that somebody will read them, and I think we ought to do the best possible job we can.
The contract allows a credit card company to change the interest rate on money you borrow from them after you've borrowed it.
Some do, yeah. It depends on the contract, but a lot of them do.
If they find out through this information system that you've been late on your payment for your automobile, they can notify you that they're going to change the interest rate on the money they've already lent you.
I think there is a misunderstanding about what the credit card agreement is, and the nature of the credit card agreement, and maybe we need to do a better job of explaining what it is. A credit card loan is a different type of loan. It is a very short-term line of credit, and it is a two-way street, and I think a lot of people don't, for understandable reasons, don't fully understand what it is. But a consumer at any time can say, "I don't want to deal with you anymore; I have this line of credit with you," and cut up the card, and that's the end of it. Or the consumer can pay off the loan. It's different than, say, a 30-year mortgage or an automobile loan in that regard. There are limits on your ability just to walk away if you're the consumer.
On the other side of it, the contract with the credit card company is that "We have a line of credit with you, but we do have the right at any time to say we're not going to extend that credit to you anymore," which, by the way, also includes, "We have the alternative to say you are now a riskier customer than we had when we opened the agreement; we have the right to increase the interest rate, because you now have become a riskier customer."
But particularly if you're a person in some tight economic circumstances, because that's why you missed your car payment, you're then faced with an interest rate that can go from an introductory 0 percent, like these solicitations that many of us are familiar with in our mailboxes, to 30 percent, and there's not much we can do about it.
I don't know that you would get a jump like that, because the introductory rate is subject to its own set of circumstances, but you could have a 12 percent rate that goes to a 20 percent rate. And that's what the contract and the basis of the agreement is. My agreement with you is, on the point of view from a credit card company, you come to me, you have a certain credit score, and based on that credit score, I'm going to charge you 12 percent. If in the future it turns out that your credit score has deteriorated, and you now are more risky to me, I'm going to charge you the interest rate I would charge to somebody that has that credit score. ...
Is it fair to change the price of the deal after the fact, particularly with people who, generally speaking, are in financial distress, [and] that's why they haven't made a payment? Ninety-five percent of the people in America try to or are making their payments on time.
So it's usually something like a divorce or you get laid off or some tragedy that causes you to start missing payments.
It's the nature of the agreement and the nature of the product. The product is not a promise. And again, I think as an industry we need to make sure people understand this better, but the product is not a promise to somebody that we will lend you that amount of money forever at that interest rate. It is a very short-term revolving line of credit. If the consumer wants to have an assurance that they will have that amount of money for a longer period of time, they could go to another company and get a one-year loan or a three-year loan. Now the truth is, they'd probably pay a higher interest rate for them. ...
Why doesn't the company, which will give you your 15-day notice, [say], "Your score went down; we're going to raise your interest rate," do it the other way around? They are checking all the time, so why don't they tell people, "Your score went up; therefore we're going to lower your interest rate"?
Well, they will to some degree. It just depends. They will to some degree call up and say, "I'm going to increase your limit; I am going to lower your interest rate." It's not something they're actively pushing. I agree with that.
There's another bit of history that led to this issue of increasing the interest rate and looking for what happens to people's credit scores. And that is if you go back six or seven years ago -- the industry started seeing this, and they really hadn't seen it much before -- and that is you have somebody who paid their credit card on time, and they were borrowing slowly but surely more, but they were paying on time. They looked really good, right up to the day they declared bankruptcy and had nothing, and you lost everything you'd lent to them. And what was going on was they were using the credit card in effect to keep themselves afloat, maybe because they were living beyond their means, or maybe because they had lost their job, or whatever.
That led the credit card companies to say: "We can't just look at what's going on with our credit card. We have to go back and remember that what we have here is a short-term loan that goes month by month. And so we have to on a regular basis check their credit score, because if we checked their credit score we would see that they were not making their automobile payment, they were not paying their rent on time, that type of thing, at which point we have a choice to make. We can say either we're not going to allow you to have this credit card loan anymore, and we're going to say pay it off, or we can say, you're now more risky; we're going to raise your rate. Or we can give you the choice," which is the fact of the matter [what] you do when you raise the rate. They can either pay it off, or because they're more risky, they can keep the loan at a higher rate. ...
When we talk to, let's say, your critics on the consumer protection side, they say you represent a powerhouse, a Goliath versus their David. You're the most effective lobbyists in the country, they say in part because of what you stop getting passed, not so much what you do get passed.
But actually in some cases we supported them. These laws on the disclosures and that type of thing came from their side; they were their ideas. Now, we should have laws that have full disclosures, but let me give you an example. There are all kinds of ideas out there now for amendments. There are some in the bankruptcy bill for freestanding bills to add yet more disclosures.
The point of disclosure is, you're advertising your bills with the minimum monthly payment, but you don't tell people if you do that -- and many people are attracted to the smaller payment -- how much that's really going to cost you over time, how much that might cost you if you stuck to that minimum payment. Why not?
Let's use that as a prime example of what can be the problem. We should disclose to people, and we do, the minimum payment. We have agreed, although I'm a little worried about extra clutter here in the disclosure, that we should disclose in plain English an example of how, if you make the minimum monthly payment, it will take you a long time to pay it off.
Now, what some people have proposed, and we object to, is an individual calculation of what it would mean to that particular consumer if they made the same minimum payment they were making that month. I will tell you, I have read that proposed law. That would be a disclosure. By the time you put in all the footnotes if it's a floating rate, everything else, that would be completely incomprehensible and wrong 99 percent of the time --
Well, why don't you help them rewrite it so that it's comprehensible so that people understand, and it will tell you how much you have to pay in the end?
It does. It does by giving you an example. It gives you an example that says: "You have a loan this size. If you have a minimum payment this size, it will take you a long time."
Now, you know what they're saying. They're saying the minimum payment that's on your bill --
The disclosure would be wrong 99 percent of the time. This is going to be a hypertechnical, expensive disclosure that nobody would understand. I read through it last night. I'm a banking lawyer with 30 years' experience, [and] I wouldn't be able to understand the disclosure because there are all kinds of criteria about what happens, a footnote if it's a floating rate. There are going to be all these footnotes. And it's wrong 99 percent of the time, because nobody, almost nobody, pays exactly the minimum, that minimum every month for 20 years and never charges another thing. So we are against disclosures that nobody would understand and that are wrong. We are for disclosures that help people understand. It's that simple. ...
Why are banks and credit card companies together the number one source of complaints according to the Better Business Bureaus?
I've never heard that. I would doubt it. I've never heard that. I would be surprised. But if you say it's true, I'll --
They say when they add up their complaints related to credit cards and banks together, it's the number one source of complaints of Americans who file complaints with the Better Business Bureau.
Well, I'm surprised by that. We've done our own polling, and it shows that, generally, banks are very highly regarded, and that consumers think highly of the banks. It may be because finance is very important to people, and it may be because it's really complicated. And that again goes to the fact that we haven't done a very good job, including us, of helping people understand financial matters. ...
Your critics say that you block every attempt to pass industry reform or consumer protection legislation. You've already talked about minimum monthly payments and why you're against that, so you block minimum monthly payment legislation, interest cap rates and a ban on marketing to college students.
We've done our best to block bad bills. Those are bad bills, and we'll continue to do our best to block them.
Bad for consumers. ...
Who regulates the credit card industry?
The credit card industry is regulated by the regulator of the individual institution. In the great majority of cases it's the comptroller of the currency. The comptroller of the currency regulates national banks.
And the comptroller of [the] currency is also involved in consumer complaints?
The comptroller of the currency regulates banks for safety and soundness, and in many consumer areas.
Do you support the comptroller of the currency preempting the ability of state attorneys general to come to the aid of consumers who are in distress with credit card companies?
The comptroller of the currency has the right to preempt states. There was a national law [for] banks -- this law was enacted during the administration of Abraham Lincoln -- and so yes, we support the authority of the comptroller of the currency to regulate national banks.
And it's not just consumer issues that are at stake here. If state regulators and attorneys general can come in and regulate national banks, consumer issues, they can do it on safety and soundness issues; they can set the terms that banks can charge on deposits and things like that. You don't have a national banking system anymore. It's very simple.
So how many people do you think in the United States know who the comptroller of the currency is?
Credit card holders, how many of them know that the Office of the Comptroller of the Currency is the place they should complain to?
Well, it doesn't really matter, because if they complain to their state bank regulator, the state bank regulator forwards it to the Office of the Comptroller of the Currency. This is the way it's worked, by the way, since the Civil War. It's worked this way since the Civil War. ...
There's another factor here. A lot of this is a turf fight, where we have attorney generals and state [regulators] that for some reason don't think they have enough to do and want to regulate national banks. Let's put it in perspective. The comptroller of the currency has about 2,000 banks it regulates. It has 2,000 examiners. That's one examiner for every bank. Now, for really small banks the examiners go in and spend a couple weeks. The larger banks have permanent, full-time staffs of examiners that have offices in the banks. The ratio is one examiner to one bank. You know what the ratio is at the state level for all the institutions they have to regulate? One to 100. ...
We have a national banking system that is regulated by the OCC, and that's the way the Congress created it. ... And since it started, by the way, there have been two court decisions yet again saying the comptroller of the currency has the exclusive authority, continuing a long line of court cases, all the way back to 1869 that say this is the way we intended to regulate it. We have a national banking system.
Your critics say you got an end to usury, no limit on interest rates; you got an end to limits on fees; you got an end to any limit on what kind of information the members of your association who have credit cards and credit reporting agencies can swap; and you want to have an end to locally based consumer protection organizations like state attorneys general, and you want to get it into your OCC, which is an industry-funded self-regulator.
Well, the first two, basically, are correct [about] the fees and the interest rate. The third one was that we have the authority to exchange any information we want, that is absolutely false.
Well, you don't do medical information, but financial information.
Within limits. There was a law enacted and just reauthorized this year which said that we have a national credit reporting system. It is a very extensive, detailed law on what kind of information you can exchange and what you can't exchange, and what consumer rights are to come in and see that information, get free credit reports for the first time. It's a very extensive set of regulations of the credit reporting system in this country.
Now, there are some people out there who didn't get what they wanted in the bill. But the bill passed overwhelmingly in a bipartisan fashion because it's a good bill. ...
So why, all of the sudden --
We haven't changed. All the comptroller said was instead of having to do it case by case every time -- we've been doing this for 140 years -- we're going to put it in a regulation so people understand it. That was the only difference. ...
So all these attorneys general, law enforcement officers, attorneys like yourself, are simply wrong. They've been exercising authority in the past and investigating consumer complaints without any real authority?
They really haven't been. There may have been in isolated cases, but they have not had the authority, the broad authority, to regulate the consumer activities of national banks. And where they have tried and it has been litigated, they have lost. All the way up to the Supreme Court they have lost. You can listen to attorney generals who will go up and say, "Gee, the OCC doesn't have this authority," and yet we've now had two more court cases that say yes, they do. ...
One of your former colleagues who is an attorney for Citibank [and] who was involved in the decision in 1996 to raise the fees that went to the Supreme Court, and the deregulation of fees, or, if you will, the nationalization of fees -- he was in principle in favor, but he said in practice what has resulted is that we have created a Frankenstein that is out of control, because of the use of fees to get revenue as opposed to discipline customers.
Well, I think an important thing to understand about the credit card business is the competitiveness of it. It's a very, very competitive business with lots of companies offering products with different factors in it, including different interest rates, different annual fees, different fees. ... And the consumer has a lot of choices, and so the consumer gets hit with a late fee, and [if] the consumer doesn't like it, they have a lot of options to go over and change their credit card. ...
So you think it's fine that the fee structure [is] as it is, and the fact that they're being used by some of your member banks to get revenue as opposed to discipline people?
This is not at all unusual in our economy these days. There are fees all over the place.
No, I understand; we've discussed that. But I'm trying to get your reaction, personally, to this.
I work for them. I'm not in the position to tell a credit card company what to do with their structure of how they charge --
That it's not fair, for example --
I think it would be shortsighted for a credit card company to have fees that would make somebody angry, because they're likely to lose that customer, and I think it's going to cost them more to replace that customer than they're likely to get out of the fee. ...
We've asked for interviews with all the major credit card companies. They won't talk to us. Why?
I can't speak to the exact individual reasons. I can give you my speculation on why they haven't talked to you. One is, that's our job. They pay us dues to handle these kinds of, sometimes difficult, assignments. And I think the second reason is, they presume that at least part of it will be fairly negative, and if it's about the industry generally, you don't necessarily want your particular brand to be the one that's singled out. So I'm just speculating. You called us. That's our job, to try to handle this kind of --
You haven't talked to them about this?
Have I? No. This happens fairly regularly, I must say, in any trade association business, that the companies say, "That's your job." ...