Citibank Says Credit Market Doesn't Work
Citibank announced yesterday that it might take back its highly-publicized promise to abandon universal default. The promise drew praise when it was announced, and it also helped Citibank and other lenders fight off any new regulations. After all, if the industry would regulate itself, Congress wasn't needed. This was just another example of the genius of the free market--better products will prevail, increasing consumer wealth. But it seems the market didn't work so well.
From the New York Times:
In any case, the “Deal Is a Deal” policy did not give Citigroup the edge it hoped for. Most customers did not recognize the benefit, in part because of the difficulty deciphering the fine print among offers from different banks.
“We hoped and expected that these two points of differentiation would lead customers to vote with their feet,” John P. Carey, the chief administrative officer for Citigroup’s credit card unit, told a Congressional panel in April. “We have been disappointed with the results we have seen so far.”
I have argued here, here, here (and probably other places--I'm really caught up in this point) that the credit markets are broken. Citibank is now Exhibit A. Credit products are now so complicated that customers cannot distinguish the details of one card from another. That means they cannot punish bad cards or reward good ones--"voting with their feet," as Carey said. That has changed products and pricing throughout the industry. The smart card issuer 1) competes in areas customers can see (interest rate, rewards, relationships), and 2) load the cards with tricks and traps that will increase revenues but not be visible to the ordinary reader (double cycle billing, universal default, over-limit fees, pay-to-pay, etc.). Over time, the products simply get worse. Consumers miscalculate both the price and the risks. Customers who never step into a trap will be all right, but a larger and larger portion of the population pays for credit in ways that no market competition will ever correct.
As I see it, there are two choices: The markets can stay broken, or serious, comprehensive regulation can deal with tricks-and-traps pricing--and let the market provide competition on interest, rewards and relationships.