A little bit more on “inept” overdrafters.

Stephen Spruiell did not like my previous characterization of his opinions on consumer finance, nor does he like the idea of consumer protection (my numbering):

[1] Is Konczal really trying to argue that poor people aren’t capable of understanding the connection between overdrawing their checking accounts and overdraft fees? Somehow, liberal condescension is still capable of surprising me….

[2] I like the way pietistic financial “reformers” such as Mike Konczal attribute sadistic motives to their opponents (“smacking around poor people”) while pushing “reforms” that will in all likelihood lead to an increase in loansharking (poor people actually getting smacked around). Kevin Drum is right about this if nothing else — overdraft fees are a form of short-term credit offered at very high interest rates, like payday loans. But there is a persuasive case to be made that such forms of credit are actually welfare-enhancing. Liberal scolds look at the high annualized rates and shriek, but they’re not thinking of the unintended consequences: What would happen if these forms of lending were restricted? Would poor people suddenly stop needing credit? Who would step in to fill that gap? Credit-card debt is fully dischargeable in bankruptcy, unlike debt owed to the Bank of Vinnie and Frank….

[3] You know, there’s another way to opt-out of this service: Don’t overdraw your account.

In response.

[1] Spruiell argued that people who pay overdraft fees are “inept.” He seems to stick by this in his post, so let’s discuss this. I provided evidence from FDIC that says that a large amount of the poorest bank consumers, the people most likely to pay fees, and the people most likely to pay the most fees, have very little money in the bank. 60% have less than $100 on average. Is this “inept”? It makes perfect sense for a person to want to pay a premium upfront to not get hit on the back end with a large amount of fees for overdraft, to want to opt-out of this feature.

In [3], he says you can already opt-out by not overdrawing the account. I think a problem is that Spruiell views the banking relationship as an independent thing floating out there, that people can use or not use responsibly, like a car or a gun. The reality is that charging fees on their unsuspecting clients is a major profit source for these banks, and they are actively and rationally trying to maximize this. How else can you explain double cycle billing for credit cards, or for this issue, the shuffling of charges banks used to do to maximize overdraft? The bank is not neutral, but an opponent for clients much of the time. So by “opt-ing out”, he means both watch your finances and be smarter and more nimble than the financial sector. Good luck, unless you are in a position to sit $1,000 in a checking account and pay off your credit card monthly without stress. I don’t think people are stupid, and I’m not condescending to them, I just think in reality people are not perfect calculators, especially when the other side is “nudging” you to pay fees.

In most circumstances this is fine; if people lose money by ineptly playing darts or basketball after putting money on the game, that’s their problem. But given that access to basic banking is a prerequisite for functioning in the normal economy, this should worry us.

Aside: with technology and without regulation, the tendency toward the sophisticated quiet bleed of consumers and finance will increase. Kevin Drum wondered about the future of privacy in purchases recently, and various people told him to await the superfuture that is coming. I forgot to mention to him the most obvious thing I remember in this vein: the FTC complaint (settled) that CompuCredit was changing terms on credit cards depending on where you made purchases, with one nice example being increasing your interest rate for paying for a marriage counselor with your credit card, as divorce is a risk factor for not paying your bills. Classy.

The card networks were trying to get SKU data, and I’m not sure how that battle is currently going. But if so, without regulation, you could get your rates jacked for, say, purchasing music or books associated with depression, as depression is correlated with poor bill payment. Watch out emo kids! It’s almost like an unregulated financial sector functions as some sort of crazy 18th century theoretical prison here, where it is always watching your behavior from a central, opaque location, and you are never quite certain what will make it jump and attack.

[2] As for me pushing people into the mob and loan sharks, is there good evidence of that happening? I’d be curious as to the evidence Spruiell would muster, but all I know of this are my own experiences, as well as this study by Harvard Law professor Angela K. Littwin in Comparing Credit Cards: An Empirical Examination of Borrowing Preferences Among Low-Income Consumers:

One of the strongest arguments against regulating credit cards is the substitution hypothesis, which states that if a restriction on credit cards decreases access, borrowers will respond by using other, less desirable forms of credit. For lowincome consumers, the argument is more powerful still, because their other options are high-cost lenders such as pawn shops and rent-to-own stores. But the substitution hypothesis has been more frequently assumed than investigated, and the empirical research that has taken place does not support the theory as strongly as has been supposed. This Article presents original data from a study of low-income women. The findings suggest that lenders such as pawn shops and rent-to-own stores may function as complements more than substitutes. More critically, low-income borrowers may experience credit cards as no more desirable than these other borrowing types. In addition, the research uncovered another form of credit that low-income families routinely use and participants evaluated favorably, but that is never discussed in literature. Both results indicate a need to develop a more nuanced formulation of the hypothesis that better predicts the consequences of credit card regulation…

Middleclass bias and traditional economic methodologies have meant that all regulation-driven substitution away from credit cards has been assumed to be harmful. But the current study suggests that credit cards are actually among low-income consumers’ least-preferred sources of credit, meaning that there is no “worse” alternative to which they would turn if credit card access were reduced.

Spending isn’t necessarily going to be exogenous here, so the idea that the poor will go to loan sharks needs more evidence (and I’d be willing to read it, my mind isn’t made up here). People are more likely to go to friends and family than loan sharks, the study finds. And it’s important to remember that the poor also find the current credit and financial access they have predatory, just another type of pawn shop and rent-to-own. Nicer suits on the people, perhaps.