PBS: Secret history of the credit card

http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html

by kalvin • 18 years ago

76 71 18 years ago

ovi2563• 18 years ago

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However, as this increases the cost on society, and (I think) on yourself in the long term, regulation is imposed - in the form of compulsory insurance.

mseebach• 18 years ago

Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.

awt• 18 years ago

Wouldn't you agree though that if enough people screw themselves, people who haven't screwed themselves start getting screwed, too?

netcan9• 18 years ago

It's true. That's an important distinction.

But apart from 'information' requirements like those imposed on tobacco in many places (advertising bans, warning labels, mass propoganda campaigns) I don't think any more information would help. If you go that path, you may as well regulate.

What would happen if all regulations beyond basic information availability requirements were lifted? If you could sell people whatever they would buy? We know what happens in lower risk, higher value credit.

The effect of large scale defaults is a flavour of everyone else is screwed.

iamelgringo4• 18 years ago

What other product can you purchase, and have the price change after you purchase the product?

What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan?

What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely different companies?

I've meet well educated Md's and people with Master's degrees who've gotten screwed by credit card companies. It's not a matter of education, IMHO. It's a matter of deceptive business practices that people don't really get wise to until they've gotten burned badly. Have you ever tried to read through a credit card agreement? I'm a well educated man, and I can't make heads or tails of those agreements.

I'm sorry, but even an industry needed regulation, its the credit card industry.

fallentimes3• 18 years ago

I agree. When used properly, credit cards are unbelievably useful for consumers & businesses alike. The blame should lie on the person who makes the poor decisions with the credit cards, not the credit cards themselves.

ovi2563• 18 years ago

A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide.

Of course, that's not what happens. So the harm limited to self argument does not apply.

gaius• 18 years ago

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future

How do you assess that except on a case-by-case basis?

nazgulnarsil2• 18 years ago

um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?

ovi2563• 18 years ago

Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).

netcan9• 18 years ago

Mr. Kahr, for one, makes no apologies. "If someone is riskier, he should be paying a higher rate,'' he said. "It's more economically sound. It's fairer for riskier people to pay a higher interest rate, higher fees, whatever it is, than less risky people.

Interesting. What he is really saying is 'what's fair got to do with it? Free markets dissolve the concept.

"If there was a demand for a credit card product that never changed its terms and rates and stuck with the customer no matter what, I'd be running around telling people 'Let's market this wonderful fairness card,'" he said.

"You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."

randallsquared2• 18 years ago

"Free markets dissolve the concept [of fairness]."

Some would say that free markets implement the concept of fairness. Of course, there are no free markets in the world today, to a first approximation, since all the prices and outcomes are distorted by external agencies, so whether free markets are fair is a bit academic.

netcan9• 18 years ago

That is irrelevant really. You may think that the result is fair, but fair is not the reason that is the result.

The free market comes to a result based on a series of self interested decisions. At the core are the buy/sell decisions. I price in a way that maximises my profit, you buy in a way that maximises your utility.

Fair (I admit an ambiguous term) represents something external to this.

sokoloff11• 18 years ago

"What he is really saying is 'what's fair got to do with it?"

Huh? People who are "riskier" paying higher rates and fees IS fair. Would you lend your (presumably hypothetical) deadbeat, drug-addled uncle your entire $100,000 retirement nest egg at the same rate and terms that you'd lend the US government?

Why the hell not?! He's family, and these big mean credit card companies are profit-seeking arms-length lenders, and you would expect them to act morally better (by your standard, not mine) than you would to family? (I would neither expect, nor as an investor, wish for them to do that.)

iamelgringo4• 18 years ago

I'm sure that paying a premium to borrow money once you are a credit risk would be considered "fair" by many. But, the example that you've posed is a straw man. Of course you'd charge a drug addict higher interest than the the US government.

The problem with credit card companies is that they loan the initial money at one price, and then adjust the price dependent on changing credit scores, insurance claims or whims.

And, a large percentage of a credit card companies, profit isn't in the initial interest rate. The profit is made in late fees, over limit fees and credit rate increases. So, they have a vested interest in the customer defaulting, being late in their payments or in going over their limit. And, when those fees are assessed, the customer generally has little recourse.

netcan9• 18 years ago

That explains why they do it, not why it's fair.

alecco• 18 years ago

Many of us would love some digital money/payments/savings/loan fair system. There has to be some way for a startup to turn bigger than Google just with that.

ph0rque2• 18 years ago

This suggests an opportunity for a credit card startup that:

* Charges no fees of any kind

* Charges a rate that is determined by a publicized equation where the only variables are the amount borrowed, time (in, say, days), and the rate.

jimbokun3• 18 years ago

Or in the words of Mr. Kahr:

"You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."

ph0rque2• 18 years ago

That's great validation, to paraphrase Arthur C. Clarke:

> If an elderly but distinguished expert says that something will be successful he is almost certainly right, but if he says that it won't, he is very probably wrong.

shimon• 18 years ago

I'd really love to see an explanation of the structure of the credit card / payments industry in terms of what roles different corporations play, who are the major players in each role, and how they make money. I understand there are networks like Visa, which seem to basically administer account number namespaces and perform some role in clearing payments between banks and merchants. There are also payment processors, who contract with those networks and provide services (card scanners, online payments, etc) to merchants. And there are lending banks, who pay the merchants (via their processors, I guess) and bill the consumer as they would for any loan.

My guess is that at one or more levels of this industry, there is an effective cartel: if you want to offer a credit card that's better for merchants, or consumers, or just run more efficiently, you're unlikely to be able to buy your way in. It does seem ludicrous that 1% to 3% of your purchases (or, from the merchant's side, revenue) goes somewhere into Visaland instantly; this seems like a massive privatized tax in return for administering an electronic payments system which might not be that difficult to replace today.

helveticaman2• 18 years ago

"The industry also got an unintended boost from President Carter. In 1980, as part of a short-lived effort to tame inflation, the White House imposed a freeze on soliciting new credit card accounts. The freeze only lasted for a few months, but it was long enough for credit card companies to introduce a new concept -- the $20 annual fee -- without inciting mass defections."

So this is an oligopoly, and behaves accordingly. Of course it charges sellers extra, charges high interest rates, and all that other shit; they don't allow more entrants into their market.

JackWhite22• 18 years ago

Credit Cards shouldn't be allowed in this world.

newmediaclay• 18 years ago

What it boils down to is that Kahr is just a great businessman. He understood what people wanted, gave it to them and tied in a great revenue model that didn't scare people away.

He did this by truly understanding his target customer and their risk/expense threshold.

PBS: Secret history of the credit card

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