Perfect Credit? You're Screwed.
Imagine going into your favorite retailer and when you're checking out, the clerk asks if you want to apply for their in-store credit card to save 10% on your purchase. Why not, you think, and you quickly submit the application. It comes back declined. That's not possible, you explain, I have perfect credit. Sorry sir, the clerk apologizes, that's why you were declined.
This very thing happened to customers of outdoors retailer Gander Mountain, spurring a recent lawsuit. Gander Mountain's credit card partner, World Financial Network, claimed that customers who manage their credit responsibly aren't profitable, and the company therefore wasn't interested in their business.
"The only true deadbeat customer is someone who has a card and never uses it," said Curtis Arnold, who runs the credit comparison site CardRatings.com. "Just having good credit alone in today's market is not enough for that customer to be profitable."
The banks are losing an estimated $12 billion per year in credit card fees that recent regulations have curtailed. Now they're scrambling to make up the difference any way they can, from charging annual fees where they didn't exist before to enticing customers to use their cards in financially irresponsible ways.
Add to that the fact that credit card agreements are unreadable to the vast majority of the American population. Since only 20% of Americans read at the 12th grade level the agreements are written in, 80% of credit card customers don't even know what they're signing.
Now, you guys know how I feel about debt and personal responsibility. For the longest time I was happy to blame consumers for the dire financial straits they encountered. But the banks have gotten out of hand, and the government has helped them along the way.
Remember my piece on debt in the Sell Your Options Dearly series? An older buddy of mine read it recently and he reminded me of something I'd completely forgotten (mostly because taxes weren't yet the bane of my existence in 1986). I pointed out in the article that credit cards were a relatively new phenomenon in the mid-70's, and he reminded me that credit card interest was tax deductible until the tax reform of 1986. So for over a decade the government was at least passively complicit in getting America hooked on revolving credit.
Can someone please explain to me how you can borrow money at near zero interest and then lend it out at up to 35% interest (which would have been a violation of usury laws in every state just a few years ago) and still struggle to keep the lights on? How is it that the banks can't make credit cards work within the established framework? And to now punish those consumers who use credit wisely is beyond the pale.
We're all up in arms about the financial reforms and who's going to run the new consumer protection agency, but am I alone in thinking that ridiculous abuses like those above warrant a crackdown? Tell me if I'm wrong.
Comments
The problem is that the Obama
The problem is that the Obama administration opted out of simple solutions (return to glass steagal, nasty crackdown on the practices you mention) because they would be poltiically unacceptable, and opted for overly complex solutions that somehow managed to get squeezed into written law. Meh.
It has a lot to do with mentality, imho: in the country of origin of the maternal side of my family, taking loans is something shameful, with two exceptions: start a business and buy a house. And even for buying a house, families struggle to cover the most they can, and usually cover at least a third of the total cost upfront. In the country I am curently living, it used to be the same until 5-6 years ago, when cheap consumer credit started to spread. A friend of mine, working in a regional retail bank, said that the executives were obsessing on how to get on this trend, and be able to give out loans at a 20% interest rate. Everyday on the journals I see ads on "€5000, no questions asked!!!".
Meh.
I would have been gobsmacked.
I would have been gobsmacked.
sounds terrible - can't open
sounds terrible - can't open an 8th credit card to save $2.17 at american apparel but can secure an extra $500,000 to buy a home
To be honest sometimes I
To be honest sometimes I wonder why my main CC card keeps me around. I have an Amex blue which I use almost exclusively to get the 1% rewards, which I then redeem for a gift cards (trading in for actual products in almost all cases seems to be a complete ripoff). I know there are transaction fees around and whatnot, but Amex has never made a dime in interest off of me, nor gotten any sort of fees from me.
It kind of reminds me of one of the first projects I saw go down at work that shocked me- profitability analysis of our clients which was later used to fire some of them. The concept of firing clients completely blew my mind at the time, and though I understand why it was done, I am still not sure that the best course of action is to flip someone the bird who is actively giving you money.
just another example of
just another example of putting short term interests (making lots of money now) over long term interests (developing a reputable brand that treats customers well and sustains long term profitability).
These businesses get it:
http://blogs.hbr.org/taylor/2010/02/the_rise_of_bu...
This behavior is not in these firm's long term best interests. Building profitable relationships that are sustainable and enduring should be the objective of these firms. Trying to screw over their customers for short term profitability is not. In the end, the banks that win the big business will be the ones that treat their customers well.
looking for that pick-me-up to power through an all-nighter?
Actually our stuff is written
Actually our stuff is written at an 8th grade level. No joke.
I'll break down some of the economics though since they are complicated. First we don't borrow at anything close to 0% interest. We (the credit card industry) get our funding from one of two places. Option one is deposits which we have to pay both interest on as well as operational costs to manage those bank accounts. Option two is the capital markets which is a lot more expensive since the interest is generally fairly generous to the people that buy the bonds and has excess spread language that requires the full payback if our profitability drops below a certain level. So the money that we lend isn't free.
The rest is just a fairly simple expected value function where fees+ finance charges-probability of default*principal balance has to be greater than our cost of funds + operational costs. Its still a profitable business for sure but the price points that "perfect" credit consumers got used to over the last 10 years can only exist when less responsible customers subsidize them with fee revenue. The financial regulation basically just made it so stupid people can't be given enough rope to hang themselves and more savvy folks have to deal with higher prices. Twenty years ago credit card nearly universally were at ~20% fixed rate APRs and that was that. It was only when you could segment and differentiate consumers that price points varied. If the government wants to make it so you can't charge fees then you'll just see the industry creep back to a point where everyone pays higher interest and pure transactors (people that don't carry a balance) will be discriminated against because interchange laws might make it so we lose money on that segment because some perfect credit people will default and fuck us. Its up to you to decide if a $59 over limit fee is justifiable or a $39 past due fee or retroactive repricing for risky behavior (cash advance at the casino for example). Only people who did those things got hit with that kind of stuff though and those practices allowed for rewards cards with 4.99% APR. If you don't like it explain it to your congressman.
Also Libor, do you work in finance? Publicly traded companies are slaves to quarterly earnings. Its the nature of the beast. Generally speaking given a set of strategies to pursue you are going to take the one with the best NPV on a time horizon dependent on vertical views over the next 4-8 quarters.
Aggravate wrote: Actually our
Actually our stuff is written at an 8th grade level. No joke.
I'll break down some of the economics though since they are complicated. First we don't borrow at anything close to 0% interest. We (the credit card industry) get our funding from one of two places. Option one is deposits which we have to pay both interest on as well as operational costs to manage those bank accounts. Option two is the capital markets which is a lot more expensive since the interest is generally fairly generous to the people that buy the bonds and has excess spread language that requires the full payback if our profitability drops below a certain level. So the money that we lend isn't free.
The rest is just a fairly simple expected value function where fees+ finance charges-probability of default*principal balance has to be greater than our cost of funds + operational costs. Its still a profitable business for sure but the price points that "perfect" credit consumers got used to over the last 10 years can only exist when less responsible customers subsidize them with fee revenue. The financial regulation basically just made it so stupid people can't be given enough rope to hang themselves and more savvy folks have to deal with higher prices. Twenty years ago credit card nearly universally were at ~20% fixed rate APRs and that was that. It was only when you could segment and differentiate consumers that price points varied. If the government wants to make it so you can't charge fees then you'll just see the industry creep back to a point where everyone pays higher interest and pure transactors (people that don't carry a balance) will be discriminated against because interchange laws might make it so we lose money on that segment because some perfect credit people will default and fuck us. Its up to you to decide if a $59 over limit fee is justifiable or a $39 past due fee or retroactive repricing for risky behavior (cash advance at the casino for example). Only people who did those things got hit with that kind of stuff though and those practices allowed for rewards cards with 4.99% APR. If you don't like it explain it to your congressman.
Also Libor, do you work in finance? Publicly traded companies are slaves to quarterly earnings. Its the nature of the beast. Generally speaking given a set of strategies to pursue you are going to take the one with the best NPV on a time horizon dependent on vertical views over the next 4-8 quarters.
Awesome post. Thanks.
Aggravate wrote: Actually our
Actually our stuff is written at an 8th grade level. No joke.
I'll break down some of the economics though since they are complicated. First we don't borrow at anything close to 0% interest. We (the credit card industry) get our funding from one of two places. Option one is deposits which we have to pay both interest on as well as operational costs to manage those bank accounts. Option two is the capital markets which is a lot more expensive since the interest is generally fairly generous to the people that buy the bonds and has excess spread language that requires the full payback if our profitability drops below a certain level. So the money that we lend isn't free.
The rest is just a fairly simple expected value function where fees+ finance charges-probability of default*principal balance has to be greater than our cost of funds + operational costs. Its still a profitable business for sure but the price points that "perfect" credit consumers got used to over the last 10 years can only exist when less responsible customers subsidize them with fee revenue. The financial regulation basically just made it so stupid people can't be given enough rope to hang themselves and more savvy folks have to deal with higher prices. Twenty years ago credit card nearly universally were at ~20% fixed rate APRs and that was that. It was only when you could segment and differentiate consumers that price points varied. If the government wants to make it so you can't charge fees then you'll just see the industry creep back to a point where everyone pays higher interest and pure transactors (people that don't carry a balance) will be discriminated against because interchange laws might make it so we lose money on that segment because some perfect credit people will default and fuck us. Its up to you to decide if a $59 over limit fee is justifiable or a $39 past due fee or retroactive repricing for risky behavior (cash advance at the casino for example). Only people who did those things got hit with that kind of stuff though and those practices allowed for rewards cards with 4.99% APR. If you don't like it explain it to your congressman.
Also Libor, do you work in finance? Publicly traded companies are slaves to quarterly earnings. Its the nature of the beast. Generally speaking given a set of strategies to pursue you are going to take the one with the best NPV on a time horizon dependent on vertical views over the next 4-8 quarters.
Good points.
I think part of the problem is, when you have situation like the OP pointed out (too good to get a credit card) then the credit card/finance industry looks like the monster. At the point you are turning people down and only approving people you are making money on then you appear to be a vulture of sorts. Obviously, most of on here can understand the urge to want to run a profitable business, so while we make get stuck in the "too good to get a credit card" category, we also comprehend why.
Oddly, I have been wondering for years how people like my parents get approved for cards. They never really use them (save for a large, one time emergency expense) and they never care a balance. I've known they aren't profitable customers, but at Aggravate detailed, it was more or less a mechanism of the market/industry.
To the intent of the OP's post. The real problem you have here is the growing complexity of politics in general. You can no longer just go with some cut-and-dry reform because somebody's campaign funder's and/or constituents are going to end up being negatively impacted. So there are always going to be people (politicians) opposing it and offering up "better solutions" which are simply workarounds for their friends.
Unfortunately, the consumers are the most ignorant and least educated, so they will always come last. When you thrown in the overall lack of concern and the short attention span of the consumers, this allows politicians nearly free reign to do as they please up until the 6 months prior to reelections at which point they start kissing babies and helping old women across the street.
I'm not a fan of a huge government, but feel that many people are inherently greedy and see them as a necessary evil to make sure things stay on track. The problem is, politicians have lost sight of what really matters (the people of this nation they represent) and those people are letting them get away with it. There is no longer one common goal...to make America the best nation on this planet, to continually make it better. It has turned into a me, me, me situation and not us, us, us like it should be.
One analogy, as poor as it might be, is this highway/freeway/interstate road that Sen. Byrd had built in the eastern part of WV. I remember seeing a report on it, many years ago (long before I had established interest in either party) about how great of a project it was and how much money it brought to the state, etc. Then I was astonished to see, as the reporter finished the piece and the camera pulled back, that the whole report was done from the center lane of this road. Not a single car had passed during the entire taping which amazed me. How much money went to build a road that practically leads to no where and that few people outside of the residents of 2 towns actually use? What a waste of tax payer money.
While some might argue the benefits of the money flowing into the poor area, I hear you loud and clear. Unfortunately for us, the tax payers, the government is only focused on being effective, with the concept of efficiency a foreign concept to them. You see this with the current administration and all those politicians who have no previous private sector business experience.
One can only hope for some real change come November.
Regards
"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so."
- Ronald Reagan
Aggravate wrote: Also Libor,
Also Libor, do you work in finance? Publicly traded companies are slaves to quarterly earnings. Its the nature of the beast. Generally speaking given a set of strategies to pursue you are going to take the one with the best NPV on a time horizon dependent on vertical views over the next 4-8 quarters.
Hey man, not hating on the industry at all, just hating on the short sightedness of this business model. All I am trying to get at is that putting short term earnings over your long term reputation is not the most rational path for the firm (and if it is, then free market capitalism as we know it needs to be seriously rethought).
The discrepancy between modern management theory, which (having read Good to Great and HBR) basically focuses on establishing long term relationships with customers, and the reality, which is F500 corporations enslaving themselves to research analysts on the street in hopes of upping their quarterly reports, is enormous.
This is totally off topic from the original thread lol. However, I guess it needs to be discussed.
If asked the best way to measure CEO performance, most of us would obviously say that the stock price is probably a great way to measure performance. This, intuitively, makes sense. But in reality, better metrics could be used that don't enslave CEO's to quarterly earnings reports and instead force them to focus on building profitable, long term franchises.
looking for that pick-me-up to power through an all-nighter?
The person being turned down
The person being turned down for the credit card should write a thank you letter to the company. People who pay their bills off at the end of the month are bad customers for the CC firms, plain and simple. I can totally understand them kicking them off. On the flip side, the next time a customer defaults I don't want to hear CC companies cry like babies. Your best customers are also your worst customers.
And yes, companies are almost forced to look at short term interests. If you look at Japan for example, they are much more understanding of dividend cuts. Imagine a company during normal times cutting their dividend to save money or invest in something. Their stock would tank hence why you have companies using debt as a way to pay their dividends. Myopic behavior completely rational because of an irrational investing public.
Just like all the fools who want to see BP destroyed until they realize their retirement fund holds a large block of shares. People can never see the interconnectedness of life.
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AMEX charges one of the
AMEX charges one of the highest merchant transaction fees of all the major cards. If you're a big(ger) spender, even though you pay your balance in full regularly (kudos, btw, for your responsibility), you could potentially be more lucrative for them than a lower spender who rolls his balances. I want to say they charge 6% transaction fee, but I don't know if that's factual.
So they're getting fee income off of your business, with no long-term exposure, as the balances are paid monthly. I'd much rather have a book of high fee-earning, responsible clients whose balances turn monthly than a book full of minimum-payment deadbeats whose accounts have a much higher return, also have a much higher risk of default. That's why they keep you around.
^^^ Can that be right? 6%?
^^^ Can that be right? 6%? That sounds outrageously high, considering the average for Visa and MC is 2%. Why would retailers accept AMEX if they have to give up 6 points to do so?
I think AMEX charges 3%
I think AMEX charges 3%
AMEX charges a merchant rate
AMEX charges a merchant rate depending on the volume of transactions the business conducts. The average is around 2.5% though. Good article though and great post Aggravate.
"Why would retailers accept AMEX if they have to give up 6 points to do so?"
AMEX used to have a special program with merchants that if the merchant only accepted AMEX and not Visa or MC, they would incur a lower merchant rate. Pretty sure this is gone now, but they still have special rates in certain industries to get more business.
Some places like Neiman
Some places like Neiman Marcus still only accept Amex I'm pretty sure. You can give a discount to be the sole network a merchant uses but you can't threaten a merchant to pull your network if they take another card (like Visa and Mastercard did and they paid out a few billion in a settlement). Our interchange assumption is about 500 bps for Amex. They kill it with that and since they are generally a more upmarket high spend card they can live on transactors alone. In the last 15 years however they have increasingly gone into revolving balances and got burned on it in the most recent crisis (they had to become a bank so they could have access to the discount window). Visa/Mastercard type cards will only charge about 250 or 300 bps on average (this is negotiable merchant to merchant) and they usually split this 50/50 with the issuer (Chase, Citi, COF etc). Amex owns its own network so it keeps the whole thing.
So for non-Amex network cards banks are getting 100 to 150 bps on transactions and assuming the customer has a small membership fee that barely covers the cost of rewards redemptions and operational costs. Amex can afford to run a pure transactor model because they rape merchants on the interchange but I hardly feel bad considering the margins most retailers have baked in on purchases. I would feel bad for restaurant but then I realize I just paid $60 for a $11 bottle of wine.
The OP is also talking about "boutique" cards given out by specific stores that are attempting to 1) cut out interchange costs which they can give to you roughly as a discount and 2) entice you to purchase more and pay finance charges on those purchases. So if they are giving you 10% off everything on your Brooks Brothers card and only avoiding the 3% interchange they would have paid to Visa/Chase on a credit card purchase they are out 7% ceterus parabus. So for that to be a positive NPV strategy they are going to have to get you to buy enough extra stuff to make up for that 7% drop or just hope you evetnaully carry a balance and pay interest. Actual card issuers cannot deny you for having too good of a credit profile, its illegal. Boutiques can do whatever they want since they are really just giving you a line of credit with their store.
Wow, aggravate, you've turned
Just came across this again