Bank Credit Cards: Not-Illegal Does Not Equal Ethical
This past May, the US Congress passed, and Obama signed into law the credit Card Accountability Responsibility and Disclosure act (CARD, of course, for short).
It provides for significant consumer-friendly reforms, due to take effect in February 2010.
These regulations are going to cost bank card issuers some significant chunks of change, as they’ll no longer be able to do things like apply your payments to the lowest-interest part of your debt, charge rates like 29.99% and hit you with large fees for slight transgressions.
That is, when the law takes effect.
A Funny Thing Happened on the Way to the CARD Act Effective Date
Something happened between May and now–something that has caused many bank card issuers to raise their rates, accelerate their payment terms, and increase fees for those who can’t comply.
Now, why would that be happening?
The obvious deduction is that the banks just couldn’t resist getting in a last feast on their already burdened consumers by jacking up rates until they are forced to behave in a way society, through its duly elected government, has dictated they must.
Oh, what to do? Bend to the will of the people?
Nah. How about one last feeding at the trough, while it’s still legal.
That’s how Christopher Dodd, chairman of the Senate Banking Committee, sees it, and he’s not alone. Last week, the committee passed legislation to move up the CARD implementation to December 1. And yesterday, he proposed freezing rates in the interim.
Sometimes, the obvious conclusion is the right conclusion. But that doesn’t stop some banks, and their industry spokespeople, from trying to argue the opposite.
Says Scott Talbott, SVP for Government Affairs at the Financial Services Roundtable:
…the bill was based on the faulty premise that credit card interest rates were going up because of legislation.
Instead, he said, interest rates were rising because of risks posed by the unsteady economy and by card holders themselves, who are defaulting on their payments or paying late more often.
In other words, we’re raising your rates because interest rates are going up in this recession, and because you greedy customers are abusing us poor folks at CitiBank and BankAmerica by withholding your money from us.
(Just to be clear: these actions are being taken by the banks who issue the cards, not by the MasterCard and Visa folks who create and brand them).
This is not a function of US culture only–it seems to be endemic in the business. Over in the UK, where they’re presently considering US-like regulation, we get a similar argument from the banks:
One senior credit card executive pointed to the United States, where the supply of credit is already shrinking and its cost rising as a result of similar reforms, which are to come into force in February 2010.
In other words, if you restrict our profits, we’ll yell and pout and gouge you and generally behave badly; consider yourself warned, you’re responsible for our bad behavior.
Responsible Business Behavior? Or Merely Not Illegal?
Most people can intuitively understand the difference between ethical and legal, and between unethical and illegal. Most of us want to live in a society where laws are ultimately derived from a sense of ethics—not the other way around. Just because something is not illegal hardly implies it is ethical.
But it seems increasingly that business is becoming deaf and blind to this simple distinction. Consider the Congressional testimony by several health care executives this past summer.
When asked whether they would voluntarily forego rescission (cancelling policies in effect) except in cases of intentional fraud, the executives one after another said they would not. Why?
Because, they said, what they were doing wasn’t illegal.
You have to ask the question, are these people stupid? Or venal?
In favor of the argument for stupidity, one can point to a modern penchant to substitute process for judgment. How else to explain a school principal suspending a 6-year old child for eating with a cub scout knife’s spoon? Or mechanical SEC procedures that Madoff and his whistle-blower Markopolis both called stultifying?
While I think stupidity is the more usual culprit, in this case I vote for venal. How arrogant do you have to be to insist that raising rates is the fault of economically challenged customers? To tell your PR people to stand down? And to argue that not being a crook entitles you to a seat at the table of responsible businesspeople?
I was privileged to share a platform this Monday morning with an entirely different kind of leader. I wish the heads of credit card operations in some of our major banks would take a look at this CEO, Aaron Feuerstein, in a 60 Minutes video. And to hear him on Monday describe in the simplest terms why good corporate citizenship must be rooted in a sense of personal values.
Not being illegal is nowhere near close enough.
Charlie,
Sometimes… just sometimes, I wonder if you’re not just a wee bit anti-capatalistic. I wouldn’t care if you were, but still, sometimes it feels like you’re railing against primal capatalistic impulses. Of course people in power abuse the position to rort and extort… its utopian to believe that anything else would be routinely likely. Thats why we need certain laws and so on… and naturally, people will push these.
However, we all have a very simple, obvious remedy. The power of free choice. If you’re being ripped, stop using that company’s services. If the company loses enough customers, they’ll change or die. I like that. A free market. Nice. As long as those in power ensure that ours IS a free market, I consider the job done. More laws than that just creates more criminals, more enforcement, more administration, more illogical bureaucrats and certainly, more lawyers.
Companies that act in trusted ways, that respect their customers and the right to a fair profit will always be hard (but good) to find. Companies like mine 🙂 Please don’t make my company life more burdoned by bureaucrats.
With kind regards,
A good idea Michael. If, of course, there was a free market. With credit cards, the terms tend to be pretty universal. If your credit rating is X, and you have Y assets, credit card companies will generally all treat you the same way.
Same thing with telecom service. If there are 3 providers, and they all provide about equivalent services, then there isn’t a free market.
In many rural markets for health insurance, one provider may control 90% of the market, and in many others two or three controlling the majority is very common. Nor is their much difference between their offerings at any given price point (or their customer service/denial rates, etc…) even when you have multiple "options".
And since doing without a credit card is actually very difficult (I did it for years, I know what I’m speaking of—I invite you to travel without one one day to see what I mean) and so is doing with phone or internet service, well, you’ve got little choice.
In fact, what the US has in many industries are largely unregulated oligopolies, because the regulators mostly don’t bother.
I’m a big believer in free markets, myself. I’d love for more of them to exist. But it is basic economic theory (and something Adam Smith understood very well) that the first thing people do when they win the market is try and make sure there isn’t a market. Free market mechanisms by themselves cannot ensure the continued existence of free markets. Government is needed, but so are the proper mores. When John Kenneth Galbraith, in the post war period, looked into why executives didn’t pay themselves a lot more (they could have) he came to the conclusion that it was essentially a cultural thing—managers wouldn’t tolerate it, it was against what they believed in.
Their ethics.
Likewise in 19th century America belonging to certain religious groups was a big plus for a merchant. People would go out of their way to do business with you, because they knew it was much more likely you wouldn’t cheat them or price gouge them, that you believed in a fair profit, but only a fair profit.
Free market fundamentalisms in the US has done a great deal of damage. The free market is not self regulating, the invisible hand does not always work to the benefit of society as a whole (as Adam Smith well knew), greed is not always good, and free markets naturally tend towards unfree markets in which the choice for consumers is to take what is offered or go without. (If you don’t believe me, take one of the "contracts" given to you by a big firm, and cross out the parts you disagree with, and write in your own wording. "Negotiate" with them. Let me know how it works out.)
Free markets are grand things. Every once in a while they even exist.
Charlie –
I will go with venal on this one. Credit cards are the ultimate contracts of adhesion. You don’t negotiate the terms, you just pick a card. But the lender has the right to cahnge terms.
Certainly, a fair number of lenders got themselves into trouble and issued credit cards to people who should not have them. The rate changes are also an attempt to flush them out and cancel the cards.
Credit card lenders are riding a market, where credit is tight and squeezing extra profit from their cardholders. They are likely to lose lots of cardholders. But I think that is part of their intent, along with making a few extra dollars in the short-term.
In response to Michael’s comment, one of the roles of government regulation is to reign in the unethical practices of unbridled capitalism. In my opinion the credit card companies have pushed the boundaries too far.
Aaron Feuerstein is one helluva role model as a CEO and a human being. He’s to be admired for principles. That said, I don’t think there’s a Bank/Financial Services CEO around that would echo that point of view…wouldn’t they just look at you like you had 5 heads and retort, " nice guy, but his company went belly-up" – lest we not forget, in today’s world, "nice guys finish last" and "besides it’s nothing personal, it’s just business!" Aaron Feuerstein doesn’t drink the Kool-Aid from the same trough as the Bank/Financial Services CEOs…Maybe its because he actually owned a business and knew his employees, so it was, and is, very, very personal to him.