Two Tribes Go to War

I read with great interest the story on Fox Business this week about the falling out between Kroger and Visa. It’s a classic example of two parties each believing that they have the upper hand in a dispute, and refusing to budge because they expect their opponent to blink first. But as American author David Drake points out, wars generally start when both sides believe they can win, and more than half of the time they're wrong. In this case, Kroger believes that VISA needs them more than they need the credit card company, while Visa believes the same thing about the supermarket. There’s a chance that both of them are wrong, and an even bigger chance that the dispute will cost both of them more than it ought to…

At the heart of this dispute is the fact that all credit card companies charge merchants a set amount for processing sales made using their cards – that’s how the credit card companies make their money, along with the interest they hope to collect from consumers who happen to be bad at math. For years, American Express had the highest fee structure, which is what led to a number of businesses refusing to take American Express cards. Master Card and Visa have traditionally had some of the lowest transaction fees, but apparently Kroger believes that it should be given a better rate than Visa wants to give them, based on the number of transactions Kroger sends in each day…

Visa, in turn, apparently believes that Kroger should be satisfied with paying the same rate that all of its competitors get. Every business wants to gain some competitive advantage over the other companies in their industry, but Visa does not see any reason why they should make less money per transaction in order to give Kroger a better bottom line. As a result, Kroger is threatening to stop taking credit cards with the Visa logo, and Visa is telling them to go ahead and refuse to accept payment and see what effect that has on their business…

Now, we should probably acknowledge that no business has any obligation to accept any particular form of payment. There are still a number of cash-only businesses operating in every community, and others who won’t take checks, vouchers, or Bitcoins. Kroger is only accepting the various credit cards as a convenience to its customers, and if it has enough loyal customers – or, at least, enough customers with more than one method of payment who still want to shop at Kroger if they can’t use their Visa cards – then this dispute shouldn’t affect them. Likewise, Visa has thousands (or millions) of other merchants who are still accepting their cards and paying their fees. What I think both companies are ignoring in this case is the competition…

The grocery industry normally operates on insanely low margins; food products can have as low as 0.8% margin, which makes it understandable that Kroger would want to save money on their merchant’s fees. Unfortunately, that also means that even a very small number of lost customers will impact their business. Visa doesn’t have the same problem – margin isn’t usually an issue for financial services firms. But Visa makes most of its money from the interest it charges cardholders, which means that the only thing that would be worse for them than not receiving merchant fees for transactions would be if people stop using their Visa cards for transactions on which they will end up paying interest…

It should be interesting to see which company blinks first. From where I’m sitting, each of them needs the other badly enough that they should really stop butting heads and work something out, but once again, I’m not the CEO of a major grocery or financial services company, and I don’t have access to their books anyway. Let’s just hope they figure this out before one or the other company fails and throws thousands of people who want no part of this feud out of work…

Borrowing a Vacation

I’m still not sure how I feel about the article in Market Watch about new services that are offering to allow people to finance vacations. That’s fair, I suppose, because I’m also somewhat ambivalent about the business transactions they’re talking about. Paying for things on credit – charging airline tickets and hotel fees on your credit card, for example, and paying them off once you get home – is a fairly normal part of travel these days. In fact, post-9/11 it can be almost impossible to purchase a plane ticket, rent a car or even reserve a hotel room without a credit card. Credit card interest being problematic isn’t news either; unless you are going to pay off all of your bills in full as soon as you get them, the interest can very quickly become a bigger problem than the things you purchased in the first place. But throwing a new form of consumer lending into the mixture just makes the whole subject even more confusing – and I don’t think the linked article is helping as much as they think it is…

The attraction of financing a vacation – assuming that you have the option of paying for it in some other fashion – is said to be that there are no hidden charges or fees involved; you know exactly what you are going to pay upfront. It is also apparently possible, depending on where you want to travel (and, presumably, your credit score) to obtain lower interest than you can usually get from a credit card company, which could be a major savings. The reason for all of the qualifiers in this post is that they also occur in the article. All of these conditions appear to vary depending on who is traveling, who is paying, what terms they want, how long they will need to pay off the trip, and what level of credit card interest they already have…

Confusing things even further is the fact that the Market Watch reporters bring up the idea of low-interest introductory rates, special deals, loyalty club and credit card rewards programs, and other limited opportunities that can, but won’t necessarily, reduce the cost of the vacation and/or the cost of the financing enough to completely change the financial implications of the situation. Some of these may be practical – financing anything at a special deal of 12% makes more sense than using a credit card to do the same thing at 28% interest – but not all of them are. In particular, applying for a credit card solely because you want to purchase something expensive during the three months you have a trial low interest rate is asinine unless you can pay off the entire trip in those three months. And if you can do that, you’d almost certainly be better off taking the trip three months later and just paying it off as soon as you get back…

The point I’m getting at here is that it isn’t clear from the article whether these programs are actually lower-cost consumer lending options or are just programs that make money on people who are unable to understand their credit card agreements or on people who are bad at math. All of the examples of other ways to finance your vacation that appear in the text struck me as one-off, specialized, unlikely, counter-productive, or just ways you could try to game the system that will almost certainly turn out for the worse. It’s possible that you could get a better interest rate from a company that just makes vacation loans than you could get from your credit card company, but if your credit is sufficiently good to do that you could probably just get a better credit card rate or a short-term bank loan that would do the same things for much less; that’s how consumer credit works…

Pull the Other One

I was scanning through the news sites the other day and I ran across a story out of Arizona that I can’t help thinking epitomizes the false naivety that is responsible for so much of our current political gridlock. I usually try to avoid political discussions in this space, partly because there are already more political blogs online than there are people who want to read them, and partly because it’s not really my field. None of my degrees are in political science, history or law, and until “running this government like a business” becomes more of a possibility than a punch line there isn’t going to be much I can contribute to the conversation. That said, it’s events like this one that make me wonder if there’s really a dialog left, or if both sides are just trying to score points at the expense of everyone else…

As reported in the Phoenix Business Journal online, Arizona’s governor has just signed into law a new bill that will allow collections companies to use a defaulting customer’s last billing statement as proof of the amount that he or she owes when they attempt to collect the debt. Supporters of the bill claim that this will make it easier for companies to collect what they are actually owed, harder for deadbeats to skip out on their responsibilities, and allow companies to get more money from the sale of defaulted account debts to companies that specialize in recovering those funds. Naturally, the backers insist, this information would never be used to make it harder for people to recover from bankruptcy, add extra fees, charges and interest to accounts after the fact, or defraud people who don’t even owe anything into paying up to avoid legal expenses…

Opponents of the bill, naturally enough, insist that this is exactly what will happen under the new law. Even assuming that every member of every company extending credit, every collections agency trying to recover money, and every finance company buying up defaulted accounts are paragons of virtue and justice – and this would be a very unlikely assumption in a time when certain large banks keep trying to foreclose on properties that aren’t even mortgaged – it’s still hard to imagine how a law that allows a creditor to “prove” that you owe them any amount they like simply by printing a new version of your final statement is good for anybody. In fact, they will insist, at least some of the business interests pushing for this new law are probably gearing up to do exactly that…

Now, as usual, the truth is probably somewhere in between those extremes. I’ve spent some time in collections myself, and it’s certainly true that there are a lot of people who feel entitled to anything they can make off with, and will game any system just for the fun of it even if there’s no actual profit to be had. It’s also unavoidably true that any system built and run by humans is going to include human error, and that means that allowing this practice will inevitably cause harm to people who have done nothing wrong, even if none of the companies involved ever does anything wrong either. The problem here is that the companies already have all of the advantages of money, power and political connections over the consumer, that a single unjust “collections” attempt can destroy a family’s entire world – and that the people pushing this measure are pretending that no such thing as a fraudulent collections attempt could ever happen…

I don’t have an answer for the current financial crisis, or for the ongoing meltdown of consumer credit. And I can’t deny that collections failure is an issue, or that any company that gets dragged down by deadbeat customers and unrecovered collections will take all of its employees, suppliers and stockholders with it, making the whole national crisis that much worse. But whatever the answer might be, I’m reasonably sure that this isn’t it…

The Ethics of Usury

There was an article online this past week about a series of credit card offers going out around the United States with interest rates well above the levels normally associated with predatory lending, which has had some observers calling for the passage (or enforcement, where applicable) of usury laws. The idea of interest rates that exceed the level permitted by law is certainly not new; most of the world’s major religions have weighed in on the practice over the centuries and most civilized countries have to address the matter sooner or later. But despite the recently passed credit card reform laws, none of these rates are actually illegal – it turns out that charging someone 59.99% annual interest isn’t actually a crime, as long as you tell them about it upfront. The real question is whether we can support such services from an ethical standpoint – or if they should be condemned on those grounds as well…

To begin with, we should probably acknowledge that by some interpretations all forms of interest are prohibited by various religious texts, including those of most Western religions. This is the origin of the idea of usury as a sin, and of laws intended to prevent people from committing it. But if you can’t charge interest for making someone a loan then you can’t make any money by doing so, and therefore there is no real motivation for doing so. If you do extend loans to people you will probably have to add something to compensate for those individuals who abscond with your money or just lose all of it – a 5% increase if 5% of your customers never pay you back, or whatever. You might even offer better rates to those people who you feel are more likely to repay the loans, and steeper ones to people you consider a bad risk. Once you have done so, however, you are stepping onto a very slippery slope, because it is always possible that the person you believe has a 99% chance of paying you back won't, while the person you charged extra because you felt their odds were only one chance in ten will – in which case your practices were misguided if not actually discriminatory…

In the case of these 59.99% (and in a few cases 79.99%) credit cards, most of the people who are offered such rates were told about them upfront and accepted the cards because they could not get a credit card any other way, and modern life can be difficult sometimes if you don’t have one (try to rent a car, book a hotel, or buy an airline ticket without one). One could legitimately argue that the banks extending such programs are offering a service to people who would otherwise not be able to have a card; one could also argue that these institutions deserve something for the massive added risk they are taking – and, indeed, these credit card programs have an appalling default rate compared to conventional arrangements. And one could certainly argue that as long as such rates are openly offered and impartially administrated (and that no actual laws are broken) that a government has no business telling its citizens on what terms they may promise to repay a loan. But none of that changes the fact that these institutions are making money off of the underserved, the impoverished, and the desperate – and that all too often such programs are not sold or administrated fairly in the first place…

So my question is, should our government outlaw such credit programs, knowing that the customers using them will not be able to get loans any other way? Or should they allow such programs to continue, knowing that at least some of those institutions offering these card programs will exploit the ignorance, lack of sophistication, and in some cases outright greed of their customers? It would be a wonderful world in which no one ever needed credit, and no one ever had to charge for extending credit, but in this world, what should we do about these accounts?

It’s worth thinking about…

The Ethics of Credit Checks

If you’ve ever applied for a loan, a credit card or even certain membership programs, attempted to rent an apartment or finance a car, you’re probably already familiar with credit reports and the multitude of ways yours can be altered to reflect a greater credit risk than you actually are. If you’ve ever applied for a job involving security clearances, sensitive information, access to money or securities, or law enforcement, you’ve probably also encountered the concept of a criminal background check, and the possibility of being mistaken for a career criminal who has the same given name and family name as you, especially if your family name is “Smith.” There’s nothing particularly controversial about either one; assuming nothing fraudulent has appeared on your credit history, a credit check is probably the most cost-effective way for a lender to determine if you’re a credit risk or not, and there are any number of jobs where certain types of criminal background could be problematic. Unfortunately, as with any other tool, these investigations are not always used honestly…

There’s a test case currently in the courts where the Kaplan Higher Education Corporation was cited by the Federal Equal Employment Opportunity Commission for using credit histories to eliminate a disproportionate number of job applicants of African ancestry from hiring consideration. The company is denying the charges, saying that their company supports diversity in the workplace and excludes anyone, regardless of ethnic background, from hiring consideration if they have poor credit; apparently, the need to offer counseling on student loans and financial aid issues would make people with dodgy credit scores problematic. You can read the Los Angeles Times article about the case if you want to, but as usual I can’t help wondering if there isn’t a larger ethical issue involved here…

Members of traditionally underserved communities are much more likely to have had credit issues in their past than majority groups, although it must be conceded that how much more likely depends on whom you ask. Thus, any such qualification, no matter how even-handedly applied, is going to exclude more people from various minority groups from hiring consideration than it will members of whoever is the majority (or best served by the credit industry) group in the relevant community. The real question isn’t whether or not this is going to happen (it clearly will) or even if this is truly a discriminatory hiring practice (simply because it excludes minorities) but rather whether the exclusion is a reasonable business practice in the first place. If the goal here is to provide good financial advice that your customers/students will listen to, then why do you need people with spotless credit to do that? Wouldn’t people who have run afoul of the system and recovered their credit-worthy status be a better choice? More to the point, wouldn’t people who have demonstrated that they can do this be a better choice than innocents who have just had the good fortune to avoid such problems so far?


Of course, if the goal is to avoid either propagating credit fraud or being defrauded yourself, then a criminal background check would be more relevant than a credit check, and someone with an actual history of credit fraud would be more problematic than someone who was jailed for vandalism or drunken driving. But at the same time, I have to question whether individuals who are at risk for commission of such crimes are more likely to listen to someone who had, for example, been caught and punished – or some wide-eyed innocent who has never had a single impure thought. One could legitimately argue that someone who has been through the system has a better idea of not only how to avoid trouble but also why you should want to avoid trouble than someone who hasn’t. So the question is, if people with less than perfect records can provide better service, and if hiring based on ability rather than past credit history is a superior moral position anyway, do we have an ethical responsibility, to society or to our employers, to hire such people? Or do we have a responsibility to cover the company’s metaphorical behind by only hiring people whose records indicate that they are absolutely beyond reproach?

It’s worth thinking about…