More unintended consequences of laws

From a June 19th Bloomberg news story...

Discover Card Chief Executive Officer David Nelms said new U.S. safeguards for credit-card holders will mean higher interest rates, more fees and fewer loans industrywide. As a Discover card holder, this at least concerns me and will be a reason to keep a closer eye on the fees. However, I guarantee you that if some creditors increase interest rates, assess user fees, increase late fees or make fewer loans, even to customers in good standing, they will lose customers to a creditor who does not do so or does not do so as much. “There are many consumers that actually will not benefit,” Nelms, 48, said yesterday in an interview after Riverwoods, Illinois-based Discover reported second-quarter results. “Some of the unintended consequences are going to be difficult for customers.”

This is the credit industry's response to H.R. 627, the Credit Cardholder's Bill of Rights Act of 2009, which was signed into law by President Obama on May 22. It must have been popular; it passed the Senate 90-5 and the House 361-64. It will set limits on credit-card rate increases and fees, as well as set curbs on marketing. The law was passed after complaints that credit-card firms deliberately confused customers to drive up profit. How can you prove that they deliberately confused customers? How many confused customers testified to such activity? I have made a late payment a time or two over the years and have been assessed fees but not because I was confused. If I was, it wasn't their fault. Isn't paying my bills by the due date my responsibility? Will I not learn my lesson better if I have to pay late fees and/or higher interest rates? Furthermore, why would you purposefully confuse your customer base which is your revenue stream? Sure there would be short-term profits, but as word spreads of such practices, would not those seeking credit patronize other more ethical firms and result in lower profit or even bankruptcy for those unethical firms?

MasterCard Inc. said this month that some of the industry’s practices were “unfair” and “deceptive.” Why would MasterCard "shoot themselves in the foot"? Were they above all of this "deception"? Did they lobby Congress to write such a law so as to bring down their competition?

Discover won’t be hurt as much as some competitors because it didn’t engage in some of the disputed practices, Nelms told analysts. Still, the U.S. rules will drive up average annual percentage rates on card loans and consumers may find it harder to get credit, Nelms said in the interview. Hmmm. Was the law not intended to limit rate increases?

“Most consumers have benefited enormously from risk-based pricing,” Nelms said. “Those that kept their credit in good standing have had historically low rates over the last 10 years. I see that unwinding.” Responsible consumers are rewarded for their responsibility with lower rates, and irresponsible consumers are penalized for their irresponsibility with higher rates. This may not seem fair, but consumers do not have a right to credit. Credit is a privilege that comes with responsibility. Demonstrate to creditors that you can pay back your debts, and you can have more credit.

Nelms told analysts on a conference call Discover will pull back “dramatically” on offers to transfer balances from competing cards at discounted rates, and that the discounts may not last longer than six months. Some banks have offered balance transfers at 0 percent rates that last more than a year. I know some people who stay afloat by transferring balances every six months or until their interest rate increases. What happens when a firm removes that feature? Will they not lose clients? What if the whole industry removes that feature? What recourse will those consumers have but to pay higher rates?

Visa Inc. Chief Financial Officer Byron Pollitt said June 10 that card issuers may impose annual fees in response to the legislation. Nelms said his company was the first to offer no annual fee, and it’s too early to tell whether that policy will be abandoned. “I’m not ruling it out, and it could vary by product,” he said. “We’re going to evaluate all our options, but we don’t have current plans to put in annual fees.” Since Visa cannot just absorb losses without reducing their stock's value or even going bankrupt, their responsible consumers may have to pay for their irresponsible consumers via higher fees.

Discover will keep its “cash back” program that refunds a percentage of a cardholder’s purchases, Nelms said. That's good to know. As someone who pays the balance every month, why else would I use a credit card? If I can get some value in the form of a reduced balance, actual cash or a gift card, why would I not take advantage of it since the purchases will cost the same whether I pay in cash or credit?

No matter what the government does, people will naturally seek the highest return on their investment and the lowest cost of credit. This is the free market at work; there will always be competition for good investments and cheap credit. Lawmakers may feel better about themselves and have something to tell their constituents during re-election campaigns, but in the course of correcting a perceived "unfairness", they only distort activities that result from natural laws and usually hurt the people they intend to help.