Conservatives Lap Up Credit Card Industry Propaganda
The New York Times reports that, in response to proposed legislation to curb predatory practices by credit card companies, the companies are likely to seek more revenue from customers who pay their bills on time:
Had they read the rest of the article, however (or given this five seconds of thought), they'd have realized that the opposite is actually true, and has been for a long time. Responsible people like me, who pay our credit cards on time, have long been getting a free ride. We don't contribute to the bottom lines of these companies. We pay nothing, but we get rewards, incredible convenience, and the equivalent of a rolling interest free loan every month. It's a sweet deal. As the article notes, there's a term for people like us within the credit card industry: "deadbeats."
The reason we get this sweet deal is because credit card companies make most of their revenues from their loan sharking activities. Their business model is to keep extending credit to people in the hopes that they will eventually overextend themselves, at which point they will get stuck paying exorbitant interest rates every month and find themselves unable to make any headway on their balances. In other words, under the current system, those who have fallen behind on their payments subsidize us.
It didn't use to be that way. People used to pay annual fees for the privilege of having a credit card. The free ride that many customers now get is a result of a predatory business model made possible by the relaxing of regulation. And that business model is ultimately not good for society. It's a big part of the reason we're in our current economic mess.
It's funny to me that self-proclaimed market enthusiasts would assume that "responsible" card holders have some sort of right to a free lunch. Just because you're getting a free lunch right now doesn't mean that you deserve one. If you want a service, you should be willing to pay for it, not expect to be subsidized by the victimization of others, particularly when such a system ultimately hurts everyone.
UPDATE: In case it's not clear from my post (and judging from the comments so far, it isn't), allow me to make a few additional points. First, I'm well aware that credit card companies make money off of every transaction. Thus, even if I make all my payments on time and pay nothing for my card, I'm still making some money for the card company by using the card. This is beside the point, though. Either those fees are significant enough to warrant giving free cards to the "responsible" crowd (in which case, nothing will change) or they are not (in which case, such customers will be asked to pay more, in one form or another). Either way, it doesn't change the fact that 70% of credit card industry revenue comes from interest payments and, thus, those customers are subsidizing everyone else through the exorbitant rates they're paying.
Second, as the title of this post should have made clear, I think most of this is just credit card company propaganda. I don't, for instance, believe for one second that any companies will start charging instant interest on purchasers. Any company that did that would instantly lose all of their customers to their competitors. I think that, at worst, responsible cardholders may be forced to pay small annual fees, like they used to.
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.Conservative and libertarian bloggers have, unsurprisingly, latched on to this bit of credit card industry propaganda as further evidence that the Democrats want to punish responsible people in order to subsidize irresponsible people (see clueless rants here, here, and here).
“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”
Had they read the rest of the article, however (or given this five seconds of thought), they'd have realized that the opposite is actually true, and has been for a long time. Responsible people like me, who pay our credit cards on time, have long been getting a free ride. We don't contribute to the bottom lines of these companies. We pay nothing, but we get rewards, incredible convenience, and the equivalent of a rolling interest free loan every month. It's a sweet deal. As the article notes, there's a term for people like us within the credit card industry: "deadbeats."
The reason we get this sweet deal is because credit card companies make most of their revenues from their loan sharking activities. Their business model is to keep extending credit to people in the hopes that they will eventually overextend themselves, at which point they will get stuck paying exorbitant interest rates every month and find themselves unable to make any headway on their balances. In other words, under the current system, those who have fallen behind on their payments subsidize us.
It didn't use to be that way. People used to pay annual fees for the privilege of having a credit card. The free ride that many customers now get is a result of a predatory business model made possible by the relaxing of regulation. And that business model is ultimately not good for society. It's a big part of the reason we're in our current economic mess.
It's funny to me that self-proclaimed market enthusiasts would assume that "responsible" card holders have some sort of right to a free lunch. Just because you're getting a free lunch right now doesn't mean that you deserve one. If you want a service, you should be willing to pay for it, not expect to be subsidized by the victimization of others, particularly when such a system ultimately hurts everyone.
UPDATE: In case it's not clear from my post (and judging from the comments so far, it isn't), allow me to make a few additional points. First, I'm well aware that credit card companies make money off of every transaction. Thus, even if I make all my payments on time and pay nothing for my card, I'm still making some money for the card company by using the card. This is beside the point, though. Either those fees are significant enough to warrant giving free cards to the "responsible" crowd (in which case, nothing will change) or they are not (in which case, such customers will be asked to pay more, in one form or another). Either way, it doesn't change the fact that 70% of credit card industry revenue comes from interest payments and, thus, those customers are subsidizing everyone else through the exorbitant rates they're paying.
Second, as the title of this post should have made clear, I think most of this is just credit card company propaganda. I don't, for instance, believe for one second that any companies will start charging instant interest on purchasers. Any company that did that would instantly lose all of their customers to their competitors. I think that, at worst, responsible cardholders may be forced to pay small annual fees, like they used to.
posted by A.L. at 12:33 PM
34 Comments:
Umm... don't you realize that the credit card company immediately gets 2% of every transaction?
No, he doesn't.
Conservatives are dumb. That's all this post was posted to imply.
I usually agree with and am very interested in your posts and the clarity of your writing. This one though is wrong. The credit card companies have been using all kinds of predatory practices to make money off of people who can only pay the monthly minumum.They also make a piece off every transaction at the store.Why the "pay on time" consumer or "deadbeat" should be punished for this by not getting a "free lunch" as you put it is not clear to me.Lots of people will just cancel their cards or find carriers who don't punish the good customers. The credit card companies will still make tons of cash, even with lowered interest rates and more regulation.They are just trying to scare us with this "punish the good customer" rhetoric in hopes of not getting regulated any more tightly.If the card's too expensive people will cancel it. I know I will. And by the way, there will end up being banks that don't punish the on time payer and that's who people will go with. The credit card companies are just trying to blackmail congress with threats of higher costs if they are further regulated.
"Umm... don't you realize that the credit card company immediately gets 2% of every transaction?"
Yes, they get transaction fees from retailers. But this is true for all transactions, whether by the "responsible" or the "irresponsible." If these fees were enough to sustain giving free cards to everyone, then nothing would change. But if you read the article, you'd see that over 70% of their income comes from interest payments from balance-carrying card holders. Thus, transaction fees alone aren't enough to make it profitable to give free cards to everyone. Thus people like myself are getting a free lunch.
The entire business model is built around tempting people to overextend themselves and then jacking up the interest rates on balances. That's why people who pay on time (like myself) kept having their credit limits extended, even without asking.
"They are just trying to scare us with this "punish the good customer" rhetoric in hopes of not getting regulated any more tightly.If the card's too expensive people will cancel it. I know I will."
I completely agree, which is why I think is largely propaganda. They will never charge immediate interest because everyone would cancel their cards and go with a competitor. I suspect that small yearly fees will start to become more normal, though.
It does seem to be, in so many ways, a terrible business model - ethically, morally, etc. It's very clever and sensible if we only look at profits. After all, they're selling essentially nothing. They're loaning out small amounts of money for extremely high (dare I say usurious) rates and making the bulk of their money off of people in trouble. It's absurd and it's dangerous. It relies not on good consumer behavior (which is basically what is required for a healthy, sustainable economy) but on its opposite. I'm still literally flabbergasted that it's gone on as long as it has.
To add to the free ride concept:
Visa Signature and the MasterCard World cards are premium cards given to the best customers (like Gold and Platinum once meant).
To pay for the additional perqs that these cardholders get for using their cards often and paying off their balances monthly, Visa and MasterCard add surcharges to merchants who accept these premium cards. And, because of the big V/MC anti-trust suit, both companies have determined that these cards cannot be excluded by merchants. So if you don't want to pay for the high-roller who comes through your store once, and is not repeat business--too bad, V/MC wants to collect their extra due from you to keep the card holder happy and using their card.
TANSTAAFL elites--you just don't see those who are paying for your perqs.
Say I buy an item for $100. The credit card company makes $2. I get cash back or rewards that are equivalent of about 1% (in reality less, but 1% is a nice even number). So we'll say they keep $1 of that transaction.
Now, the $100 is actually a free 30 day loan. Till I pay it, they're out the $100. This costs them whatever the current interest rate is. Right now it that's pretty close to zero, but let's say it's 5%. That works out to a cost of $0.41 for the 30 days they loaned the money out.
Obviously should the customer keep a balance or make a late payment, they're hit with 20% interest rates which more than make up for that grace period.
But assuming I pay it off at the end of the month, this leaves them with about $0.59 to cover the costs of doing business - customer service, marketing, fraud prevention, statement printing, etc.
I can't guess at those costs, but I really can't imagine they're servicing "good customers" at a loss - if I was costing them money they'd drop me as a customer. To suggest otherwise ascribes an unusual level of charity to some of the most evil corporations on Earth.
If anyone is subsidizing my use of the card its the merchants that I buy from. While I'm sure they do make the lion's share of their profits from the bad customers, I can't buy any argument that their behavior is somehow giving me a free ride.
Eric,
I guess one way to look at it is that the amount of money the companies are making on interest payments allows the companies to eek out a small additional profit by extending free cards to "responsible" customers. They make enough from the indebted customers to cover a large percentage of their overhead costs, etc. If revenue is reduced on the interest side, however, more of the overhead/service costs have to be attributed to the "responsible" customers, which potentially shrinks or erases whatever thin profit margin existed with respect to those cardholders. Thus, time to re-evaluate.
Eric,
The US has the highest interchange rates of any region in the world, by far; this is despite the rampant fraud that occurs in some regions. Many of those areas have much higher borrowing costs for banks, so your logic unfortunately doesn't match up with what I have seen on the ground.
A quick primer on card rates:
Nominally, the rate charged is broken down into several pieces. The discount (the basic % rate, which goes to the card issuer), followed by the interchange (flat fee, + fraction of a % that goes to association--V or MC). Added to that can be the surcharges for non-face to face (internet or phone orders), international cards used, and premium cards (as I noted before). In some cases, there can be a reduction, for certain low risk transactions (corporate purchasing cards with validating data) or when the associations want to tap into a market (fast food restaurants). On top of that add the fees of the processors (usually per transaction fees for authorizing and settling the transactions, batch settlement fees, monthly fees, chargeback fees, etc.).
Now the credit risk to the issuing banks is much smaller with debit cards (tied to a bank account) than strict credit cards, but for years they got a pass on that until V/MC settled the Wal-Mart suit on card processing fees. Even though over half of cards now used are debit cards, and only pay out of funds on deposit (so no "lending" and greatly reduced credit risk), the net cost to businesses only drop about 15%, depending on transaction size. (Debit cards have higher per transaction interchange, but lower discount, so low $ transactions <$50 IIRC, which are much more likely with debit cards, can cost nearly as much as credit card sales--and see note on debit cards, above.) Even when they have lost, banks have gamed the rules to insure continuing profits on transactions.
The premium "good" customers are paid for out of increased discount for the merchants (which has been the American Express model for years). Poor customers finance themselves through ever increasing and ever multiplying fees. When I moved from a good customer to a poor customer last year, I got the shock of added fees when my limit was first lowered below my balance, then I was charged an overlimit and a late fee (because I didn't pay the amount due, which was the new amount over limit)--yes, there was a grace period, but not long enough to hit based on the payments I had been making. IIRC, the last industry sources I had access to before moving from a card processing focus had at least the plurality of profits for cards and banks coming from fees, and not interchange/discount.
For some reason I am reminded of what Columbus did when he wanted to extract gold from the Carribbean natives.
Eric, you are assuming that the CC companies aren't gambling that their "bad" customers (The ones that pay off every month) don't become "good" customers (ones that owe them fees and interest). Given the high amount they make as soon as you get into a little financial bind and can't pay off everything in a month, it is totally worth them making nothing, or a small loss, every month. They COULD make lots of money, if the keep you on as a customer a little longer. Just like casinos losing money on free drinks, say - they'll make it back eventually. It's a numbers game.
A.L.,
There's another possible result from lesser revenues from interest that you have forgotten or ignored: lesser profits corresponding to lesser dividends and lesser salaries. Executive salaries to be precise. The pay of lesser mortals isn't likely to figure into the reasoning of people functioning at this level. I don't know it's a realistic possibility that theses things will actually go down, but I'm sure that this is the real result that the credit card companies are trying to avoid with with their propaganda campaign now.
The purpose of the article in the Times is to foster a class war attitude towards credit card industry reform. Whether the credit card companies can make money off their regular companies or not is immaterial: they make their big money off deliquent accounts where they charge 29.99% interest, in addition to hefty late fees.
Now the banks don't want to lose this business. So they manufacture this "gosh, it's too bad that diligent card users are going to have to be punished now" story line.
Banks are not losing money off credit card transactions. All of the "innovations" in the banking industry in recent years have consisted of finding ways to charge money for things that used to be free. Use an ATM? In spite of the fact that you are saving the bank money relative to a human transaction, you have to pay a fee.
our business uses credit and debit cards alot, and we have had to tack on a fee for using a card as opposed to paying by check because of the fees the card companies charge. american express is the worst-they charge 5% of the charge on their card. so if a customer charges 4000.00 on their card we are supposed to eat 200 dollars! of course we offer the customer a fifty dollar discount to pay with a check or use another card (the rest either charge 2% or 3%).
-proudliberal
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Credit card companies are ruthless -- they are not giving a "free ride" to anyone. They have determined that their present policies maximize their profits from those who pay their bill each month. This legislation won't cause them to change the the way they deal with those who pay each month, because that would reduce their profits.
-proudliberal
careful; there are certain rules you don't want to break on card acceptance:
Don't process sales for other businesses (factoring)
Don't impose minimum transaction amounts
Don't charge customers for using cards.
In the U.S. Other countries, fine, but in the U.S., you can discount for cash, but not increase for credit/debit. It's a good way to get hit with fines, or lose your processing account permanently.
You also need to get a better processor. If you are a brick and mortar store with more than $5000/month in sales, you should not be charged more than about 2.25% on swiped sales, and 3.5% on Amex. You're getting ripped at your current rates.
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Do you want to know how to induce a REAL DEPRESSION? Get all these
'good customers' to cut up their credit cards (like I will if these weasels try charging me for my card) and watch purchasing habits of these same 'good' customers dry up.
Yes, there will always be cash and perhaps even debit cards (although I'd think these would be even bigger losers for banks), and people are still going to need to buy groceries and such, but the disapperance of easy discretionary spending that a credit card gives would really, really hurt the economy.
I'd also think that those industries that count on the availability of easy credit card transactions: airlines, online shopping (Amazon, ebay, etc), car rentals, teeney-bopper clothing shops, perhaps even restaurants... would be most severely hit.
CarpeNoctem,
As I noted above, debit cards, even though they nominally bring in less income for banks (lower fees), actually are better for profitability because they do not have the same charge off risks as credit cards.
The real losers on debit cards are merchants, as if they could take transactions as ATM cards (and some try to force this option), the per transaction costs are higher, but there are no discount fees, so the cost quickly reaches a maximum.
Don't forget about the cash customers. They too are subsidizing the use of credit cards through the higher prices business charge to pay for the 'privilege' of taking our money via a credit card.
AL - aren't you assuming that quick payer = no profit to V/MC?
I disagree with the "free lunch" assertion. Either the original business model works, or it doesn't. Nobody is subsidizing me. (Repeat, as needed.) V/MC make something off of me, though I pay on time, and always did. Otherwise they would not have pushed their cards on me, back in the day, before dereg.
The fact that 70% of modern day profits comes from interest and late fees simply illustrates how highly profitable usery can be. The other 30% comes from -- what?
Yes, merchants pay. It's part of the cost of doing business, should they so chose. My favorite breakfast spot doesn't take credit cards.
Maybe, as you suggested, the business model doesn't work. IMHO, it does, and the additional opportunity to gouge is simply irresistible. And as DH pointed out, much of the gathered-in money goes to execs.
As an aside, those who run high balances are those at greatest risk for default. Risky borrowers always pay more. The problem here is with the usurious rate structure, and mid-game rule changes, rather than the underlying concept.
Don't forget about the cash customers. They too are subsidizing the use of credit cards through the higher prices business charge to pay for the 'privilege' of taking our money via a credit card.Think of this as a "privacy premium". (Yes, I'm a heavy user of cash and this hidden subsidy for credit card users affects me financially.)
Oh brother, i can't even believe we need to have this argument. Quit deluding yourself, people, by convincing yourself that you're not getting a free ride because the merchants pay a fee every time you use the card. YOU (and I) get an interest free loan, YOU (and I) get the convenience of being able to make a $1200 purchase without needing to carry $1200 cash with you (did i mention, an interest free $1200 purchase?), and YOU get frequent flier miles. Yet neither YOU (nor I) pay one penny for that. And WE'RE not getting a free ride? Please.
Just the mere fact that people who are getting a free (yes, free) service may need to now pay something for it when card companies are no longer able to assess exhorbitant fees on others, by definition means they're subsidizing you (and me). Just deal with it already.
Now, whether it would be smart for card companies to chase away good payers by charging them fees, well, that's a whole 'nother argument. But again, don't delude yourself into feeling good by convincing yourself you're not getting a free ride paid for by people paying 35% interest rates.
"and YOU get frequent flier miles..." - Frankie
Are those really good for anything any more? Would it be worth getting a new card for getting frequent flier miles (my current card has no such perks, but also no fees whatsoever). Just sayin', I've heard freq flier miles aren't all they're cracked up to be.
On a different note, Fraud Guy, where did you get that list of "things not to do as a merchant"? Is it really unlawful or in violation of the merchant/CC Card agreement to impose minimum purchase amounts for credit cards? Little restaurants around here love to do it.
Frankie -
Disagreeing with you doesn't make me delusional. If anybody is subsidizing my purchase, it is the merchant. I've bought home improvements set up for 24 months with no interest - not on a credit card, via a finance arrangement set up by the contracting company. That is part of their cost structure and it is in their business model. Yes, lots of people are getting ripped off, but it is the finance company CEOs who benfit, not me.
Chris,
I worked in card acceptance for years--7 years at a merchant acquirer, and 7 with different merchants. Some rules have been modified, but the basic concepts remain the same.
Some of the details will be in the merchant agreement, but most are online, for example in Visa Regulations section 5.2.F Card & Cheque Acceptance/Prohibitions:
"A Merchant must not:
...
-- Establish a minimum or maximum Transaction amount as a condition for honoring a Visa Card or Visa Electron Card"
{warning--link is PDF of rules}
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First of all, not all card companies stopped charging fees. American Express still charges one and also charges to be in their points program.
As for the rest, I suspect they are just bluffing. If any of mine started an instant interest charge I would immediately cancel the card. Likewise, if they take away the points or rebate programs out they go. If they start doing that I do not need them and will merely use AMEX or just my debit card from the credit union.
Unless these other cards (who send me at least five new offers per week) differentiate with no fees and good programs I don't need them. I think most people feel that way and very quickly the card market would consolidate around Amex and debit cards and the gougers would lose massive share.
They brought this on themselves by creating all those programs to take market from the traditional card issuers. Their usury is pure corporate greed and that must be stopped.
Why would a money-making company encourage what you call "deadbeat" behavior? These companys trip over themselves to provide the perqs and garner more customers.
Can it really be true that so-called responsible customers are exploiting a system at the expense of others?
Since participation in credit card usage is entirely voluntary, then the current pricing structure is entirely fair because it matches the cost(supply) with consumer behavior (demand).
Legislation didn't set these pricing structures, the company's themselves did. If they government had stepped in and created this kind of mess, then you'd be able call "unfair" practices.
Ironically, that is what has happened NOW.
Can it really be true that so-called responsible customers are exploiting a system at the expense of others? Yes, it can be true. The credit card companies call such people "deadbeats" for a reason. They banking on the significantly > 0 odds that a "deadbeat" will become a "revolver", or a late-payer.
Jazzbumpa said:
Frankie -
Disagreeing with you doesn't make me delusional. If anybody is subsidizing my purchase, it is the merchant.------
Alright, if that's the case then there's no issue here - fees won't need to be imposed on people who currently pay none. We'll see.
They used to call them "charge cards." You were expected to pay in full upon billing. Then they switched to the "credit card" model. That's when all the trouble started.
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