From The New York Times:
The noxious penalty imposed on American Express and Discover consumers who exceeded their spending limit has finally died, quashed by legislation signed in May by President Obama to ease onerous fees for cardholders. In recent days, American Express customers began receiving notices of the fee elimination, which takes effect in October. Discover Card customers will soon get similar notifications.
There’s a section in this article that I want to unpack. Let me reproduce it in full:
The changes at Discover and American Express (which, by the way, included in its letter a notice that it would raise late fees and interest charges) come in the wake of the Credit Card Accountability, Responsibility and Disclosure Act, which bars card companies from penalizing consumers unless they specifically ask to breach their limit and agree to pay for the privilege.
Rather than levying the fee automatically, both firms will now use technology to decide whether and when to allow consumers to exceed their limit, based on the cardholders’ recent spending and creditworthiness.
But before you gush over the changes, consider this: Both firms probably arrived at their decision based on a calculus that showed it would be too costly to build a system that lets consumers opt to breach their credit limit, as the law required. Instead, it was cheaper to simply do away with the fee.
Desiree Fish, an American Express spokeswoman, said the company had determined that the cost to build such a mechanism would be more than it received from over-the-limit fees. Most other banks are likely to come to the same conclusion, particularly since they would have to tell customers why they are levying a fee when competitors are not doing so anymore.
A few things.
Notice what “building a system” entails here. On the back end, if a consumer has exceeded their limit with their purchase, they’d have to do a check to see if the consumer has signed off on paying a fee to go over their limit. This isn’t very hard, it’s a simple check to see if something in an account is turned on (it consists of something like “if Client.Overdraft == True, then Charge.Accept”). Instead, they are doing something far more complicated – they are doing some sort of risk modeling, probably based on some sort of statistical learning techniques, to analyze their recent “spending and creditworthiness” metrics. I do not know for sure, but I’m assuming that this is a check to see if the marginal expected loss is less than getting the juicy interchange fee from the transaction.
Since the back end now involves something more complicated, time-consuming (on the order of milliseconds, but still time-consuming), and energy using than a quick check to see if a client’s feature is turned on, this must not pass a cost-benefit analysis on the front end. Think about what that means – American Express thinks if they ask their customers if they want this feature they’ll overwhelmingly say no, so they aren’t going to bother. They’d rather keep the option of letting it go over to grab some interchange fees from time to time.
I see this as a giant gain to markets. We think of markets as giving people choices over what they want, but that also means giving people choices over not having what they don’t want. American Express looks at their massive set of consumer data, surveys, marketing as well as their own experience of the client and the product, and says there is no way people are going to say yes to this option, so let’s not even bother sending out a mailer asking them if they would want it. If the market had previously been working, everyone would naturally have signed up for what they previously had.
This is why I think Obama’s approach is very market friendly. It’s not about dictating what “rights” consumers have over their credit cards, where rights directly refers to specific options and features. It instead is focused on disclosure and choice. Allow credit card companies to decide whether or not they want to offer an option to sign into overcharge fees that customers must sign into. Customers have the choice where they didn’t previously. If customers don’t want to, the credit card companies will have to come up with other features that are worthwhile to consumers. For instance:
Robert Manning, the author of “Credit Card Nation,” said not everyone is so fortunate. Many people are living hand to mouth with just one card, and others have had their credit limits slashed through little or no fault of their own. He thinks some companies might come up with membership programs to serve this population, with new cards that charge annual fees and waive a handful of over-the-limit and late fees each year, no questions asked.
This is what Warren and others mean when they say a CFPA will allow actual innovation to take place. In order to convince consumers that a credit card overdraft charge is worth it, they’ll have to negotiate on other terms – by making these terms clear, and able to actually be chosen by consumers, there will be more variety and more competition among lenders. And that is what markets are all about.