Senate, Consumers Call Bank’s Bluff

Yesterday, I tore into both the banking industry scare tactics and the New York Time’s recitation of them as fact.   It was obvious to me that their predictions of doom and gloom were highly unlikely to be realized in the hyper competitive market that is the credit card industry.

Senate Says Go!

By now, I am sure you have heard that the Senate passed the measure by 90-5, a far greater margin than I might have anticipated.   I guess, once the writting was on the wall, and passage was all but assured, few Senators really wanted to be known for voting against this measure.     My hunch is that they finally realized that there are more credit card holders than voters in this country.    It also didn’t hurt that, like the auto industry, the major players are literally dependent on  government for their day to day survival.   This makes lobbying congress exponentially more difficult.    Just like the automakers had to swallow new mileage rules, the banks are going to have to treat their customers with some measure of fairness.

Another possible factor in the bill sailing through the Senate, is that the banking industry prefers this legislation than to any mortgage industry reform.   According to Ryan Grim at the Huffington Post.   According to him: “the credit card bill is also not a fundamental threat to the structure of the financial industry. Rather than a knife to the gut, it’s more a paper cut. Being required to warn consumers before jacking up interest rates may annoy financial institutions, but it won’t radically alter the way they do business.”

The theory goes that potential regulation of the mortgage industry, allowing judges to modify loans in bankruptcy court, would have had a seismic effect on the banks, so they reluctantly went along with credit card reform.    I feel that this theory has a lot of merritt.

New York Times Consumer Affairs Writer To Banks: Yeah, Right

The most interesting article I read regarding the passage of the Senate bill also happened to be in the New York Times.    Ron Lieber of the “Your Money” section says:

For months now, the card companies have been threatening to cut rewards programs sharply to make up for revenue lost because of the new restrictions. My guess, however, is that this talk is just so much saber-rattling. Card companies want to make money, and big spenders help them do it, even if those cardholders do not go into debt.

This was my point exactly yesterday.   He goes on to say:

“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”

That last part is crucial. People who spend a ton generate fees galore from merchants, and that money helps the card company stay in business. So you may soon see card companies giving away more goodies or lowering annual fees for people who hit certain spending thresholds each year. American Express already does this on a number of cards.

Here, he cites merchant fees as a reason credit card companies won’t drop their best customers, just as  as I did.   He also goes further to reference branding and shopping habits of reward card holders.     Delta knows that holders of the Delta American Express are more likely to purchase tickets from Delta than another competitor.

Consumers: Bring It On

Over at The Consumerist, the headline read “Credit Card Company Threats Don’t Scare Consumerist Readers” as readers saw right through the industry scare tactics with comments like:

“This is a predictable response. I’ll be curious to see how much of it will actually happen and what is just bluster. If nothing else there are many decent credit cards offered by Credit Unions that likely will still offer no annual fee and grace periods, if not rewards.”

and:

“Charging interest immediately on a purchase? Are they trying to lose customers?”

Will Credit Be Reduced ?

Perhaps so, but only on the people who are so unlikely to pay their bills, that the only way the credit card companies can make money is by using dirty tricks to encourage them to rack up huge fees.    Frankly, this arrangement is bad for the borrowers, the lenders, and the economy as a whole.     People who are that unlikely to pay their bills, probably shouldn’t be encouraged to have more credit cards anyways.   Frankly, some of the industry’s worst threats are actually positive features.