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One Answer to Why People Hate Banks

posted by Bob Lawless

My last post mentioned a column by Joe Nocera on debt collection practices. Nocera's column is entitled "Why People Hate the Banks," and it appears on the penultimate page of the national print edition of today's New York Times. In a moment of sweet, sweet irony, Citi provides another reason to hate the banks just by turning the page.

The last page of the New York Times national print edition has a full-page color ad touting the achievements in the bank's 200-year history. The print ad evokes the same idea as currently appearing on the Citi home page, but the print ad has a more detailed time line:
  • 1812: Citi opens in New York
  • 1866: Citi funds the first transatlantic cable
  • 1904: Citi funds the Panama Canal
  • 1948: Citi supports the Marshall Plan to rebuild Europe
  • 1956: Citi backs uniform cargo containers
  • 1958: Citi backs the commercial jetliner
  • 1977: Citi pioneers the ATM
  • 2011: Citi is the first card in Google Wallet

Exactly. For the first 150 years, the bank helped build infrastructure that made the U.S. the largest economy in the world. For the past 50 years, it has been figuring out how to get fees out of consumers' wallets and pocketbooks.


But credit card debt collection practices are really those not of "banks". They are practices of the collection industry. The bank sells the accounts as-is, where-is with no reps etc. That's one reason why the collector pays pennies on the dollar. In fact, the bank is incented to sell them, and to put no investment into their collection, by federal banking regulations that require the bank to write off every dollar of an unsecured loan as soon as one payment goes 6 months overdue. (The regulation exists to protect the FDIC from banks dressing up their books by "amend and pretend" treatment of delinquencies.) So if people hate "banks" because of things non-banks do, maybe someone could educate the people that banks aren't doing all that they think. Like Joe Nocera. Or Credit Slips.

mt, you may not have seen the prior post in which they discuss the practices of certain banks of selling off debts without adequately checking if that money was still owed or if the amount listed as owed is accurate.

I also think it's fair to blame the banks partially for the collection practices of other businesses because they choose who to sell to. If they were interested in protecting their customers, they'd do their diligence in determining the validity of the debt and in determining whether the buyer is a reputable business.

mt -- requiring banks to charge off accounts after 180 days has absolutely nothing to do with whether or not the banks can still collect the accounts. The banks can make a business decision to (1) do nothing; (2) collect in-house; (3) hire a debt collection firm; or (4) sell the accounts.
When banks knowinly sell junk debt to junk debt buyers, with full knowledge that the junk debt buyer is then going to sue people even though they do not have proper evidence, then the banks are directly to blame.


I am familiar with the industry from multiple perspectives and took what you note into account in my comment.


You don't understand the business. Do nothing vs sell? That is arguing zero is an option vs a positive sum. This is a for-profit business. Fail. Collect in house? Sorry, that staff costs M-O-N-E-Y, in good times and bad. To match the net income from selling, you have to cover their costs which means you have to collect a multiple of what you sell for. 3) Hire a debt collection firm? Well, at least this is an option. But is it superior? Think about the time value of money. The margin for hold has to be well above that for sell because of the time value of money. At best, this becomes a market timing question - I hire a firm when bids are low, I sell to them when they are high. As well, selling eliminates the contingent risks that come with holding and enforcing.

If you understand the business, you know that it is binary. For credit card debts less than 6 months old, banks hold. After 6 months, they sell. There is only one reason for the timing, the bank regulation.

mt: You are clearly taking the perspective that a bank has one goal or duty to make money. And that the bank has no duties to its clients.

Fine. But then, the banks have no business whining when their clients decide they hate the banks.

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