Economists Take on the Credit Card Bill

The Credit Card Bill of Rights was signed in to law weeks ago, but it is still generating some debate as to how it will ultimately shake out.

Over at the New York Times, a couple of Harvard economists, Ryan Bubb and Alex Kaufman, are making their own predictions.

The Word From Haaaavard

According to Bubb and Kaufman, they feel that the credit card bill will be a win for consumers and that the banks will survive, as does nearly everyone who is not in the banking industry.    Their analysis is based on the performance of credit unions.     They claim that credit unions have significantly lower penalties and fees as compared to credit cards issued by banks.      They then conclude that if credit unions can do it and still make a profit, so can the banks.    I have very little experience with credit unions, but I do find they often have fee free ATMs.

They then reach the conclusion that rewards will be cut because people paying interest and fees have been subsidizing those, like myself, who never carry a balance.

My Take

I have to agree that banks will still make profits the old fashion way, without being able to employ the same tricks and traps they normally do.  Besides, they can and will develop new tricks and traps.    Foreign transaction fees anyone?

As for the theory that people who pay their bills on time  subsidize those who don’t, I still don’t it.   They either make a profit on my account or they don’t.   If they do not, why is my mailbox full of offers?   Why have I been approved for every credit card I have ever applied for?   Why don’t banks realize that I am a “deadbeat” who always pays my balance in full and on time and just cancel me?   Why do they keep offering me more and greater rewards?

I don’t believe a business will continually sell a product below it’s marginal cost, unless it is a loss leader.   Bubb and Kaufman would have us believe that the credit card companies balance their customer portfolio so that their losses are justified by their profitable customers.   I just do not believe that is now or has ever been the case.   I think that, like an insurance company, they would drop me in a second if they really thought they were likely to lose money on me as a customer in the future.

Where Reward Cards are Going

I think you may see the time where reward cards are restricted to only those with the highest credit scores, but they won’t go away.  I think that you may also see the minimum spending clauses come back a bit.   The income that the banks make on reward cards is mostly through annual fees and merchant fees.   Raise your annual fee, and you will lose customers, but raise your minimum spending requirements, and you will promote the use of your card over others.    There may be a minimum spending option to reach a loyalty program status level, or a points bonus, or both.    Both the Starwood American Express and the American Express/Delta Airlines Reserve Card come to mind.   Starwood has a promotion where you earn 15,000 valuable StarPoints when you reach a minimum spending level, while the Delta card offers invaluable Elite Qualifying SkyMiles when you hit spending thresholds.   In fact, if you spend enough with your Reserve card, you can make their “Gold Medallion” status without even stepping on an airplane.

Other Directions

As we get closer to the implementation of the Credit Card Bill of Rights early next year, look for reward cards to offer valuable perks that have no marginal cost to the bank or it’s provider.    Airlines will waive fees and put you on their priority wait lists if you have a their co-branded card.  Other companies might give you exclusive membership in some other type of “club” that gives you early access to new product releases.    I can forsee the day when the first people with the new I-Phone or whatever are those with the Apple Credit Card.

I would also expect to see a lot of loss leader tie ins.  Get a brokerage account with us, and you will be able to apply for our reward card.    Consider our mortgage/insurance product/cable tv subscription, and you can be eligible for this super competitive reward card.

These are natural evolutions of a competitive marketplace, and they are mostly a good thing.   Ultimately, there will have to be a new law to reign in the next generation of tricks and traps, and the cycle will begin all over again.