Tag: credit cards

  • Voice–The Credit Card, Not the TV Show

    Posted by

    Katie Porter

    For years, "product innovation" in financial services made consumer advocates squirm. This was the cover term for the 2/28 teaser ARM, automatic and costly overdraft protection, and direct deposit "payday" style loans. It was a great term because it's hard to be anti-innovation, especially in a world where every day a new app or technology proves useful. A new credit card, called "Voice" from Huntington Bank, is innovating in the credit card space. While the pros and cons of rewards are debatable (Ronald Mann's Charging Ahead has a dated but good discussion of rewards), the marketing and design of the Voice card are intriguing. What do I see?

    1) The personification of the bank. It "listens." Consumers can "tell the card" things.

    2) Big touted benefit of a one-day late fee. That's a nice consumer perk but perhaps telling about how many late fees are really the result of simple mistake rather than financial hardship. And that's a fact that perhaps should play into what a "reasonable" v. "abusive" late fee is.

    3) That consumers presumably will be drawn to this idea of switching up rewards. If people forget to pay on time, are they really going to log on at the start of every quarter to change up and maximize rewards. The card allows consumers to "Earn a point per dollar on all purchases with Voice and pick a triple rewards category. So, you get the flexibility to earn 3x points in the category where you spend most. Go from triple gas points in fall to triple utility points for winter. It’s your choice." Huntington presumably will track whether consumers actually make such choices, and it would a field day for a behavioral economist to study how consumers use such a product.

    4) No annual fee, so hey, maybe chasing rewards on cards with high annual fees would do well here. Typically we see high rewards paired with high annual fee (think airline cards). Query how good the rewards perks can be if the bank doesn't have annual fee revenue. Maybe the answer is that Huntington is marketing this card to its retail customers, and it knows enough about their habits to have optimized this product–both in terms of attracting them and being profitable. There's been a lot of talk about personalized medicine, but personalized finance is a reality too.

  • The Disingenuous Mr. Russell Simmons

    Posted by

    Adam Levitin

    Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment.  Simmons claims that his card takes "the poor, the voiceless and the
    under-served" out "from the claws of payday lenders and check cashers, from
    humiliating
    lines waiting to cash their paychecks and then more lines to pay their
    bills." 

    Gosh, you'd think that Russell Simmons was operating a
    charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users.  (See here for more details on the RushCard.)  The RushCard is an alternative to check-cashing outlets, but that's all that it is–another high-cost financial service for the poor.  I'd be curious to know how much revenue the RushCard makes on interchange; I suspect it would still be quite profitable without it.  Maybe Russell will show us the books.

    Russell Simmons is claiming to be the voice of minority communities and the poor on interchange.  He's not, and his personal financial interest in maintaining high interchange rates compromises him as an advocate on interchange, just as the fees on the RushCard compromise him as an advocate for the poor. 

    It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees.  The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.  

    Simmons also misunderstands (perhaps deliberately) the Durbin amendment in his post; he complains that it regulates debit interchange while leaving credit interchange untouched, and that this dings the poor, while leaving the rich unscathed.  That's just wrong.   While part of the amendment deals only with debit cards, part covers all payment instruments, including permitting merchants to offer a discount for debit (how does that hurt the poor?).  The impact of reduced debit card interchange will inevitably be reduced credit card interchange rates for smaller ticket transactions where credit competes with debit. 

    The logic of the Durbin amendment is straightforward:  debit transactions are just like checks, but with even lower fraud risk because of real-time authorization.  Checks clear at par throughout the entire banking system.  Therefore, debit should clear at par too (or close to it–the amendment is generous in this regard).  If debit clears at near par, credit interchange rates will drop, and because merchants are, in general, more price competitive than card issuers, the savings will be largely passed through to consumers.  The card industry will have to learn to live with reduced (but still substantial profits), which should incentivize the card industry to innovate to develop new, efficiencies or higher margin products.  Net result:  consumers win.

  • Interchange Irony: George Mason University Edition

    Posted by

    Adam Levitin

    George Mason University law professors Todd Zywicki and Joshua Wright have been the leading (and almost sole) academic defenders of the current interchange fee system.

    So how's this for irony:  Zywicki and Wright's own employer announced that it will no longer accept Visa for tuition payments because interchange fees are too high.  (You'll have to watch a 15-second BP propaganda bit before the video on GMU).  The school doesn't want other students or taxpayers footing the bill for rewards programs.  Antiregulatory ideology runs deep at GMU, but clearly it won't get in the way of a real world business decision.  

    Note, btw, that GMU was able to opt-out of taking a particular card network (somehow the other networks are permitting a convenience fee to be tacked onto the tuition bill to cover interchange).  Universities are in a rather unique position of being able to refuse to take cards altogether.  For most merchants, taking payment cards is just part of operating in the modern commercial economy.  

  • Pro-Consumer Innovations in Payments

    Posted by

    Adam Levitin

    Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important
    pro-consumer innovation in payment systems of the past two decades has been the
    general disappearance of annual fees on most credit cards." 

    Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.  

    The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.  

    In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default.  I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes.  (Please pipe in if you do.)  

    The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments.  Maybe others have thoughts about pro-consumer innovations.  Comments are open.  

  • New Credit Card Tricks, Traps, and 79.9% APRs

    Posted by

    Adam Levitin

    The card industry is at it again, devising new tricks and traps to disguise the cost of its products and avoid price competition.  Unfortunately, this was exactly what I predicted in the wake of the Credit CARD Act.  I was a vocal supporter of the Credit CARD Act, but I also viewed it as a missed opportunity.  Congress focused on prohibiting particular abusive credit card practices, but left the door wide open for the card industry to put all of its ingenuity to work devising new substitute practices.  Far better if Congress had taken up a regulatory model that permitted card issuers to charge only certain specified types of fees (at whatever level). 

    Now, even before most of the Credit CARD Act's provisions have gone effective, a new report from the Center for Responsible Lending finds that the card industry has already invented a new bunch of tricks and traps.  (I'm still waiting to see an issuer implement my personal candidate–the "high risk transaction security fee"–which could be applied to pretty much any transaction the issuer wants to deem high risk.) 

    One thing the Credit CARD Act did quite effectively, however, was clamp down on so-called "Fee Harvester" cards-ultra subprime cards that charged extremely high upfront fees, but offered minimal lines of credit.  The Credit CARD Act limits upfront fees to 25% of the line of credit,
    effective in February 2010.

    It's interesting to see how fee harvester card issuers are responding.  Many assumed that they would simply be out of business.  I'm not so sure that's the case.  A recent news story about South Dakota-based First Premier Bank, NA, perhaps the king of fee harvester companies, shows how the card industry is adapting.  Currently, a First Premier card bears a 9.9% purchase APR, a $250 line of credit and at least $256 in fees in the first year, $179 of which are immediately applied.  The $256 is divided among four different fees. 

    First Premier is apparently now using direct mailing offers to test a new product that conforms with the Credit CARD Act.  This new card has $75
    in fees and a $300 credit line, but a 79.9% purchase APR    .  Yes, you
    read that correctly.  79.9%.  Now 79.9% APR looks pretty shocking, but it turns out that the new card is actually be cheaper than the old First Premier card. 

    (more…)

  • The Australian Interchange Experience

    Posted by

    Adam Levitin

    The New York Times ran a story on the impact of interchange regulation in Australia.  Calling it interchange regulation is somewhat of a misnomer.  The Reserve Bank of Australia in fact acted to bust up anticompetitive private regulation of interchange.  Payments are an area with intense regulation, but that regulation is often private self-regulation.  Thus, what occurred is better thought of as interchange deregulation. 

    Guess what?  Interchange regulation is working exactly as one would have predicted.  Consumers who want rewards have to pay for them directly now.  They can't free-ride off of other consumers (using cash, debit, or non-rewards credit cards) to finance their frequent flier miles, etc.  Not surprisingly, annual fees have gone up for rewards cards.  This has also pushed consumers toward greater debit card usage, which is often a healthy thing.  (To be fair, there is a similar move to debit in the US without interchange deregulation, so the causation in Australia is questionable.)

    A predictable problem has arisen in Australia, however.  Some merchants are now imposing credit card surcharges that are greater than the cost of accepting credit card transactions.  This isn't good for consumers.  But it isn't a problem with interchange regulation.  This is just a symptom of less than perfectly competitive markets in other areas of the economy.  Excessive surcharging is most likely to appear in the least competitive areas of the economy. 

    (more…)

  • Interchange Legislation Overview

    Posted by

    Adam Levitin

    It's summer, so it must be interchange season here in DC.  A trio of interchange-related bills have been introduced (or really reintroduced) in Congress.  First, there is the House version of the Credit Card Fair Fee Act of 2009, H.R. 2695, sponsored by Representative Conyers.  Second, there is the Senate version of the Credit Card Fair Fee Act of 2009, S. 1212, sponsored by Senator Durbin.  And third, there is the Credit Card Interchange Fees Act of 2009, H.R. 2382, sponsored by Representative Welch.  I think it is useful to summarize what these bills would do and their approaches to interchange regulation. 

    (more…)

  • Credit Card Line Reductions and Eliminations

    Posted by

    Adam Levitin

    Chargeoffs In the coming months and years we are likely to hear the banking industry and its supporters blame the Credit CARD Act for reductions in consumer credit availability.  That might end up being the case, but we should be skeptical of the claim (and of the magnitude asserted) until we see some data that supports such a finding.  The fact of the matter is that there is already a tremendous credit contraction going on in the credit card space.  The chart using data from Carddata.com shows the annualized rate at which card issuers are closing down accounts at their own initiative.  As of April, it was 19.01% (I understand that to mean that in April about 1.6% (=.19/12) of all accounts were closed).  Remember, this is account closings, not credit line reductions, which are occuring on top of the account closings. 

    In other words, a fair conclusion is that even without the legislation, we'd be seeing credit lines cut and eliminated right and left.  That means it just won't do to rest on priors and fall back on the syllogism of more regulation means more costs means less credit available.  To be fair, there could be an anticipatory effect showing up in the account attrition data.  But the legislation
    doesn't start to go into effect until late August, and a lot of it
    doesn't go into effect until 2010.  So a profit maximizing issuer would
    probably want to close the accounts that are profitable under current
    law, but not under the new law on the day before the legislation goes
    into effect, rather than a few months ahead.

     

  • Credit Card Defaults–Piggybacked Underwriting

    Posted by

    Adam Levitin

    If you want to get a window on why credit card defaults are soaring, look at credit card underwriting.  There is virtually no income verification in the card industry–all loans are stated income loans (a/k/a liar loans), and we know how well that worked for mortgages (and there's more temptation to lie about a card as a default won't cost you the house). 

    The card industry does do some ersatz income verification, however, using credit reports,but this might only exacerbate underwriting problems.  Credit reports only list debts, not income, but card issuers are able to piggyback off the underwriting of lenders that do income verification.  Thus card lenders will look at mortgage debt on credit reports to gauge income levels.  If you have/had a large mortgage, that implies a large income. 

    The problem with this style of underwriting is that it relied on mortgages being thoroughly underwritten both in terms of income verification and in terms of mortgage-debt-to-income ratios.  As mortgage lending standards went out the door, so too did card lending standards.  Card issuers ceased to get the benefit of mortgage lenders' income verification and got squeezed as mortgage debt gobbled up an increasing share of borrowers' income. 

    To be sure, there are other factors now pushing up credit card defaults to historic levels, unemployment being chief among them and the inability to refinance credit card debt by using home equity, but what amazes me is that even now that we know that mortgages size is a completely unreliable indicator of repayment ability, leading card issuers are still piggybacking off of mortgage underwriting.

    (more…)

  • Credit Card Legislation

    Posted by

    Adam Levitin

    The most significant credit card reform legislation since the 1968 Truth-in-Lending Act cleared its last major hurdle today, when it was overwhelmingly approved by the Senate.  There are some not inconsequential details to iron out in conference (House version, Senate version), but the bill is as good as passed. 

    It's worthwhile stepping back for a second to gain some perspective on this bill.  Since 1968 there has been only minimal regulation or legislation relating to credit cards.  Four years ago, the card industry pushed through the BAPCPA and then poured money into defeating Tom Daschle's reelection bid.  The industry looked invincible.  The banking industry showed that it still has significant political muscle when it defeated cramdown legislation last month. 

    That there would be any regulation of the card industry today is quite remarkable.  Some of the credit goes to the card industry's greed—for all that the industry knows about consumer behavior, it didn't realize that when consumers are squeezed too hard for too long, there will be legislative pushback.  But a lot of the credit for the legislation goes to the Congressmen and their staffs that really pushed the issue, especially Representative Maloney and Senator Dodd, as well as to advocates and academics who worked very hard for the legislation.  From the consumer groups, Travis Plunkett and Ed Mierzywinski deserve particular plaudits.  And some of Credit Slips' Finest had a hand in the legislation:  Robert Lawless, Katie Porter, and Elizabeth Warren, and non-Slipster Lawrence Ausubel.  Congratulations!

    (more…)