We have not talked a lot about payment protection plans, those great deals where the bank agrees to pay your credit card balance in the event of disability or death in exchange for premiums. They are great for the banks. In an article in the American Banker, Victoria Finkle and Jeff Horwitz reports that the banks only return to the consumer 21 cents of every dollar paid in premiums and earn profit margins of 50% or more on the plans. Finkle and Horwitz report that the FDIC and CFPB are looking into the plans, with a regulatory probe of Discover Financial Services already underway. The article is worth a read, especially for the surprisingly candid assessments of industry insiders.
These plans are another example of "gotcha capitalism"–a business model dependent on sustained miscalculations or mistakes by the other party to the transaction. For everyone but the consumer at death's door, the premiums are way too high to justify the expense.
UPDATE (2/8): More on the CFPB probe of Discovery from Donal Griffin and Carter Dougherty over at Bloomberg.
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5 responses to “Payment Protection Plans”
My issue with these plans is that many credit card companies are “slamming” unsuspecting borrowers into them without their knowledge and then hiding the charges. They basically set it up so you have to OPT OUT of it instead of Opt In.
I had a bank do that that me until one day I just happened to notice I was being charged for it on my statement. In no way did I voluntarily sign up for that crap.
I have no issue with them offering legitimate products and upselling consumers who might actually want that stuff. I have a problem when companies purposely try to sign you up for something without your knowledge.
I just had to comment on this. I worked in provincial solicitors’ firm dealing with payment protection insurance complaints in the UK. I kept an archive of PPI policies. In the UK these plans were generally sold as “insurance” rather than banking products, perhaps due to less significant regulatory differences. I was truly appalled by some of the things I saw. Policies that cost more than they could ever pay out (unless you were “lucky” enough to die). Policies with coverage that policyholders would never claim on (redundancy insurance of the unemployed… disability insurance for the disabled…). I even spoke to one or two people who had be told, by staff at mainstream banks “no PPI, no loan.” Credit Card PPI was much the same. The most serious and most common complaint was simply that the cardholder never asked for it.
From looking at the plan FAQ on Discover’s website, it looks as if the plan is even worse than the generality of credit card PPI policies: it allows the cardholder to suspend payments for up to 24 billing periods, but is notably silent about whether interest continues to accrue. The plan doesn’t even make cardholders’ payments for them. Most PPI policies provided that payments would be made, rather than merely suspended.
The major problem, as I saw it, with PPI sales was a problem common to co-selling of other products (consider, for example, auto-loans from car dealerships). Co-selling can to perverse incentives on sales staff or third-party intermediaries to push the co-sold products to improve the vendor’s profits on the sell profitable primary product. If something is co-sold, consumers are less likely to shop-around, find out what the going rate for that product is, what its advantages and disadvantages are. If it’s a product they haven’t thought about before then the salesmen who co-sells the product may be the consumer’s only source of information about that product when they decide to take it or leave it. This is particularly a problem when the nature of the product sold is something as abstract as PPI.
You have to be crazy to take any of these products. You’re not insuring yourself, you’re insuring the bank. If you’re dead, so what, let the estate deal with it, and if you’re disabled, you can file bankruptcy, exempt everything and get rid of the balance that way.
Another ridiculous banking “product” is overdraft protection – aka charging a $50 fee, $30 daily interest, and $7 processing fee for the overdrafting incident when the better and much cheaper option would simply be to reject a transaction that takes the customer into negative balance.
IIRC, a lot of insurance commissioners in the US were trying to regulate the product. They lost to the banking regulators, since the product technically is not insurance. (This argument is technically valid. The bank does not promise to pay any third-party debt; it only promises relief of its own debt if certain contingencies are met.) Insurance regulation has its own problems, but is far more likely to be substantive than bank consumer regulation, which largely centers on disclosures.