Is the hot-off-the-press Credit Card Accountability, Responsibility and Disclosure Act “likely to bring about moderate, and even positive, changes” — as Ryan Bubb and Alex Kaufman argue in today’s New York Times? I’m skeptical.
Bubb and Kaufman — economics doctoral candidates at Harvard — argue that the terms that have been offered for years by credit unions that issue credit cards have long met the terms demanded by this new piece of federal legislation. So because credit unions have obviously been able to earn sufficient profit over the years by issuing credit cards with terms similar to those now demanded by Uncle Sam, investor-owned banks that issue credit cards will similarly be able to earn sufficient profit.
If Bubb and Kaufman are correct, it follows that few, if any, deserving consumers will suffer any increased difficulties in getting credit.
But Bubb and Kaufman (rather mysteriously, in my view) go on to say the following:
Credit union cards are a great test case for how regular cards will perform under the new law. The evidence so far suggests that the credit card act is likely to bring about moderate, and even positive, changes. Card issuers, after all, need to retain customers. Any bank that attempts to pad its bottom line by, say, levying large annual fees will likely see its customers flee to credit unions or to banks that emulate the credit union model.
The last two sentences quoted above make good sense. They raise the question, though: why didn’t we see any such flight or emulation in the past? Were consumers dumb or careless before the enactment of the new legislation and somehow now are smart and responsive?
I haven’t read the research that Bubb and Kaufman mention in their op-ed, but I wonder if they controlled for the possibility that the class of credit-card customers most profitably served by banks differs from the class of credit-card customers most profitably served by credit unions. If the customers of one type of institution differ significantly (in their credit histories, income profiles, rate of card usage, etc.) from the customers served by the other type of institution, then credit terms profitably offered by one type of institution are not necessarily profitable for the other type of institution.
Given Bubb’s and Kaufman’s explicit understanding that competition is at work in the credit-card-issuing industry, it’s not clear to me why they are confident that new restrictions imposed by Uncle Sam will have no deliterious effects upon consumers.
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{ 12 comments }
I think the bill has alredy harmed consumers. I think it has harmed me.
I used a card for a large purchase under a 2.99% fixed forever term. The min payment is about 2% of the balance. I sometimes make the min payment, I sometimes make a little more.
I got a notice in the mail that my min payment was rising to 5% of the balance. I believe the timing of this is not an coincidence; I believe it is in response to the credit card bill that will become effective soon.
Now, I won't be harmed by this much. I have the cash to pay the balance in full whenever I want to, but if I were cash strapped it would kill me.
I think there are a few gaps in arguments put forth by our Harvard scholars:
1. Credit Unions often seek a deposit acct (current or savings) from customers, while traditional credit card issuers dont. Consequently, the losses are lower for credit union cards.
2. Credit Unions have membership fees ($5 to $15 range…which cross subsidizes the profit on credit cards)
Credit Unions also have incredible tax breaks. All I ever have to do to set off my banker friends is to call credit unions "banks." An immediate tirade about unfair competition ensues.
Bill, I wish I had that kind of power with my friends
In my management consulting days, I remember retail people in analagous businesses building these elbaorate models to estimate the cost of acquiring a customer versus the value of having a customer once acquired.
Some customers cost more to acquire than others, some customers are more valuable to have once acquired. But obviously a successful business requires some positive spread between the cost and benefit of acquiring a new customer.
Anyway, that was a long preamble to a simple point:
A credit union has a relatively captive customer base it martkets to. It's average cost of acquiring customers is probably low compared to someone running "What's in your wallet?" commercials during the Super Bowl. A Credit Union also probably has a more homogenous group of customers than someone who trawls broadly for customers through advertising and direct mail.
This is all to say that what terms may be profitable for a credit union to offer based on its customer acquisition cost and average customer value may not work for a card company operating on a fundamentally different business model.
Think Vic is onto an important distinction between credit union cardholders and bank cardholders.
Generally, people who belong to a credit union have a depository relationship with it and may also get or apply for a credit card. With that linkage, credit unions are in a much better position in terms of information about financial behavior of their credit card borrowers.
Bank card issuers market their cards to consumers who meet their credit criteria, and most will not have a prior relationship with the bank.
I think they might have been talking about zero annual fee credit cards, which are apples and oranges (mostly) with credit union product offerings. A common prediction is that credit card customers who don't carry balances are going to see zero annual fee cards disappear because of this law. These people use credit cards for purchase convenience. Maybe they move to Visa/MC debit cards instead. But they're not going to substitute "credit union". It's the kind of issue you would expect a grad student to completely miss, and it seems, they did.
If I am not mistaken, when I applied to become part a Credit Union they required a strong credit check. Credit Card companies on the other hand send out mass applications who meet some business model credit risk. They are willing to take the extra risk for the higher interest rate charged. This new legislation along with the new regulation recently enacted (Google "UDAP") takes away the credit card companies ability to price risk. So now everyone has to pay for a regular card company.
The unintended consequence is that CC companies will either raise their low end credit score or will increase the interest rates. (FWIW, my CC just raised the interest rate, even though my credit score increased.) If they increase the interest rates those who would have purchased an item on credit may just use cash instead.
Don,
I was going to respond to your rhetorical question by saying something like, "Maybe because they're idiots," but that didn't seem too kind. Instead I will go with, "Maybe because they aren't interested in making a sound argument based on logic and reason, but in fact are more interested in rationalizing a predetermined position they've arrived at through pure emotion."
Credit unions are non-profit, so saying that a "credit union can make a profit on credit cards while charging less than banks" is comparing apples and oranges.
Jon Biggar stole my thunder, but his point is correct and important enough to re-emphasize: credit unions are not allowed to make a profit without endangering their license. Any profits must be paid to the members–the account holders. And, one must be a member to hold a credit union-issued card, take out a loan, mortgage, etc.
"likely to bring about moderate, and even positive, changes"
This is a great way to promote the regulatory state.
(1) The changes won't change much. They will be moderate.
(2) Even better, the changes may even do something good.