Banking Machiavellianism

Get ready. With new consumer regulations in place or on the way, banks will be more aggressive than ever -- in their effort to protect income.

Let's start with the Fed's measure that takes effect this summer. Banks have to get customers to agree to "opt in" to overdraft coverage for their checking accounts. If customers don't agree, they won't be able to overdraft, which means no fee income for the banks. Those who opt in will be "protected" from overdrafting, but there are no limits on the penalty or the number of times it can be imposed.

So, of course, banks want you in their program, and they are coming after you. From the New York Times:

The banks' marketing campaigns range from subtle to alarming. In recent weeks, Chase has tested several direct-mail pitches to see whether an assertive or alluring tone will drive people into a branch to sign up for overdraft coverage. "Watch your mailbox so you can say 'Yes' to continue Chase debit card overdraft coverage," read one note, a toned-down version of an alternate letter warning consumers that their debit card might not cover unexpected emergencies, like a highway tow.

Bank consultants see an opportunity here as well. They're encouraging banks to go with an aggressive opt-in strategy, and here's why:

Depending on your situation and your customer base, this strategy could involve a targeted and multi-channel initiative to encourage customers to opt in. A recent FDIC study indicated that 93 percent of NSF activity is being driven by 14 percent of the accountholders. And an amazing 68 percent is being driven by just five percent of accounts. These consumers average $1,610 in NSF fees annually.

In other words, if you have a history of overdrafting, your mailbox will overflow with reminders that you need to opt in. Hell, they might even take you out to dinner.

Meanwhile, the new credit card regulations that took effect yesterday? There are a million different ways around them:

If you don't already hate your credit card company, see how you feel in 20 minutes. Did you finally think you'd caught a break when the government tightened laws to protect consumers? Well, the credit card companies were way ahead of everyone...

Sorry to say, the cat-and-mouse game between consumers and credit card issuers is hardly over. Many of these tricks are still legal and thriving under the new law, along with many more loopholes that banks are eager to test.

It's always the Catch-22 with financial regulation. As well-intentioned as it might be, banks will find ways around it. And whenever the noose tightens on the banks, customers need to be more vigilant than ever to protect themselves.

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The fact that corporations, especially banks, have found dishonesty to be easier and more profitable than adding value shows that the regulations (or their lack) favor such practices. Worse still is that those we elect act as if this is necessary for corporations to profit. Yet a business model based on the likely marginal cost to customers exceeding their likely marginal benefits is not sustainable.

Not just dishonesty -- but in fact extending all their powers to convince customers and the general public to engage in actions that will in fact have negative consequences. It'd be like hospitals mailing out free cigarettes in order to try and get more patients and boost their revenue. It's absolutely terrifying that these companies have still not had a "come to Jesus" moment, even in the wake of the worst financial meltdown since the Depression.

Great analogy. SO how do we get things to change here? What action do we take? It's not a rhetorical question. We talk in forums like this. We tell friends. We write letters to Congress, etc. But is there anything to be done that will actually change the situation? I am tired of feeling frustrated and stymied. No matter what mortgage holders and mortgage brokers did leading up to the debacle of autumn 2008, it wouldn't have been as bad if people didn't get to bet that there would be a crash. The same thing is happening now with CC companies -- they win through encouraging bad behavior, and then they are covered when the bad behavior breaks down the system. There has to be a way to interrupt the cycle and level the playing field for, you know, NORMAL.

The only thing I can think of is to prepare for the worst. The economy has been living on amphetamines for the longest time, and they are wearing off. It's time to realize that we will have to pay for the wild times and go through some rough times. It's time to pay off debts and depending if you trust the banking system, save money/gold at home or in banks. It might not save the U.S., but it might save a few from hardship.

So are these just scare tactics? It sounds like we need to beware of real tactics.

Good point, Joe. It's both. Therefore - a new title for this post!

Yesterday we got 5 CC offers in the mail!

I was kind of hoping that the CC reform wouldn't go through. That way people would voluntarily quit using them!

But it still looks like the CC companies are still going to shoot themselves in the foot.

I wonder how long it will take for some other company to come out with a decent credit card? Perhaps with an interest rate less than 10%, 15%? Are there any decent banks out there?

10%? Do you know that credit card debt is not secured.

Yes banks are greedy. On the other hand not every credit card consumer is prudent and responsible. In this whole credit card discussion, there is little talk about responsibility on the part of consumer.

The problem is the consequence of both bank and consumer misdeeds are borne by tax payers in the form for bailouts or FED backstops.

Interesting untold story about credit cards: the reason that most of these banks need to go on this spree is because they leveraged to the hilt to consolidate and buy up credit card portfolios in the late 90s and early 00s. Thanks to the miracle of modern accounting, these purchases became "assets" on the books of most of the major credit card players, but the dirty secret was they borrowed a lot to purchase these in the first place. So, when the economy tanked, the market price of these "assets" dwindled significantly as well. They are doing a dance of unwinding these loan arrangements right now to pretty up their balance sheets, but there is a limit to what they can do. Used to be that BoA, Chase, and Citi used to look down their noses at Capital One because they had "prime" customers, and only Cap One charged interest above 20%. My how times have changed.

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