A Different View On Credit Card Regulation

I love dissent and I love a good debate. My views on the proposed credit card bill of rights is well known (I strongly support the idea). From the Huffington Post blog site, comes a different view on the regulation of the credit card industry. Alan Schram, a hedge fund manager has written an editorial titled “The Folly of Credit Card Regulation.”

It it he makes the argument that the credit card industry does not need any more regulation as it is already a very competitive marketplace. He contends that further regulation will restrict credit, and increase interest rates, which will have a negative effect on the overall economy.

Where I Agree With Him

I do believe that the current credit card industry is very competitive. I frequently remind disgruntled credit card customers that their business is valuable, and they should move on to another bank if they are not treated the way they deserve to be. I may even grant, to a limited extent, the argument that increased regulation will lead to somewhat reduced credit availability, but that is where our opinions differ.

Where I Disagree

First of all, his argument that credit cards are very competitive, while true, does not mean that consumer protection is unnecessary. That argument could be made for any competitive industry. The insurance industry is also highly competitive, should we not regulate it? Consumer products too are a very competitive market, should we end regulations there?

I would ask Mr. Schram why the current level of credit card regulations is optimal? I think most consumers would argue that it is in fact under regulated and that credit cards are too widely available. People receive numerous credit card offers that fill up their trash cans and shredders already. It is not unheard of to receive offers meant for deceased relatives, children, and even pets. I think most Americans would gladly trade a few of these offers for some realistic consumer protections.

Furthermore, burying terms and conditions in many pages of fine print is not my idea of a competitive marketplace that is consumer friendly. I am just at a loss to think of another industry that reserves the right to change the terms of it’s contracts arbitrarily on transactions that have already occurred.

Finally, I would also argue that not every reduction in credit is a bad thing. Clearly, when credit is extended to those who are unable to pay it back, everyone suffers. The banks suffer a loss, and the credit worthy are ultimately held to higher interest rates. You only have look at the numerous instances of credit worthy customers who’s rates are going up for no reason of their own to see that this is occurring. In fact, you only have to look as far as our own MrCreditCard himself!

Clearly the threat of higher interest rates is a fairly empty one for a number of reasons. First, people are seeing their interest rates go up right now anyways, so that horse has already left the barn. Second, they are unlikely to go up any further since, as he says, the market is so competitive anyways. Credit card companies are competing on rewards for those who pay their balance in full, and on interest rates for those who don’t. On the terms and conditions that people find objectionable, there is almost no competition whatsoever. Of all the credit cards I have, the terms are indistinguishable. On the other hand, I am constantly getting offers for lower rates.

Conclusions

Ultimately, his argument boils down to this question “What regulations are necessary on a competitive market”. He argues that a competitive market functions best with fewer regulations. I would argue that the existence of competition with an industry does not preclude the need for effective consumer protections. I would think that the experiences of the rapid deregulation of the financial industry over the last eight years has put his argument to rest permanently. A person in the hedge fund industry should know better.

Now that I read his commentary again, I am wondering if it is in fact just a “modest proposal”. Perhaps I have misjudged him.