“Rein in the credit card games” (via editorial Detroit Free Press)

November 30, 2008



BY ADAM J. LEVITIN • November 28, 2008, Detriot Free Press

As every sector of the American economy lines up to sit on Congress’ lap and ask for an early Christmas present, things aren’t looking so good for American consumers. The visions dancing in their heads are not of sugar plums, but of unemployment, debt, and foreclosures. They’re wondering how they are going to pay for Christmas presents.

Now we learn that Treasury Secretary Henry Paulson wants to save Christmas, by using taxpayer funds to bolster the credit card market. But before we shower taxpayer dollars indiscriminately at every down-at-heel, ragamuffin credit card lender, we should take a hard look at how they got themselves into so much trouble. Just throwing money at the credit card industry without requiring a systemic change in how it does business is merely asking for a repeat of the crisis.

The card industry’s business model is the heart of the problem and needs to change. Just as with subprime mortgages, the credit card business model creates a perverse incentive to lend indiscriminately and ignore delinquencies. Card issuers make money on every credit card transaction, regardless of whether the consumer ultimately pays a finance charge. The issuer receives around 2% of every transaction in a fee paid by the merchant (and passed on to all consumers in the form of higher prices). This fee is called the interchange fee. Card issuers will collect about $48 billion in interchange fees this year.

Because interchange is based on transaction volume, it creates an incentive for banks to issue as many cards as possible, regardless of the creditworthiness of the borrower. By creating a huge revenue stream unrelated to credit risk, interchange encourages card issuers to engage in reckless lending – and virtually every credit card loan is a “liar loan” with no income verification.

Banks have compounded this problem by shifting much of the loan risk to investors through securitization. When card issuers securitize credit card debt, they transform the credit card debt into a pool of assets used to pay off bonds. If the pool turns out not to be large enough, the bond investors take the loss. But if there’s a surplus, it goes to the card issuer.

While card issuers sell off most of the default risk, they keep any upside that comes from inflating their fees and rates. This is a heads I win, tails you lose situation and leads the banks to increase fees and interest rates on securitized debt. If the higher fees and rates cause more defaults, it is investors who bear the loss. If the higher fees result in more income, however, it is the card issuer, not the investors, who benefit.

In order to ensnare consumers in these fees, the card companies employ an ingenious system of billing tricks and traps. The hallmark of credit card pricing is obfuscation through disclosure. Card issuers have created enormously complex pricing structures, with multiple interest rates and fees. On top of this Byzantine structure, issuers then layer a filigree of abusive and deceptive billing practices, buried in reams of fine print.

Making the total cost of using a card utterly inscrutable allows issuers to play a game of three-card monte. Card issuers distract consumers from the total price of credit cards by emphasizing teaser interest rates and rewards programs. Meanwhile, issuers raise the back-end fees that consumers inevitably underestimate. Since the 1990s, overlimit fees have gone up over 115% and late fees over 160%. The rise of these fees has a 99% correlation with the growth of securitization. Because credit card pricing is opaque, the market cannot function efficiently, and consumers inevitably misuse credit cards to their detriment.

The tricks and traps in the fine print alone cost consumers over $12 billion last year, and this is only a fraction of the pain inflicted by the one-two punch of interchange fees and abusive interest rates

Most consumers spend responsibly and live within their means, but the banks have devised a system to encourage reckless overspending – and enrich themselves in the process. But it turns out the maze of tricks and traps even fooled the banks. As delinquencies rise, they are looking for a handout. Whether or not they get it, we need to learn something from this crisis and fix the credit card business model or we’ll all be in line for some special lumps of coal in a Christmas future.

ADAM J. LEVITIN teaches bankruptcy and commercial law at Georgetown Law

The Next Banking Crisis

November 30, 2008

Visa and MasterCard’s merchant interchange fees are more than a $60 billion annual hidden tax on Americans. Since early 2005, WayTooHigh.com has been chronicling the news and providing commentaries on this unfair fee.  The thousands of member banks used to own all of Visa and MasterCard – which are trade associations that operate the vast electronic paymentnetwork.  They still own about 50% after their IPOs.  Will they use these added billions to cash out and run from Visa and MasterCard?  Or, as the banks continue their downward spiral, watch as they use their cash cow interchange fee revenue stream as the next finger to stop the cascade of record losses.  Interchange fees will be the next tool to grab our attention.


November 30, 2008

Fight Unfair Credit Card Fees

The credit card interchange fee is the biggest credit card fee you’ve never heard of.  Nearly $2 of every $100 American consumers spend using credit cards go directly to the credit card industry through the interchange fee.

In 2007 alone, America consumers paid over $42 billion in credit card interchange fees.  Even consumers who don’t use plastic pay more through higher prices.

And the credit card interchange fee is set in secret – consumers don’t know they’re paying it through higher retail prices.  Interchange fees have risen a staggering 133% since 2001.

A rare bi-partisan consensus has emerged:  HR 5546/S 3086, The Credit Card Fair Fee Act which stops the price-fixing by the credit card industry and uses a transparent market-based process.

New On UnfairCreditCardFees.com

[source: UnfairCreditCardFees.com]

“Credit-Card Fees Targeted by Retailers Who Say Banks Overcharge ” (via Bloomberg)

November 28, 2008

Reposted – Bloomberg, reporter Jonathan D. Salant

Nov. 29 (Bloomberg) — The subprime mortgage crisis is giving department and convenience stores and gas stations a new argument in asking Congress for power to negotiate the fees banks charge them to process credit-card transactions.

Retailers such as Target Corp. say banks make so much money from the fees that they give credit cards to people who can’t pay their debts, just as they provided mortgages to homeowners who can’t afford them.

“It’s another version of subprime lending,” said Mallory Duncan, chairman of the Merchants Payment Coalition representing trade groups for 2.7 million gas stations, drug stores, supermarkets and other retailers. “The system should be fixed before we are in a position of having to bail out more banks.”

Duncan, a registered lobbyist, is senior vice president and general counsel of the National Retail Federation, whose board members include Delray Beach, Florida-based Office Depot Inc., Cincinnati-based Macy’s Inc., and Plano, Texas-based J.C. Penney Co.

The merchants want an antitrust exemption so they can band together to negotiate with banks over the so-called interchange fee, usually between 1 and 2 percent of the purchase price, that a retailer’s bank pays the cardholder’s bank each time a customer swipes a credit card. The retailer’s bank then collects the fee from the merchant. Consumers don’t see the charge, which merchants say is built into their prices.

‘Significant Issue’

“This is a significant issue for us, and a very high cost for us,” said Eric Hausman, a spokesman for Minneapolis-based Target, the second-largest U.S. discount retailer. “We do expect the next Congress” to look into the issue, he said.

Retailers say the fees should be part of the discussion when Congress returns in January and looks at overhauling bank rules. So far, the merchants have pushed their proposal without success. The House Judiciary Committee approved it in July, though it hasn’t reached the full House or Senate.

Banking groups and the credit-card companies say the interchange fees ensure that retailers get paid even if cardholders default. If the fees were onerous, merchants wouldn’t be so eager to take credit cards, they say.

“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, the Washington-based trade group for smaller banks. “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.”

Representatives at Bentonville, Arkansas-based Wal-Mart Stores Inc. and Kohl’s Corp. in Menomonee Falls, Wisconsin, had no immediate comment. Spokesmen for Macy’s, J.C. Penney’s, Office Depot, Hoffman Estates, and Framingham-Massachusetts-based TJX Cos. didn’t return phone calls yesterday.

Credit-Card Issuers

Among the largest credit-card issuers is New York-based Citigroup Inc., which this week received a U.S. government rescue package, including $20 million in cash. Two more credit-card issuers, Bank of America Corp., based in Charlotte, North Carolina, and New York-based JPMorgan Chase & Co., were among nine financial institutions receiving $125 billion from the Treasury in October.

“I am connecting the dots with the credit-card industry and the mortgage industry,” said Lyle Beckwith, a senior vice president with the Alexandria, Virginia-based National Association of Convenience Stores.

The banks say credit-card fees cover operating costs, protect banks against default and fraud, and allow them to offer cards with no annual fees and rewards. The charges vary from bank to bank and depend in part on whether the card includes cash rewards or other benefits.

Without the ability to recoup costs, smaller banks wouldn’t be able to issue cards and compete with the larger institutions, said Paul Weston, president of TCM Bank NA in Tampa, Florida.

Fewer Accounts

“You’d see a reduction in the number of accounts,” Weston said. “You’d dial back the features on the account. Some banks would reintroduce fees.”

Financial institutions and their trade associations formed the Electronic Payments Coalition to oppose the legislation, arguing that merchants are simply trying to reduce costs.

“Like any business, they want to find ways to lower their cost of doing business,” said Trish Wexler, a spokeswoman for the coalition, whose members include New York-based American Express Co., Citigroup and San Francisco-based Visa Inc. “We believe that going to Congress and asking for consumers and for the financial institutions to pay is the wrong way.”

Beckwith, whose organization’s members include Dallas-based 7-Eleven Inc. and San Ramon, California-based Chevron Corp., said banks got away from the business model of determining how much a house was worth and how much a homeowner could afford.

“The credit-card business is run by the same banks the exact same way,” 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.”

[source: Bloomberg]

“More customers resume using old-fashioned cash” (via AP)

November 24, 2008

Cash or credit? For more Americans, who have already maxed out their credit cards or are just trying to manage their spending better in the tough economy, the answer is increasingly the old-fashioned one.

Retailers like Wal-Mart Stores Inc., Target Corp. and J.C. Penney Co. are noticing a marked shift away from credit cards in favor of cash and debit cards. A big factor is less credit available as major card issuers cut spending limits and raise fees even for customers who pay their bills on time.

The shift ends Americans’ long love affair with credit cards and is one of the changes in consumer behavior that has emerged since the financial meltdown that could depress consumer spending this holiday season and affect shoppers’ habits long afterward.

[Click here to read more. source: AP]


“Plan to Rescue Citigroup Begins to Emerge” (via NY Times)

November 23, 2008


Federal regulators were considering a new rescue for Citigroup on Sunday, a step that could mark a third leg of the government’s broader efforts to bolster the nation’s financial industry, according to people briefed on the plan.

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.

Click here to read more, source: NY Times]