My Two Cents

Credit card companies

Chris Farrell May 19, 2009

New legislation will limit the ability of credit card companies to impose certain fees, ban some practices and impose greater openness and transparency in dealings with customers. Credit card companies are mad, so they are now saying that they’re going to stiff their best customers. That’s the message delivered by the industry in today’s front-page New York Times story.

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

I don’t buy it. First of all, the market remains competitive enough that if credit card companies do go after their safe credits someone else–WalMart?Target?–will offer these customers a better deal. What lender doesn’t want a book of business from people who pay off their loans in full and on time?

Second, I don’t know of any business that thrives by treating its good customers poorly. Just ask executives in the recording industry.

Third, the credit card companies seem to be saying is that they couldn’t make money without practicing unsavory tactics. Maybe that true with their current business model, although I doubt it. The end of the story gets to the heart of the industry’s problem:

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”

“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.

My bet: Credit card customers are going to end up with a better deal than before. The main industry players may change. But competition and innovation and well-informed consumers is a recipe for the market to push companies to develop a better business model from the customers point of view–not a worse one.

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