Senators Criticize Credit Card Companies

Although I must confess to not being a close observer of the Washington scene, even at my remove, it’s crystal clear that the Democrats haven’t been willing to take on Bush frontally. Polls show widespread opposition towards Bush’s Iraq policies, and all the Dems are willing to put forward is a wimpy two sentence non-binding resolution expressing disapproval of the surge. They made no effort to cut off the war’s air supply by restricting funding. Admittedly, the Democrats don’t have the numbers to beat a veto, but their tactics reveal a lack of resolve, of toughmindedness. A no-holds-barred fight over the budget would weaken Bush and embolden his critics.

Instead, Democrats (and Republicans who are sensitive to the change in popular sentiment) are going after safer targets. And bank credit card pricing is about as safe as you can get. A MarketWatch story, “Senators criticize credit-card fees,” reports on hearings before the “Permanent Subcommittee on Investigations of the Homeland Security and Governmental Affairs Committee.”

Now what is interesting is this group is not a subcommittee of the Senate Banking Committee (see here for a list of subcommittees). Furthermore, its chairman, Carl Levin, is not a member of the Banking Committee.

One can specualte as to what this means in terms of Senatorial politics (is this group trying to end run Banking? Steal its thunder? Pressure it into taking more aggressive action than it is now contemplating? Or is this actually supportive?) Irrespective of the internal and jurisdicitonal dynamics, this says the heat is on the credit card industry, and isn’t abating any time soon.

Now in fairness, this process has a long way to go. We are merely at the finger-waving and name calling stage. No legislation is pending. If the industry has any sense, it will rein its pricing in. However, I don’t see the industry doing much more than window dressing and ending the most egregious practices. If you’ve gotten used to 30+% interest rates, it’s really hard to go back to the mere low 20s.

From MarketWatch:

Both regulation and legislation are needed to stop abusive credit-card practices, the chairman of a powerful Senate subcommittee said Wednesday, adding that credit-card companies have to be reined in. Senators criticized excessive fees and penalty interest rates, and spoke about the need for improved disclosure at a hearing of the Permanent Subcommittee on Investigations of the Homeland Security and Governmental Affairs Committee.

“Even if someone had questions about the amount of interest on a bill, most consumers would be hard pressed to understand how the amount was calculated, much less whether it was correct,” said U.S. Sen. Carl Levin, D-Mich. “But by nickel-and-diming tens of millions of consumer accounts, credit-card issuers reap large profits.”

Levin, subcommittee chairman, said the Government Accountability Office has found that disclosures from the largest card issuers were “often written well above” the eighth-grade level at which about half of American adults read. Further, the report indicated that popular credit cards have interest rates of more than 30% for holders who pay late or exceed a credit limit….

Increased credit-card use has contributed to more household debt, according to the GAO. The credit-card debt owed by an average U.S. household more than doubled to $2,200 in 2004 from about $1,000 in 1992, according to the Board of Governors of the Federal Reserve System.

The funny bit is how totally flatfooted the bankers’ responses are:

“Our approach to the market is shaped by competition,” said Bruce Hammonds, president of card services for Bank of America Corp. Hammonds said customers want flexibility, and that fee disclosure is not as straightforward as producing the nutritional information for a can of soup.

“Shaped by competition.” That’s an interesting justification. That appears to translate into, “We look to our competitors to see how much we can get away with.” And the can of soup idea was a dangerous gauntlet to throw down. If the SEC can require clearer financial filings and more transparent fee disclosure for securities, which are more complicated (or ought to be) than credit cards, the industry can do much better.

Richard Srednicki, chief executive of Chase Card Services, added that risk-based pricing, which can result in higher payments from consumers, is “integral” to the credit-card industry. “We need risk-based pricing to manage our business,” he said.

In other words, we reserve the right to lend to people who really shouldn’t be borrowers, provided we can charge enough.

These lame responses says the industry isn’t taking this salvo terribly seriously, otherwise they would have hired a PR firm to script better answers. And they may be right, it isn’t serious…..yet.

But if we see an economic downturn, and the newspapers feature more stories of middle class people who fall into a debt trap due to unfortunate circumstances, the pressure on credit card issuers will intensify, and Congress may decide to do more than merely point fingers.