December 2, 2008
Credit Card Fees Equated to Subprime Mortgages
The interchange
fees banks charge stores for credit card transactions allow them to issue
cards to people who can’t pay off their debts. That, according to a retail
industry group, puts the practice on the same footing as the subprime mortgage
system that helped land the U.S. in one of the worst economic crises in
modern history.
“It’s
another version of subprime lending,” Mallory Duncan, chairman of
the Merchants
Payment Coalition, a trade group representing 2.7 million gas stations,
drugstores, supermarkets and other merchants, told Bloomberg News. “The
system should be fixed before we are in a position of having to bail out
more banks.”
“I
am connecting the dots with the credit-card industry and the mortgage industry,” Lyle
Beckwith, a senior vice president with the National Association of Convenience
Stores (NACS), told Bloomberg.
“The
credit-card business is run by the same banks the exact same way,” Mr.
Beckwith said. “They’re not in the business of making loans based
on the ability to repay. They’re sending out cards based on a business
model of making money off the interchange fee.”
Mr.
Duncan who also serves as senior vice president and general counsel for
the National Retail Federation, said the system of interchange fees generates
revenues for banks whether cards are paid off or not. The charges also
raise costs for retailers and consumers.
The
banks argue the need for interchange fees to cover operating costs and
protect them in the case of card defaults.
“You
have a choice of whether or not you want to accept plastic,” said Jason Kratovil,
vice president for congressional affairs for the Independent Community
Bankers of America. “If the pros outweigh the
cons, you do it. It makes a real pithy sound bite to make it that these
big banks are out there to gouge consumers.”
Discussion Questions:
Do you agree with the connection being made by some in retail that interchange
fees are the credit card equivalent of subprime mortgages? Are credit
card defaults the next big economic crisis America will have to face?
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I have regularly read and heard that the default in credit cards will cause greater problems than the default in mortgages. Of course, the difference being that mortgages do have some assets behind them. Credit cards have none.
As with my colleagues, it seems a day doesn’t go by without a new and ever-more ridiculous offer for a credit card. Who says money is tight? It is ironic. I can go to Chase or BofA and ask for a $50,000 unsecured personal loan. The lending office will look at me like I come from another planet. Then I can go home and with as few as 3 recent credit card offers, write myself over $50,000 in checks from the very same banks.
I guess the banks are only careful if someone is looking. Unfortunately, the government won’t start looking at this segment of the business until it unravels.
I am an ardent supporter of interchange fee reform – and transparency. However, I was siding with the banks on this one, feeling that the position was tad bit extreme, until the line that said that interchange fees help protect banks from defaults. And the Independent Community Bankers of America needs a better spokesman, because his quote makes it sound like they are perfectly aware that they have a monopoly and retailers are simply stuck with them.
I get the reasoning – if banks are allowed to use interchange fees as part of the business model that lets them lend to riskier and riskier consumers, in effect passing the costs off to retailers who then have to spread them to all consumers, then we’re building a model that removes one of the “checks” on the system – that banks are making sure that consumers are credit-worthy when they extend credit to them. Because if a consumer defaults on a credit card debt, it is the bank who should have to take that hit. Interchange fees should only cover the costs of the financial system, not fund high risk bets that banks have no incentive to monitor closely.
Tying that to the mortgage crisis seems extreme and may be putting a lot of spin on something in order to get a headline, but I’ll tell you – the banks don’t seem to be helping their cause in this regard at all.
You couldn’t have picked a hotter topic for discussion amongst the retail community in Canada. Credit card companies have been quietly gouging retailers on interchange fees for the past 18 months through ever increasing rates. Canadian consumers paid over $4.5 billion in hidden credit card fees last year alone.
The Retail Council of Canada has taken this up as one of their big battlegrounds and even created a great website (www.stopstickingittous.com)
Retail groups need to step up to get this issue under control. The current gouging shows what happens when we don’t work together.
Sometimes I wonder how my credit card can rebate me 5% of my purchases every month. It’s a nice windfall, especially since I spend several thousand dollars on business travel. I wonder what these credit card companies are thinking. They keep sending me offers for 0% interest if I take advances of tens of thousands of dollars. It’s so tempting to just borrow a $100,000 or so on the credit cards and just disappear. I wonder how many have done just that? Definitely credit card defaults will rise. So you don’t pay your credit card, what are they going to do to you? Not much. If you don’t pay the electric bill they shut off your power. If you lose your credit card, you just get another one from someplace else. One time I got a credit card for my dog. We used it at the vet a few times for fun. Soon my dog got offers for more cards. Some might call it a business model. I call it insane.
Phil Rubin is right–it’s not about the interchange fees; it’s about mis-estimating the default risks. However, even if there’s a problem (and there likely will be), it’s small potatoes compared to the mortgage problem. Total consumer revolving credit debt is ~$700 billion, while total mortgage debt is well above $10 trillion.
Other than consumer mortgages, the debt we should be worried about is the US Government’s. Not just the “official” debt (which is staggering) but the massive amount of underfunded future spending obligations.
The problems are much the same in the UK. While bank interest rates have been reduced, credit card companies have been increasing their rates and dissing requests/demands from the government that they stop. Meanwhile, they are still sending out ridiculous offers and giving out cards to almost anyone who requests it (and probably their dogs as well). Yes, pretty damned irresponsible and another example of making sure the issuers are OK and charging ridiculous fees.
So, are people here defaulting? You betcha. I volunteer at Citizens Advice and we have had a shocking but totally predictable increase in people getting overwhelmed by their debts and not knowing what to do. Even though credit cards are deemed “non-priority,” the issuers tend to be unsympathetic and unhelpful. Interest charges are sometimes frozen on request but by no means in every instance. Which means the debt just keeps on growing while the likelihood of paying it off keeps on diminishing. Lose, lose, lose. And they can do something about it even if it takes months. Creditors can take defaulters to court and if they default again, can send in the bailiffs and confiscate their property. They can have earnings attached and force people into bankruptcy.
I’ve read that consumers in both our countries are cutting back on their plastic and spending only the money they have (or not spending the money they don’t have, as the case might be). I strongly believe we have been strong-armed and lulled into thinking that the never-never as it is called over here is an acceptable way of life but, equally, I strongly believe we have all been complicit in the greed. We can have money today to buy anything we fancy? Oh, yes, bring it on.
I believe this has the potential to be as big as the mortgage crisis and is the next big shoe to drop. Credit card issuers have been out of control for a long time. They couldn’t care less if you can repay but are only interested in how many cards they can issue. The interest rates that they charge should easily make up for their losses but I suspect they won’t.
And all this was before our economy got so bad. Now it has to be much worse with more defaults than ever. We can only hope that our government doesn’t decide to bail them out of this but that would just be wishful thinking on my part.
Credit card fees, subprime loans–same thing and it wil eventually have the same result. Wait until people start defaulting on credit card loans, car loans and the rest. I smell more bailouts.
But insofar as the credit card companies are concerned, I can’t understand why there hasn’t been some attempt at reform. Frankly, the fees charged to consumers alone are nothing short of usury. These companies are nothing more than loansharks in business suits and should be treated accordingly.
Well it’s a question of responsibility. Retailers want no-fee transactions and they can have them–it’s called cash! Retailers would have you think that the fees come out of their profits, but you all know that fees are added into the price of everything you buy. The fact is that fees are like taxes and there is only one entity capable of paying taxes and that entity is the consumer. By the same token credit card interest rates are a tax. You can call it a tax on stupidity but I assure you that the Credit Card industry knows exactly what they are doing and they are making a profit.
Today’s economy is no surprise at MasterCard and Visa. They saw this coming and have adjusted their business models to cope with the situation. If retailers are seeing increases in transaction cost, you can bet that the increases are accruing funds against a projected increase in defaults. It would be my thought (probably unpopular) that the Credit Card Companies are acting in a responsible manner.
Yes, credit card balances are smaller than mortgage balances in America, but the carrying costs of those card balances is often up to triple the rate of the mortgages. As a result, a credit card holder with just $20K in debt may be on the hook for a larger monthly payment than they owe on their $200K mortgage.
Considering this high cost of credit, the argument that high interchange fees are also needed to offset defaults seems spurious on its face.
Banks may well argue that consumers signed the contract, therefore it’s their responsibility. But card issuers also hike interest rates on the slightest technical premise, make unilateral changes to cardholder agreements, and pile on fees. This puts too many decent people on a downward credit spiral, while raking in profits for the banks. A few consumer protection guidelines–limits on card-issuer behavior, coupled with realistic workout options for consumers–would seem prudent and fair.
Credit Card fees are not the same as sub prime lending. The concept from the beginning was to loan consumers funds when they wanted a service or product but couldn’t afford it easily. How does this mean that the banks are only responsible?
Where is all the “responsibility” talk regarding consumers taking ownership of their own actions. Sure, banks will give a card to just about anyone these days (and I do not agree that they do so) but the consumer is aware of the agreement going in if they bother to read their service agreement. Most do not. And shame on them!
Let’s not forget that Visa & MasterCard are competitors and that no one is “forcing” a merchant to accept credit cards. It is simply good business for them to do so because consumers don’t like to carry cash. If a merchant cannot afford the processor’s rates, then let them stick to cash or find a deal with a processor that fits their unique needs.
Let’s stop blaming the banks for everything…and put the responsibility on both parties where it belongs!
The interchange fees are the least of the problem. The expectation would be that they are actually adequate to cover credit card defults. Hopefully (though it’s probably doubtful) the banks have not mis-forecast the default rates on credit card debts.
The real equivocation is the credit that has been extended and that in turn has allowed consumers to over-leverage just as they did in buying homes they couldn’t afford. Fortunately this securitization problem (and the 10x leverage seen in the CDO market) arent’ the same. The card underwriters are likely just as responsible as those who are spending beyond their means at retail.
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I have regularly read and heard that the default in credit cards will cause greater problems than the default in mortgages. Of course, the difference being that mortgages do have some assets behind them. Credit cards have none.
As with my colleagues, it seems a day doesn’t go by without a new and ever-more ridiculous offer for a credit card. Who says money is tight? It is ironic. I can go to Chase or BofA and ask for a $50,000 unsecured personal loan. The lending office will look at me like I come from another planet. Then I can go home and with as few as 3 recent credit card offers, write myself over $50,000 in checks from the very same banks.
I guess the banks are only careful if someone is looking. Unfortunately, the government won’t start looking at this segment of the business until it unravels.
I am an ardent supporter of interchange fee reform – and transparency. However, I was siding with the banks on this one, feeling that the position was tad bit extreme, until the line that said that interchange fees help protect banks from defaults. And the Independent Community Bankers of America needs a better spokesman, because his quote makes it sound like they are perfectly aware that they have a monopoly and retailers are simply stuck with them.
I get the reasoning – if banks are allowed to use interchange fees as part of the business model that lets them lend to riskier and riskier consumers, in effect passing the costs off to retailers who then have to spread them to all consumers, then we’re building a model that removes one of the “checks” on the system – that banks are making sure that consumers are credit-worthy when they extend credit to them. Because if a consumer defaults on a credit card debt, it is the bank who should have to take that hit. Interchange fees should only cover the costs of the financial system, not fund high risk bets that banks have no incentive to monitor closely.
Tying that to the mortgage crisis seems extreme and may be putting a lot of spin on something in order to get a headline, but I’ll tell you – the banks don’t seem to be helping their cause in this regard at all.
You couldn’t have picked a hotter topic for discussion amongst the retail community in Canada. Credit card companies have been quietly gouging retailers on interchange fees for the past 18 months through ever increasing rates. Canadian consumers paid over $4.5 billion in hidden credit card fees last year alone.
The Retail Council of Canada has taken this up as one of their big battlegrounds and even created a great website (www.stopstickingittous.com)
Retail groups need to step up to get this issue under control. The current gouging shows what happens when we don’t work together.
Sometimes I wonder how my credit card can rebate me 5% of my purchases every month. It’s a nice windfall, especially since I spend several thousand dollars on business travel. I wonder what these credit card companies are thinking. They keep sending me offers for 0% interest if I take advances of tens of thousands of dollars. It’s so tempting to just borrow a $100,000 or so on the credit cards and just disappear. I wonder how many have done just that? Definitely credit card defaults will rise. So you don’t pay your credit card, what are they going to do to you? Not much. If you don’t pay the electric bill they shut off your power. If you lose your credit card, you just get another one from someplace else. One time I got a credit card for my dog. We used it at the vet a few times for fun. Soon my dog got offers for more cards. Some might call it a business model. I call it insane.
Phil Rubin is right–it’s not about the interchange fees; it’s about mis-estimating the default risks. However, even if there’s a problem (and there likely will be), it’s small potatoes compared to the mortgage problem. Total consumer revolving credit debt is ~$700 billion, while total mortgage debt is well above $10 trillion.
Other than consumer mortgages, the debt we should be worried about is the US Government’s. Not just the “official” debt (which is staggering) but the massive amount of underfunded future spending obligations.
The problems are much the same in the UK. While bank interest rates have been reduced, credit card companies have been increasing their rates and dissing requests/demands from the government that they stop. Meanwhile, they are still sending out ridiculous offers and giving out cards to almost anyone who requests it (and probably their dogs as well). Yes, pretty damned irresponsible and another example of making sure the issuers are OK and charging ridiculous fees.
So, are people here defaulting? You betcha. I volunteer at Citizens Advice and we have had a shocking but totally predictable increase in people getting overwhelmed by their debts and not knowing what to do. Even though credit cards are deemed “non-priority,” the issuers tend to be unsympathetic and unhelpful. Interest charges are sometimes frozen on request but by no means in every instance. Which means the debt just keeps on growing while the likelihood of paying it off keeps on diminishing. Lose, lose, lose. And they can do something about it even if it takes months. Creditors can take defaulters to court and if they default again, can send in the bailiffs and confiscate their property. They can have earnings attached and force people into bankruptcy.
I’ve read that consumers in both our countries are cutting back on their plastic and spending only the money they have (or not spending the money they don’t have, as the case might be). I strongly believe we have been strong-armed and lulled into thinking that the never-never as it is called over here is an acceptable way of life but, equally, I strongly believe we have all been complicit in the greed. We can have money today to buy anything we fancy? Oh, yes, bring it on.
I believe this has the potential to be as big as the mortgage crisis and is the next big shoe to drop. Credit card issuers have been out of control for a long time. They couldn’t care less if you can repay but are only interested in how many cards they can issue. The interest rates that they charge should easily make up for their losses but I suspect they won’t.
And all this was before our economy got so bad. Now it has to be much worse with more defaults than ever. We can only hope that our government doesn’t decide to bail them out of this but that would just be wishful thinking on my part.
Credit card fees, subprime loans–same thing and it wil eventually have the same result. Wait until people start defaulting on credit card loans, car loans and the rest. I smell more bailouts.
But insofar as the credit card companies are concerned, I can’t understand why there hasn’t been some attempt at reform. Frankly, the fees charged to consumers alone are nothing short of usury. These companies are nothing more than loansharks in business suits and should be treated accordingly.
Well it’s a question of responsibility. Retailers want no-fee transactions and they can have them–it’s called cash! Retailers would have you think that the fees come out of their profits, but you all know that fees are added into the price of everything you buy. The fact is that fees are like taxes and there is only one entity capable of paying taxes and that entity is the consumer. By the same token credit card interest rates are a tax. You can call it a tax on stupidity but I assure you that the Credit Card industry knows exactly what they are doing and they are making a profit.
Today’s economy is no surprise at MasterCard and Visa. They saw this coming and have adjusted their business models to cope with the situation. If retailers are seeing increases in transaction cost, you can bet that the increases are accruing funds against a projected increase in defaults. It would be my thought (probably unpopular) that the Credit Card Companies are acting in a responsible manner.
Yes, credit card balances are smaller than mortgage balances in America, but the carrying costs of those card balances is often up to triple the rate of the mortgages. As a result, a credit card holder with just $20K in debt may be on the hook for a larger monthly payment than they owe on their $200K mortgage.
Considering this high cost of credit, the argument that high interchange fees are also needed to offset defaults seems spurious on its face.
Banks may well argue that consumers signed the contract, therefore it’s their responsibility. But card issuers also hike interest rates on the slightest technical premise, make unilateral changes to cardholder agreements, and pile on fees. This puts too many decent people on a downward credit spiral, while raking in profits for the banks. A few consumer protection guidelines–limits on card-issuer behavior, coupled with realistic workout options for consumers–would seem prudent and fair.
Credit Card fees are not the same as sub prime lending. The concept from the beginning was to loan consumers funds when they wanted a service or product but couldn’t afford it easily. How does this mean that the banks are only responsible?
Where is all the “responsibility” talk regarding consumers taking ownership of their own actions. Sure, banks will give a card to just about anyone these days (and I do not agree that they do so) but the consumer is aware of the agreement going in if they bother to read their service agreement. Most do not. And shame on them!
Let’s not forget that Visa & MasterCard are competitors and that no one is “forcing” a merchant to accept credit cards. It is simply good business for them to do so because consumers don’t like to carry cash. If a merchant cannot afford the processor’s rates, then let them stick to cash or find a deal with a processor that fits their unique needs.
Let’s stop blaming the banks for everything…and put the responsibility on both parties where it belongs!
The interchange fees are the least of the problem. The expectation would be that they are actually adequate to cover credit card defults. Hopefully (though it’s probably doubtful) the banks have not mis-forecast the default rates on credit card debts.
The real equivocation is the credit that has been extended and that in turn has allowed consumers to over-leverage just as they did in buying homes they couldn’t afford. Fortunately this securitization problem (and the 10x leverage seen in the CDO market) arent’ the same. The card underwriters are likely just as responsible as those who are spending beyond their means at retail.