Okay, we are not holding our breath here, but the decision by the US Treasury to get into the credit card business has encouraged one or two hopeful souls to ask whether we might see a moratorium on the cheap credit offers that drop through the letter boxes each and every day.
Credit Slips blogger Adam Levitin goes so far as to suggest that if the US government is going to bail out the credit card industry, we should make sure that the business model changes in the process – since it is the billing tricks and traps that encouraged reckless lending and irresponsible borrowing in the first place.
Levitin has aired his argument in a San Diego Union-Tribune op-ed piece.
The card industry’s business model is the heart of the problem, and needs to change. Just as with subprime mortgages, the credit card business model creates a perverse incentive to lend indiscriminately and ignore delinquencies. Card issuers make money on every credit card transaction, regardless of whether the consumer ultimately pays a finance charge. The issuer receives around 2 percent of every transaction in a fee paid by the merchant (and passed on to all consumers in the form of higher prices). This fee is called the interchange fee. Card issuers will collect about $48 billion in interchange fees this year.
Because interchange is based on transaction volume, it creates an incentive for banks to issue as many cards as possible, regardless of the creditworthiness of the borrower. By creating a huge revenue stream unrelated to credit risk, interchange encourages card issuers to engage in reckless lending – and virtually every credit card loan is a “liar loan” with no income verification.
Fintag sees the problem the other way round: taking out debt is still just too easy, while saving money is near impossible.
I arrived back from the land of the depressed to find a pile of mail on my doormat. Apart from the usual invites to the best parties, there were a couple of credit card applications. Quite simple really. You sign your name, check the details are correct and send in the free post envelope. 7 days later a piece of plastic arrives and I have GBP15,000 of debt.
So where was the junk mail selling high deposit rates, high yielding bonds, or sexy new savings accounts? Well it is because despite the banks wanting cash, it is too much of a hassle to collect it. Firstly I have to complete many forms, send off copies of my passport, notarised of course, utility bills, driving license identification, social security numbers, etc. All very useful for your local Identity Theft merchant.
Collecting this information is all part of know your client and anti-money laundering. Mellon sent me a letter saying they wanted proof as to who I was. It is a small unit trust that I have had for about 7 years. Why? I haven’t moved house, my gender is still the same and they have the cheek to tell me I cannot redeem unless they get samples of my DNA and third party proof that my IQ is less than 90.