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Class Credit

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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