Author: Adam Levitin

  • Who’s Paying for Your Rewards Points?

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    Adam Levitin

    The relationship between consumers and credit cards gets a lot of attention. But merchants also have relationships with credit cards, and the dynamics of this relationship have significant effects on consumers’ use of credit cards as well as on the competitive landscape in the credit card industry. A lot of my academic work has related to this (I apologize for the self-promoting links), and this post is meant to provide a short summary of some of the issues that arise in this relationship. There are a lot of twists that I cannot convey in this blog posting, but I am happy to carry on a conversation in the comments and refer readers to my articles on the topic for more detail (the most recent papers are at the bottom of the linked webpage).

    Merchants pay banks a fee on every credit card transaction. The fee is referred to varying as the “merchant discount fee” or the “interchange fee.” Because of these fees, credit card transactions are much more expensive for merchants than transactions on most other consumer payment systems: cash, checks, ACH, PIN debit (but not signature debit). There is also significant cost variation among credit cards. Some cards, such as rewards and corporate cards can cost merchants twice as much as others. These fees (tens of billions of dollars) are vital to credit card networks’ profitability and have led merchants to attempt all sorts of strategies to minimize their payment costs.

    The largest component of the fee merchants pay goes to finance credit card rewards programs, which in turn generate more credit card transactions. Although merchants finance the rewards programs, they derive little or no benefit from them. Rather than generating additional sales, rewards programs merely induce consumers to shift transactions from less expensive payment systems to more expensive rewards credit cards. So why, then, do all consumers pay the same price for purchases, regardless of the means of payment?

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  • Bankruptcy Claims Trading: Part I

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    Adam Levitin

    Let me turn to a true bankruptcy nerd topic tonight—corporate bankruptcy claims trading. Bankruptcy claims trading is the buying and selling of claims against a bankrupt corporate debtor. (Trading in consumer bankruptcy claims is an issue that has not been academically explored to the best of my knowledge.)

    Bankruptcy claims trading is virtually unregulated in the U.S. Although claims trades can effect changes in corporate control, they are not subject to securities or mergers and acquisitions regulation. There is also little case law on bankruptcy claims trades; my next post will address a very recent decision in the Enron bankruptcy that is the most significant to date.

    So who on earth would want to buy a bankruptcy claim?

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  • Watching TV for the Commercials

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    Adam Levitin

    I recently saw an amazing commercial on CNN Headline News for an operation called 1-800-Credit Card Debt. It appears to be some sort of debt adjustment agency. The CEO, a guy named, Tom Cooke, I think, was speaking and said “Don’t let bankruptcy even enter your thoughts.” I sure hope these guys are not allowed to serve as a BAPCPA credit counselor. (What I believe to be their website is a bit more balanced.) The commercial, though, raises the question of whether there are any ethical guidelines for credit counselors? What about liability? Malpractice? I would think that a credit counselor should be obligated to neutrally inform people of their full range of options under the law. For some folks, filing for bankruptcy is a wise decision.

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  • Credit Rating Agencies

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    Adam Levitin

    Credit rating agencies have begun to be scrutinized as the mortgage market struggles, but the scrutiny has been on corporate credit rating agencies that graded (and essentially blessed) securitized mortgage debt. But what about the consumer credit rating agencies?

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  • (What Determines) What’s in Your Wallet?

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    Adam Levitin

    How do credit card companies make their lending decisions? Or more precisely, how do they decide who to target with which “pre-approved” offer or other solicitation? This is one of the major “known unknowns”. I’d like to give some intentionally provocative musings and hopefully start a discussion in the comments.

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  • ATM Surcharges and Bank Consolidation

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    Adam Levitin

    Last month Bank of America raised its ATM surcharge from $2 to $3. The surcharge is the fee charged to customers of other banks for using Bank of America’s automated teller machines (ATMs). Bank of America is the first bank in the United States to raise its ATM surcharge to the $3 level.

    Why did Bank of America suddenly raise its ATM surcharge 50%? My theory is below the break.

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  • Two Sides of the Coin: Payments and Lending

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    Adam Levitin

    I’m thrilled to be able to join Credit Slips this week for my first foray into law blogging. I’m hoping to write a bit about credit card advertising, bankruptcy claims trading, reclamation rights, identity theft, and my pet topic of credit card merchant fees. Later this week I’m also hoping to post something timely about Yom Kippur and debts, which might put my background in Jewish history to use (I wasn’t always an attorney).

    For my first substantive post, however, I’ve decided to write about ATM fees, although they are not a “credit” or “bankruptcy” issue per se. Nonetheless, I think they illustrate important themes in my work—the interconnectedness of different parts of the banking industry, particularly payments and credit, and how the competitive dynamics of the banking industry affect consumer lending and consumer behavior. Credit cards are surely the posterchild for the interconnectedness of payments and lending, an issue which I’ll blog about later this week.

    The ties between payments and lending go much further, though, as I hope my post on ATM fees will show. What banks do on the payments side of their operations (including ATMs) affects what they do on the lending side and vice-versa. Payments and depositary accounts fund lending operations, and the costs at which banks can raise funds affects how they lend out money; it’s a lot easier to make a risky loan if the cost of capital is low. Likewise, the consolidation and concentration of the banking industry focuses and increases the banking industry’s political power, which affects all types of banking and lending regulation. So, if we want to think about lending practices, it is also useful to think about what enables and drives those lending practices, as lending is only one part of bank economics.