In the parlance of the credit card companies, a "deadbeat"deadbeat" is someone who pays their balance in full and on time each month. Only in the twisted world of the credit card companies, would someone who lives within their means and dutifully pay their entire balance on time each month be labeled a "deadbeat."
If you are older than 30-35, you probably remember that Visa and Mastercard used to charge members an annual fee, which varied depending on who issued the card, but most were in the range of $25-$35 at a time when American Express charged $65 a year for an annual membership.
At some point in the 1990's, the credit card companies decided to eliminate the annual fees, in lieu of new charges, and a brand new scheme to generate income, the check card or ATM cum credit card.
According to the seminal documentary, The Secret History of the Credit Card, which was produced for Frontline by Lowell Bergman, annual fees were not introduced until 1980, when the Carter Administration succeeded in getting the card companies to curtail their solicitation of new customers. The freeze, which lasted only a few months, led the card companies to seek a new source of revenue since they were not able to solicit as many potential customers as before. Thus, the idea of an annual fee of $20 was introduced.
Annual fees were a vital new source of revenues. But they also helped cover the costs for unprofitable "transactors'' -- those troublesome customers who avoided interest charges altogether by paying off their balances each month. Now even these customers were contributing to the bottom line.
But the flush times were about to face new perils. The first big sign of trouble came in 1990, when AT&T entered the market by offering a credit card with no annual fee. On the first day it was launched, the offer generated an astonishing 260,000 phone calls. Competitors panicked and quickly followed suit, spelling doom to the lucrative annual fees
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Robin Stein reported that this was known within the industry as the "big scare" and the banks scrambled to come up with new sources of income.
Still, the industry was shaken. It was not just that the Big Scare signified an end to the comfortable and lucrative 10-point spread of the 1980s. It also marked a critical turning point in the broader evolution of the credit card -- from a mass-marketed, straightforward loan at 18 percent to a highly complex financial arrangement with ever-shifting terms and prices.
According to Stein, at the center of this metamorphosis was Andrew S. Kahr, a prodigy that earned a PHd from MIT at 20 and who founded Providian — currently one of the ten biggest card issuers in the industry.
Before many others in the industry, Kahr discovered that it was possible to analyze vast troves of consumer financial data and reliably predict which customers were least likely to pay off their credit card balances each month.
"It didn't require a lot of investigation to see that the people who paid in full every month were not profitable,'' Mr. Kahr said in a rare interview with FRONTLINE. Armed with exotic formulas and scoring systems, Mr. Kahr and his colleagues mined the data in relentless pursuit of the most lucrative "revolvers'' -- consumers who routinely carried high balances, but were unlikely to default.
"I don't believe in customer irrationality," Mr. Kahr said. "I don't find psychographics useful. I follow financial behavior."
Until recently, the industry claimed it was highly profitable. The year before Frontline aired the Bergman expose on credit cards, late fees alone accounted for $12 billion in revenue.
Now, the credit card industry, which aggressively and successfully lobbied Congress to change the bankruptcy laws in 2005, is now looking at new revenue streams as Congress is exploring whether or not to pass a Credit Cardholders' Bill of Rights.
“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.
People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.
Andrew Martin, writing in today's New York Times, said that industry analysts like Robertson believed that the financial arrangement for millions of cardholders was beneficial to them at the expense of the industry.
“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”
Another analyst predicted that the new legislation will cause the industry to aggressively target "deadbeats."
Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — “deadbeats” in industry parlance, because they generate scant fee revenue.
“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”
Austin Goolsbee, President Obama's economic advisor, compared the industry practices to a "carjacking."
“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.
Writing this diary, I started wondering out loud if this story was leaked to the New York Times as some kind of trial balloon by the industry, or if it was leaked to prevent an entirely new form of abuse to people with sterling credit ratings. I'm not sure which it is but one thing is certain is that the industry is already at least one, perhaps, two steps ahead of Congress. Every time that Congress has tried to rein in the industry, they have succeeded in creating new revenue streams, leaving millions of Americans awash in debt.
Martin suggested that the industry made as much as $20 billion last year from penalties in late fees, but new rules by the Federal Reserve could cost the industry as much as $12 billion next year.
Regulations passed by the Federal Reserve in December to curb unexpected interest charges would cost issuers about $12 billion a year in lost fees and income, according to industry calculations. The legislation before Congress would build on the Fed rules and would further squeeze banks’ revenue when they are being hit with a high rate of credit card charge-offs. The government’s stress tests showed that the nation’s 19 biggest banks will take on $82 billion in credit card losses in the next two years.
Of course, it will be paid for by the cardholders in yet another example of Lemon Socialism. This is what Moe Syzlak of the Simpsons fame called the "Joan Collins special."
