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Update Andrew Kahr's Response to Bubb and Kaufman

October 21, 2009

Banks, Credit and The American Consumer
The Card Game - On air and online November 24, 2009 at 9:00pm (check local listings)
Some top authorities on the consumer lending industry accepted FRONTLINE's invitation to weigh in with commentary on the industry, its range of products, and the debate about a new regulatory framework. This blog is part of a FRONTLINE/New York Times joint project, The Card Game, comprising a series of reports by the Times and a documentary by FRONTLINE, which airs Nov. 24th. WATCH A PREVIEW »

--Kahr is a financial services consultant

Ryan Bubb and Alex Kaufman are wrong

Whatever the merits of its other provisions, the new credit card legislation will not make bank pricing either more economical for consumers, or fairer to us.

On the contrary, consumers will get less satisfaction from the more restricted set of card offers that will be available. Late payers will pay less in fees, and those who pay on time will pay more. People who borrow and don't pay are not, as Bubb alleges, paying for my vacation. Rather, they increase the rates and fees you and I have to pay.

According to The Washington Post, "To make up for declining revenue, many banks are boosting fees," including not just card but checking account fees. Chase, a very responsible lender which has not encountered either regulatory or financial problems, has already raised one key fee -- balance transfer -- by 67 percent in response to the new legislation and regulation. Higher balance transfer fees penalize consumers for moving their balances to obtain more advantageous terms, and thereby make card competition less effective.

Banks will find numerous additional ways to make up the revenue that the new law takes away from late fees and default rates. Rates on cards have risen since the law was passed and are still rising, while other interest rates are not.

If someday there is going to be EFFECTIVE price regulation for cards, rather than the usual grandstanding, then for sure we will all have fewer accounts and less credit. And there will be far less consumer satisfaction. Example:

When Arkansas capped rates below 10 percent, there were few cards and small lines there -- until we figured out how banks could avoid state rate regulation. At that point HIGH RATE cards flooded into Arkansas. Surprise! Consumers wanted them. They found this preferable to not having a card, or having only a small line of credit.

Those who say they want banks to lend more and want them to place more reliance on proven and conventional products such as credit cards, rather than on credit default swaps and SIV's [Secured Investment Vehicle], will be able to achieve these goals only by maintaining retail bank price flexibility -- not by again restricting it as this law undertakes to do.

Consumers have overwhelmingly chosen cards with long 0 percent periods and rich rewards -- even when these have high punitive rates and fees, imposed if they violate card agreements. We consistently prefer these cards over the low rate cards which, contrary to Bubb and Kaufman's theory, have long been widely available from many smaller banks as well as from other institutions.

Consumers understand $35 late and over-limit fees. There's nothing confusing or complicated about these fees. We prefer 0 percent and reward products with punitive features because we're confident we can avoid penalties. And most of us prefer not to notice when we ARE punished.

Bubb and Kaufman evidently feel that many, or almost all of us, are so benighted that someone has to protect us from the "bad" choices we want to make -- such as accepting a card that will ding you $35 if you are one day late.

Why are they so shy about the implications of this? Surely there are some of us who are clever or righteous enough to merit exemption from their "protection" -- so that we can continue to benefit from a 0 percent rate for a year or more and earn attractive rewards. Why don't Bubb and Kaufman propose a national examination, or an IQ or education or credit score standard so that the rest of us at least aren't forced to take products we like LESS, just to protect what he sees as a foolish multitude?

Interventions by regulators and Congress are not invariably benign and salutary. Minimum credit card payments were greatly increased by the OCC [Office of the Comptroller of the Currencey] a couple of years ago, by regulatory fiat. Did that make consumers wealthier, happier or less likely to default? I don't see it. Card customers are defaulting in record numbers. If payments are higher, fewer people can or will pay. Who gains from that?

Would you want to have to go to a credit union to get a card, as Bubb and Kaufman envision? Or maybe to a mutual S&L [savings and loan], or mutual savings bank? All these institutions are unsuccessful competitors, with miserable market share for cards or anything else. They offer limited services and no convenience.

The epitome of a "mutual" institution is the trade unions, also losing market share. Believe it or not, AFL-CIO also offers cards. Take a look at them. Given the choice, most of us, including most trade union members, have chosen to accept cards issued by major banks such as Chase and Wells Fargo.

Bubb and Kaufman say we're wrong -- you're wrong -- and we should be restricted to types of cards that we have overwhelmingly rejected. Is he right? Or are you?

3 Comments

COMMENTS

Here are two big American myths at work:
1)"you have control".
Not hardly, we live in a country where you cannot make a reservation, get a rental car, or get an airline ticket without a credit card. You cannot get a place to live or a job without a credit check. The idea that a modern average American has a choice is not only a lie but dumb founding. It isn't just the credit issuers it is the credit reporting companies that need reforming.
Here's the truth you have control when you take it away from those who abuse it.
2) "The Midwest is the moral heartland of America filled with bucolic villages, quaint covered bridges, and bustling with the business of our agrarian heritage"
The truth is in the midst of the prairie, in South Dakota and Nebraska, the two most profitable industries are usury and crystal-meth production. Not so different from the beginnings of New York. But I really don't see that any financial benefit from fostering these businesses has helped their economy generally, poverty remains a huge hidden problem there. While a few have made millions it is done making even fewer (in New York) billions. It is not entrepreneurism, it is not innovation, it is just predation and it is designed to be. Aside from buying politicians and bureaucrats, by their admission they use psychological studies and clandestine personal data collection to advance marketing strategies to take advantage of human vulnerability (in other words how can trick or trap you into working for me?). Perhaps someone needs to remember that even Jesus beat money-changers? And we need to remember that it isn't their money they are lending us it’s ours.

William / October 30, 2009 3:17 AM

But gosh, haven't we been told by numerous articles that American banks are "reaping" something like 40% of their net profit from late charges and other credit card penalties?

Banks have taken over from street corner thugs, lending to the desperate. By doing so, on the terms that they have, they have made desperate lives the more desperate. Fantastic, isn't it? That they then would seek to defend such "lending practices" in such a sanctimonious fashion? Oh, the poor, poor banks, to have people speak so harshly about them! How unfair of us...

Arthur / November 16, 2009 5:23 PM

"Card customers are defaulting in record numbers. If payments are higher, fewer people can or will pay. Who gains from that?"

The consumer. People should not need credit beyond mortgages, car loans and other big ticket items. They need to get a real loan for those items. They could also save and then pay for the products and services outright. (Crazy concept ?)

But the consumer is now hooked on credit, and in tough times will even live on credit cards. I've been there.

Personally, I have shed the yoke of credit cards, and I can tell you if a person wants a taste of how real freedom feels they should do the same.

An economy with a foundation based on easy credit is nothing more than a house of cards. Someday the door will be kicked in, and the house will collapse.

Jim / November 20, 2009 4:08 PM
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