The credit card reform bill Congress passed yesterday includes a little-noticed amendment that directs the GAO, the Government Accountability Office, to study the way banks market products to credit card customers. Sen. Herb Kohl, who offered the amendment, is especially concerned about “predatory practices and marketing” in the way banks offer “insurance” plans to cardholders, but if the GAO looks into this, it will find that banks’ practices in this area go far beyond that.
I know about this because I have spent years on the inside of the banking industry working on banking customer data. Banks constantly scour their customer base for any marketing angle they find that will let them sell something extra. Banking is a highly competitive business, and the larger banks are so expensive to operate that they have to find some kind of edge just to make a profit and stay in business. And that is especially true when it comes to credit cards.
What I think the GAO will find is that for banks, squeezing more money out of their customers is automatic. And when I say “automatic,” I don’t mean, “It’s in their blood, they can’t help themselves.” I mean, “The machines do most of the work, and there might not be any person at a bank who fully understands what’s going on in their marketing process.”
Banks don’t just sell the questionable “insurance” to gullible cardholders — they sell all kinds of things. They sell books and business equipment, supposedly at deep discounts, but actually at markups that bookstores and office suppliers would envy. They created the airline miles cards so they could target customers with travel-related offers. For years, the largest credit card issuers were advertising their identity-theft services on television. In the back rooms, they were making decisions that ensured that the identity theft racket would keep going so that they could continue to sell their services. Banks make a profit on many of the items they sell, but their real purpose in selling these items is to boost the balances of the credit card accounts, so that customers will be paying interest on their accounts for a longer time.
Is this predatory? I can’t answer that, but what I can tell you is that there is no field in the database that measures the extent to which a bank is taking advantage of its customers.
I worked for years in this side of banking, and it is hard to explain how far removed from reality the work was. I didn’t know who the customers were. It’s not just that I didn’t meet them — for security reasons, I never even saw their names. I also didn’t know what the “products” were. Nevertheless, I was doing statistics on them, and when one statistic in particular, known as “R-squared,” was a large enough number, it could almost automatically lead to 50,000 inserts being printed and mailed to all the customers in a particular demographic segment.
I would argue that there is no predatory intent in this kind of operation, but at the same time, there are no mechanisms in place to identify or stop actions that are predatory in their effect. Corporations don’t have a conscience. When a corporation measures how well its departments are doing according to how much profit each department generates, and it is almost legally obligated to do so, it is impossible for the departments to engage in the kind of self-criticism necessary to prevent a corporation from doing harm.
Let me give you a specific example. Banks commonly advertise products to cardholders whose balances are already so high that accepting the offer would lead the bank to charge the cardholder an over-limit fee. Banks say this is an accident, that they have no way of knowing what the customer balance will be when they prepare these offers two or three months in advance. Yet one of the reasons they expect to make a profit making that offer to that customer is that similar customers have been charged over-limit fees after being sent that particular offer. When you look at scenarios like this, you say the banks could be doing better at controlling their marketing activities.
And when the GAO looks into this, I believe that they will find multiple problems in the way banks sell products to cardholders. The reforms Congress just passed will help in a small way, but there is plenty of room for further Congressional action.