Here's an opportunity to supervise a consumer financial protection clinic that has done some great work - information on the position and how to apply here.
Here's an opportunity to supervise a consumer financial protection clinic that has done some great work - information on the position and how to apply here.
The Federal Reserve System has embarked on a project of exploring the possibility of faster retail payments in the United States. A similar move has occurred with the UK Payments Council. At the same time, the Electronic Payments Network is rolling out a faster version of ACH.
Here's what puzzles me: what on earth is the business case for faster retail payments in the United States? The U.S. payment system works incredibly well. Yes, it has flaws: the interchange system is unfair and security is atrocious. But those aren't really speed issues. Real-time authentication is a security issue, but that's separate from speed of payment clearance and settlement.
Now, it's true that the US lags behind other countries in terms of mobile payment technology. We don't have anything like Kenya's m-Pesa mobile payment system. But there's a reason for that: we don't need m-Pesa in the US because we already have a functioning retail banking system, and our banks are better safety-and-soundness risks than our telecom operators. (Kenya's government owns a large share of m-Pesa, making it quasi-guarantied, I guess.)
So readers, tell me, what am I missing? Is there a business case, or is this just about chasing shiny bells and whistles and wanting to have the latest technology just because? My sense is that we're seeing an "iPhone effect" of wanting the best and newest, even though the current system is just fine.
In a recent case called Madden v. Marine Midland Funding, the Second Circuit ruled that a loan owned by a debt collector violated New York's usury statute. The loan had been originally made by a national bank and was subsequently sold to the debt collector when it was in default. There's no question that the state usury law was preempted when the loan was held by the national bank. The Supreme Court's (awful) Marquette National Bank v. First of Omaha Service Corp. decision from 1978 makes that very clear. (The Court suddenly discovered in 1978 that over a century of legal understanding of the 1864 National Bank Act was somehow wrong and that banks had been leaving lots of money on the table.)
The debt collector argued that because the loan had been made by a national bank, it carried preemption of state usury laws with it as a permanent, indelible feature. "Applesauce!" proclaimed the Second Circuit: National Bank Act preemption of state usury laws extends no further than National Bank Act regulation. Preemption is part of a package with regulation, but once the loan passes beyond the hands of a National Bank, it loses its preemption protection and becomes subject to state usury laws. (Some of you might recognize that this is an argument I made several years ago. Plaintiff's counsel sent me a very nice email to this effect. You owe me a citation, 2d Circuit!).
Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002.
Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business."
Clearly, the biggest surprise in consumer borrowing since the crash has been the explosive expansion of student loan debt. It has surpassed both auto lending and credit card lending. And, since it ties with Payday Lending and pre-crash sub-prime mortgage lending for the thinnest underwriting there are defaults aplenty.
Consumer advocates are rightly urging the Department of Education to provide simpler and clearer paths forward for consumers with student loans in default but many people still need a helper. As defaults in mortgage loans and on credit card loans have fallen, providers who live on the profits of counseling people who default on those loans have turned their attention and their advertising and marketing to consumers who are in trouble on their student
Last week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.
General purpose reloadable prepaid cards, though still a small segment of the consumer financial
products market, have grown rapidly in past years -- from $28.6 billion in 2009 to close to $65 billion in 2012 (as previously discussed). Consistent with this growth in dollars, the Survey found that prepaid card use had increased among all households from 2009 to 2013 -- from 9.9% to 12%. More interestingly, the share of unbanked households that used prepaid cards had increased more dramatically -- from 12.2% in 2009 to 17.8% in 2011 to 27.1% in 2013. By comparison, 19.6% of underbanked households and 8.8% of fully banked households had used prepaid cards in 2013. When combined, unbanked and underbanked households comprised the majority (55%) of prepaid card users in the previous 12 months.
The revelation that 76 million JPMorgan Chase consumer accounts were compromised by hacking should be scaring the heck out of us. The Chase hacking is a red flag that hacking poses a real systemic risk to our banking system, and a national security risk as well. Frankly, I find this stuff a lot scarier than either ISIS or our still largely unregulated shadow banking space.
Consider this nightmare scenario: what if the hackers had just zeroed out all of those 76 million Chase accounts and wipes out months of transaction history making it impossible to determine exactly how much money was in the accounts at the time they were zeroed out? The money wouldn't even have to be stolen. Just the account records changed. What would happen then?
Interesting op-ed on digital wallets by Edward Castronova and Joshua Fairfield in the NYT. I'm a little more skeptical. Thoughts follow the break.
Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP.
One of the competitors in the Great Mobile Payments Race is changing its name. Isis Wallet, a mobile payments joint venture of AT&T, Verizon, and T-Mobile is changing its name to Softcard for fairly obvious reasons. Isis Wallet operates by having the consumer store his/her payment card information on a "secure element"--tech speak for a tamper resistant chip that safely stores encrypted information. (The particular secure element for Isis Wallet depends on the phone model.) That payment information is then communicated with merchants using NFC (near field communications, i.e., contactless). Isis Wallet also integrates various loyalty programs and merchant offers (including some that are proximity based). As Apple's Apple Pay platform shows, mobile payments is becoming a crowded field with some real heavyweights. Yet, as I'll blog shortly, there are some real challenges ahead for anyone in the field.
At today's House Judiciary Committee hearing on Operation Choke Point it seemed that Choke Point's critics are conflating a fairly narrow DOJ civil investigation with separate general guidance given by prudential regulators. In particular, Rep. Issa attempted to tie them together by noting that the DOJ referenced such guidance in its Choke Point subpoenas, but that's quite different than actually bringing a civil action on such a basis (or on the basis of "reputational risk"), which the DOJ has not done.
There is a serious issue regarding the bank regulators' use of "guidance" to set policy. Guidance is usually informal and formally non-binding, but woe to the bank that does not comply--regulators have a lot of off-the-radar ways to make a bank's life miserable. This isn't a Choke Point issue--this is a general problem that prudential bank regulation just doesn't fit within the administrative law paradigm. There are lots of reasons it doesn't and perhaps shouldn't, but when it is discovered by people from outside of the banking world, it seems quite shocking, even though this is how bank regulation has always been done in living memory: a small amount of formal rule-making and a lot of informal regulatory guidance. By the same token, however, compliance with informal guidance is enforced informally, through the supervisory process, not through civil actions, precisely because the informal guidance is not actionable. Yet, that is what Choke Point critics contend is being done--that DOJ is using civil actions to enforce informal guidance.
I don't think that's correct (or at least it hasn't been shown). But the conflation of DOJ action with prudential regulatory guidance may be creating the very problem Choke Point's critics fear.
Bank compliance officers may be hearing what Choke Point critics are saying and believing it and acting on it. If compliance officers believe that the DOJ will come after any bank that serves the high-risk industries identified by the FDIC or FinCEN, not just those that knowingly facilitate or wilfully ignore fraud, they will respond accordingly. The safe thing to do in the compliance world is to follow the herd and avoid risks. The attack on Operation Choke Point may well have spooked banks' compliance officers, who'd aren't going to parse through the technical distinctions involved.
What matters is not what the DOJ actually does, but what compliance officers think the DOJ is doing, and they're likely to head the loudest voice in the room, that of Choke Point's critics. So to the extent that we are having account terminations increasing after word got out of Operation Choke Point it might be because of Choke Point's critics' conflation of a narrowly tailored civil investigation with broad prudential guidance. Ironically, we may have a self-fulfilling hysteria whipped up by Choke Point critics, who shoot first and ask questions later.
Pop quiz: what do payday lenders have in common with on-line gun shops, escort services, pornography websites, on-line gambling and the purveyors of drug paraphrenalia or racist materials?
You can read my testimony for this Thursday's House Judiciary Committee, Subcommittee on Regulatory Reform, Commercial, and Antitrust Law's hearing on Operation Choke Point to find out. Or you can just keep reading here.
Todd Zywicki, Geoff Manne and Julian Morris have an article on the effect of the Durbin Amendment. Sigh. No surprises here. Zywicki et al. are making claims beyond what their data can support and in fact directly contradicted by their own data, which shows that some of the "effects" of Durbin preceded the enactment and effective date of the Amendment.
Credit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live.
The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.
Monday was our last day of classes. This semester I taught a seminar about the role of consumer credit in the United States' economy and society through the lens of consumer bankruptcy (primarily utilizing data and papers from various iterations of the Consumer Bankruptcy Project; find info about the seminar, which was designed by Katie Porter, here). Fittingly, the final project was to write a proposal for an empirical study of an important and under-studied issue regarding consumer credit and/or bankruptcy. A couple students honed in on the lack of research regarding the make-up of credit card debt that debtors seek to discharge through bankruptcy. Is the debt incurred for everyday necessities, such as groceries and gas to drive to work? Is a sizable portion for medical expenses? Or is the debt incurred for 3D televisions, designer suits, and other luxuries?
The students' proposals were a bit broad (admittedly because I let them be a bit fanciful), and called for reviewing all of debtors' credit card statements for the three years prior to filing and conducting extensive interviews with debtors to tease out the nature of the expenses behind the thousands of dollars in credit card debt that the average consumer seek to discharge. Coincidentally, the day that some of my students presented their proposals, Amy Traub (from Demos) came out with a new study titled "The Debt Disparity: What Drives Credit Card Debt in America." The study relies on a survey of 1,997 low and middle-income households, half of which carry credit card debt and half of which do not. The study doesn't answer my students' ultimate question, but the data may shine some light on the characteristics of households that tend to carry credit card balances and what types of expenses may underlie their credit card debt.
Today is your last chance to comment on the CFPB's Advanced Notice of Proposed Rulemaking on Regulation F, regarding debt collection. I had the pleasure of working with Pat McCoy on a joint comment to the ANPR. Our comment addresses documentation and information requirements for collectors, chain of title issues, and debt repositories.
After reading two reports released yesterday I'm even more convinced that these are among the most critical issues. The FTC announced their top 2013 complaints (debt collection still the top industry complained about) and US PIRG released a report on the more than 11,000 complaints the CFPB received on debt collection over a six month period. The PIRG report in particular highlights just how important the integrity of the information and documentation passed from collector to collector is (and how badly this is working right now). Most consumers were complaining that the debt was not theirs (25%), they were not given enough information to verify the debt (13%), or that the debt had already been paid (11%).
This is exactly the underlying issue that we address in our ANPR comment: something is very wrong when a debt buyer only gets a spreadsheet with some information about the debt, gets no documents in connection with the debt, signs a contract where the seller doesn't stand behind the information sold (and sometimes specifically says amounts or interest may be wrong), and then attempts to collect on that debt. I've argued that this violates the FDCPA. In our comment we try to propose some ways to fix this problem going forward.
I urge Credit Slips readers to send in your comments before the 11:59pm deadline.
CapOne's taken a lot of flack today over its apparent desire to check what's in your wallet by visiting you at home and at work. The LA Times story got even bigger when it made it to Twitter and great (and lots of bad, see previous sentence) puns started rolling in.
The company answer seems to be that language from a security agreement for snowmobiles got "mixed in" with the credit card language (and no one over there is reading their 6-page contracts). They are now "considering creating two separate agreements given this language doesn’t apply to our general cardholder base."
I wonder if that means that they'll also revisit the part of the credit card agreements that takes a security interest in anything you buy from Best Buy, Big Lots, Jordan's Furniture, Neiman Marcus/Bergdorf Goodman, or Saks? (I should note, your clothes are only in danger if you have a Saks "retail" card; if your card is a Platinum or World card not only is your interest rate likely lower but it seems your stuff is also safe).
Let's be really clear about what most identity theft is about: it's about payments data. Identity theft is first and foremost a payments fraud problem. We don't know all of the details about what happened at Target and Neiman Marcus, but there's a really obvious weakspot in the US payments infrastructure that should be corrected, irrespective of whether it would have prevented the Target and Neiman Marcus breaches: the use of two-factor authentication, namely chip-and-PIN cards, which are standard outside the US and have been effective in reducing fraud.
Why don't we have chip & PIN here? Because the banks don't want to pay for it because they don't bear most of the fraud costs. The banks/payment networks are the least cost avoider of identity theft, but because merchants are eating most of the fraud costs, the banks have instead have opted for a complex set of security standards for merchants (PCI Security Standards) that are of dubious effectiveness.
I'm going to wade into unchartered Slips waters today and head into Bitcoinland. I've been trying to understand Bitcoin from a payment systems perspective, where it has an interesting problem and solution: double spending. The lesson in all of this is how Bitcoin has a sort of built in seniorage--payments are never free. Currently Bitcoin builds in its costs through inflation, which is not particularly transparent, but that will ultimately change to being more transparent--and salient-- transaction fees. By disguising its costs through inflation, rather than through direct fees, Bitcoin effectively incentivizes greater consumer use of the system, much as credit card usage is incentivized through no-surcharge rules preventing merchants from passing on the cost of credit card usage to consumers.
For years, "product innovation" in financial services made consumer advocates squirm. This was the cover term for the 2/28 teaser ARM, automatic and costly overdraft protection, and direct deposit "payday" style loans. It was a great term because it's hard to be anti-innovation, especially in a world where every day a new app or technology proves useful. A new credit card, called "Voice" from Huntington Bank, is innovating in the credit card space. While the pros and cons of rewards are debatable (Ronald Mann's Charging Ahead has a dated but good discussion of rewards), the marketing and design of the Voice card are intriguing. What do I see?
1) The personification of the bank. It "listens." Consumers can "tell the card" things.
2) Big touted benefit of a one-day late fee. That's a nice consumer perk but perhaps telling about how many late fees are really the result of simple mistake rather than financial hardship. And that's a fact that perhaps should play into what a "reasonable" v. "abusive" late fee is.
3) That consumers presumably will be drawn to this idea of switching up rewards. If people forget to pay on time, are they really going to log on at the start of every quarter to change up and maximize rewards. The card allows consumers to "Earn a point per dollar on all purchases with Voice and pick a triple rewards category. So, you get the flexibility to earn 3x points in the category where you spend most. Go from triple gas points in fall to triple utility points for winter. It’s your choice." Huntington presumably will track whether consumers actually make such choices, and it would a field day for a behavioral economist to study how consumers use such a product.
4) No annual fee, so hey, maybe chasing rewards on cards with high annual fees would do well here. Typically we see high rewards paired with high annual fee (think airline cards). Query how good the rewards perks can be if the bank doesn't have annual fee revenue. Maybe the answer is that Huntington is marketing this card to its retail customers, and it knows enough about their habits to have optimized this product--both in terms of attracting them and being profitable. There's been a lot of talk about personalized medicine, but personalized finance is a reality too.
Judge Rakoff issued an opinion today holding that the New York state credit card no-surcharge law violates the First Amendment of the US Constitution because a "surcharge" and a "discount" are two ways of expressing the same thing, and the state of NY cannot direct merchants which of those two ways of expression to use. I'm a little skeptical of some of Rakoff's authority--he cites a couple of papers by some Levitin character (here and here), but the opinion is classic Rakoff: "Alice in Wonderland has nothing on section 518 of the New York General Business Law."
This ruling has real significance in the event that the settlement in the multi-district credit card interchange litigation (MDL 1720) is ultimately approved because while that settlement amends card network association rules to permit surcharging in certain circumstances, surcharging remains impossible in 11 or so states that have no-surcharge laws. If the NY statute is unconstitutional, it's hard to fathom how other states' no-surcharge statutes would be too. Of course, we'll have to see what happens on appeal.
All's Quiet on the American Front in the interchange wars. But there has been some action to report in Canada and the EU. In Canada, the federal Competition Tribunal dismissed the suit brought by the Canadian antitrust authority against Visa and MasterCard. Only a summary of the decision is available--the ruling is under seal. According to the official summary, the dismissal was on the grounds that the statutory provision in question required a resale, which had not been established by the Commissioner of Competition.
But the Competition Tribunal went on to explain that in the event it was wrong about its statutory analysis, "there had been an adverse effect on competition" from no-surcharge rules. (My emphasis.) Nonetheless, the Competition Tribunal found that the proper solution to the antitrust problem is a regulatory framework, not an injunction.
So while this was a victory for MasterCard and Visa, it was a victory on technical grounds. The Canadian Competition Tribunal was clear that no-surcharge rules are anti-competitive. It'll be interesting to see if Canadian regulators or Parliament take up the implicit invitation to create a regulatory framework as we did for debit cards with the Durbin Amendment.
Felix Salmon has an interesting and provocative piece arguing Why Mobile Payments Will Never Take Off. The problem, Felix observes, is that none of the mobile payment systems around really offer any improved convenience over plastic. (Indeed, one might note that depending on the setting, cash is still the fastest, especially if security procedures for plastic, such as checking to see that a card is signed, are followed.) Felix also observes that the developing world examples of successful mobile payment systems, like M-Pesa, don't really present a model for the US. In the developing world, mobile payments represent the Great Leap Forward, bypassing the age of retail banking and plastic cards, and going straight from paper/barter to digital. If the contest is mobile vs. paper/barter, the outcome is likely to be different from mobile vs. plastic. Felix is right on both points. Still, I'm not as ready as he is to throw in the towel on mobile.
"Make it fun and they will come," Lauren Willis discussed in the instructive post that evaluated the pros and cons of "The Gamification of Financial Education." Meanwhile, in London, a live show has been designed for children as young as five to teach them about the financial system. Interesting story on the show in The Guardian here. Tickets to "Bank On It" (running through the 14th of July) and other information here.
Money tree image courtesy of Shutterstock
That 99% invisible is a vibrant architecture and design podcast might have been beside the point in Credit Slips land -- but for the fact that its current show (Episode 78) focuses on the design and technology of casino slot machines, and the particular profitability of penny slot machines. The short piece is built on the work of M.I.T. professor and anthropologist Natasha Dow Schüll. Lots on the consumer finance and cognitive behavioral side of things; don't expect any mention of bankrupt casinos.
Slot photo courtesy of Shutterstock.
Wow. Credit card fraud really can happen to anyone, as the Washington Post's Al Kamen reported this afternoon. Apparently U.S. Supreme Court Justice John Roberts had his credit card number stolen and had to pay cash for his morning Starbucks.
This story raises so many questions. First, how many credit cards does Justice Roberts carry? Could it be that he carries just one? Second, what type of card was it? Third, where was it compromised? Fourth, how much hutzpah does this thief have? Did the thief not know who he or she was dealing with? Finally, I wonder if this event might bear on future consumer law cases before the court. One thing is clear. Even important people have to watch thier backs.
Over at VoxEU, economists Daniel Aronson and Eric French have a discussion about the their research of the effects of a minimum wage hike. I found my way to this post through Yves Smith's discussion of the topic at Naked Capitalism, which also includes some informative tables showing that the proposed hike to $9/hour is still below a living wage in many areas of the country.
Now that my last few posts have bludgeoned consumer financial education and at least bloodied disclosure, and given that my suggestion of comprehension requirements is completely untested as a means of consumer protection for financial products, what about “nudges”?
One nudge I have taken a close look at is the use of policy defaults. Defaults are settings or rules about the way products, policies, or legal relationships function that apply unless people take action to change them. Although some defaults in the law are mere gap-fillers and others, as pointed out by Ian Ayres and Robert Gertner, penalize one or more parties with the intention that the parties will contract out of them, policy defaults aim for stickiness. The idea behind policy defaults is to set the default to a position that is good for most individuals, under the assumption that only the minority who have clear preferences to the contrary will opt out.
Like many credit providers, American Express tries to escape class action liability by pairing an arbitration clause with a class action waiver, thus requiring customers to bring claims in arbitration, as individuals. In AT&T v. Concepcion, the Court rejected an attempt to use state law unconscionability doctrine to invalidate a clause like this. In the AmEx case, the Court must resolve an arguable conflict between two federal laws. Plaintiffs are merchants who accuse American Express of violating the Sherman Antitrust Act and want to bring a class action in federal court. (Actually, they waffle a bit on this (pp. 35-36), but let's just say they wouldn't turn up their nose at a federal class action...) Relying on the Federal Arbitration Act, American Express argues that the plaintiffs must honor their agreement to pursue these claims individually in arbitration. In its prior cases, the Court has resolved such disputes in favor of arbitration so long as that forum allows claimants to "effectively vindicate" their statutory rights.
I had a weird night’s sleep and then openned up my e-mail to find this headline from credit and collection news “Does The Consumer Bureau Harm Those It Claims to Protect? & Study Predicts Millions Will Die In Credit Card Red.” The immediate implication in my drowsy state was that the CFPB was somehow killing people. Wow. As it turns out, these were two headlines from two different stories, first one about how the CFPB was hurting Americans and the overall economy by constricting credit, according to a Heritage Foundation paper by Diane Katz, available here.
The second story was by Laura Rolland of the Huffington Post, and contained some grim news from a recent Ohio State Study published in the January issue of the Journal of Economic Recovery. It claims, consistent with informal data from my financial literacy class, that young people are up to their eyeballs in debt. According to Rowley, Millions of young Americans will die in debt to credit card companies. The study data show that people in their late 20s and early 30s (born 1980 to 1984) carry significantly higher credit card debt than older generations and pay it off more slowly, have about $5,700 more than people born 1950 to 1954, and $8,200 more than those born 1920 to 1924. The study even predicts that these young people will continue to charge well into their 70s.
Community banks and credit unions are the darlings of Congress in the financial services industry. This is quite understandable--they play an important economic role in their communities and have a much greater civic presence than the big banks. The president of the local community bank is much more likely to be involved in major civic organizations than the Bank of America branch manager. As a result, a parallel regulatory system has developed for community banks and credit unions. Small banks and CUs (net assets of less than $10 billion) are exempt from CFPB examination and from the Durbin Amendment's regulation of their interchange fees. They're subject to regular FDIC seizure, rather than OLA, and are not subject to SIFI regulation with higher capital requirements. And they would have been exempted from the proposed cramdown legislation.
There's a linguistic irony that "gift" is the German word for poison. What, then, should we make of the "gift card"?
Senator Richard Blumenthal's introduced new legislation, the Gift Card Consumer Protection Act (S.3636) that aims to close up the loopholes in existing gift card regulation and to protect consumers with gift cards when the retailer goes bankrupt. The legislation has a few moving parts:
It'll be interesting to see what the opposition ends up being to the bill. The bill is dealing with two separate, but related problems.
Preliminary approval was granted for the interchange litigation settlement (MDL 1720) last Friday. Approval was widely expected, but I would also expect an appeal. What the 2d Circuit will say is anyone's guess, and then there is still the question of final approval. Nonetheless, I think it's worth commenting on one aspect of the settlement that I haven't previously addressed, namely the incentives of the various named plaintiffs to support or oppose the settlement. This is both a matter of law and a matter of optics.
Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.
Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System. The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.
That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty. Sure, the warranty covered replacement . . . but not shipping (a la "fine print"). The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments. Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.
I was really hoping that I would be able to go at least a year without having to call Todd Zywicki out for his comments on some consumer finance issue. But it's not to be. Zywicki has weighed in on the interchange settlement, proclaiming it to be great thing for consumers. Mission accomplished.
How does Zywicki reach his conclusion? By claiming that:
[the settlement] does affirm the core principle that interchange fees should be set by free markets and consumer choice rather than by judges or politicians, thereby preserving the engine behind one of the marvels of the modern age: the evolution of a 24-hour globally-connected system of instantaneous, secure, and ubiquitous payments system.
Let's put aside the fact that other countries have more advanced, more secure, faster, and more ubiquitous payment systems than the United States without oppressive card network rules and price-fixing. Apparently this is an ideological matter. The settlement affirms the primacy of free markets and consumer choice, Zywicki claims. How? Zywicki isn't long on the details, but the answer would be that it preserves the current interchange fee system. In short, the settlement is a victory for consumers because it accomplishes next to nothing.
Moved to top from 8/15.
I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720). I'm weighing in on it now. I've written up an analysis of the proposed settlement. It's available here. [N.B.: this is substantially expanded 8/21 revision of the original 8/15 analysis.] It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court, and it appears that at least several of the named plaintiffs will reject the proposed settlement.
The short version of my analysis is that the settlement is an exceedingly bad deal for merchants and not in the public interest.
JPMorgan Chase and Class Counsel have received preliminary approval of a $100 million class settlement in In re Chase Bank USA, NA "Check Loan" Contract Litigation (MDL 2032), a case involving Chase's increases in minimum payment amounts on some Chase cardholders who had taken advantage of low-APR balance transfers. If confirmed, the proposed settlement would be, as far as I can determine, the second largest private settlement (or judgment) in a consumer class action relating to credit cards. In re Providian Credit Card cases settled for $105 million right at the end of 2000, and Rosted v. First USA Bank settled for $87 million in 2001. There have been larger settlements between card issuers and regulators, such as the CFPB's recent settlement with Capital One for $210 million (approximately 2/3s of which is restitution to consumers), the FTC's $114 million settlement with CompuCredit in 2008, and the OCC's $300 million restitution order against Providian in 2000.
Given the huge volume of consumer credit card complaints both before and after the CARD Act, it's interesting to note how rare 9-figure private settlements have been. Whether this is a reflection on the state of our class action litigation system or a reflection on the actionable strength of consumers' complaints is unclear, but I would have expected to see more large consumer credit card class actions settlements. I'd be curious to hear others' thoughts on whether I'm expecting too much or why there haven't been more such settlements (or if I've missed some big ones).
The CFPB released a beta version of its complaint database on June 19th. Right now, one can only search credit card complaints, which the CFPB began taking on the first birthday of its creation, July 21, 2011. My takeaway is that this is major step forward for the disclosure of complaint data but that the "beta" in the website is well-deserved. You can see some neat graphics and and best of all you can download the raw data. One problem is that this is SO apparently cutting-edge and sophisticated that I couldn't figure out how to use many of the features after a half-hour of poking around (and while some may disagree, I think it's safe to say I have more technology and statistical skills than the vast majority of U.S. consumers). Below was my effort to use the "embed" graphic feature that is touted as allowing one to "publish this dataset on the internet at large."
And yes, I know the graphic does not appear and the hyperlink does not work. If you cut and paste it into a window (old school), it does appear.
The number one agenda item for small banks is to repeal the physical, on-machine disclosure requirement for ATMs. Yes, I'm serious, that, that is the top agenda item for small banks. And they wonder why they're not doing so well...
Still, it's worth understanding why they're focused on this issue. The Electronic Funds Transfer Act requires disclosure of ATM fees both physically on the machine, as well as on the screen. Failure to do so subjects the financial institution to liability, including actual damages (close to zero), statutory damages (up to $1000/violation but with a class action cap) and attorneys fees. As it happens a cottage industry has emerged bringing strike suits over missing ATM signs (query how signs just fall off ATMs...). I've blogged a bit about it here.
This weekend I saw an ATM that shows why merely requiring physical disclosure doesn't accomplish much--the disclosures were perhaps a foot off the ground and the ATM was in a space where kneeling was impractical (unless you want to get hit on the head with a door). I'm not sure if that was the fee disclosure (which must be in a "prominent and conspicuous location") or some other disclosure, but it's pretty useless for anyone who isn't crawling. Check it out after the break.
The Tennessee Court of Appeals has issued a decision that highlights the problems facing credit card debt collectors in a post-robosigning world (see here and here). The decision reaffirms what should be a simple principle in a debt-collection lawsuit. The burden is on the debt collector to show it owns the debt and to show the consumer is liable for the amount the debt collector asserts. The debt collector's say-so is not enough.
In LVNV Funding, the consumer had opened a Sears Gold Mastercard account in 1985 and was being sued for a balance that was a little more than $15,000. He had not used the account since 2001 and thought it had been settled in 2005.
One might first think Sears was the plaintiff. It was not. Sears had sold the account to Citibank, but Citibank was not the plaintiff either as it had sold the account to Sherman Financial Group. The plaintiff was LVNV Funding, a subsidiary of Sherman Financial to which the account had been assigned.
The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:
(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened. This won't fix our too-big-to-fail problem, but it's a small move in that direction.
(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys. That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation).
(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened. (It's also possible to have two-tier pricing with interchange fees continuing to rise for small banks...)
(4) The small banks' debit card transaction market share grew slightly. It's not clear to me that this is a real trend, but it's possible that this is a side-effect of the big banks like BoA clumsily trying to recapture reduced debit interchange revenue with direct consumer fees. It seems that some consumers don't take well to hidden fees being replaced with direct fees. It's still not clear how many accounts were really moved to small banks/CUs in response to BoA and the like, but that could explain the growth in debit card market share for small banks. In any case, merchants aren't steering away from small banks as we were told they might do. (It was never clear how they would steer anyhow).
(6) There may be other, harder to measure benefits for small banks from Durbin. To the extent that it makes their deposit account/debit product more competitive, this could have spillover benefits for their other products. The deposit account (monetizable via debit or check) is the gateway relationship. It enables the cross-selling of other products (loans, investments, insurance). So the benefits to small banks may be more than just on the debit revenue side.
(5) The big issuers are paying lower network fees (4 cents lower for sig, 2 cents lower for PIN), which means that small issuers are really getting a 23 cent/transaction advantage of signature and 6 cents/transaction advantage on PIN. It's not clear, however, what the network breakdown of small issuer transaction is.
Again, it's still early in the game. There's still the merchants' litigation challenge to the Fed's Durbin Amendment rulemaking, and we could well see a bunch of market moves. Visa seems to be trying to go back to tying credit and debit products via its network fee, and there's always the possibility of either some innovation (think mobile), a new settlement network (PayPal?), or a new entrant buying an existing player and shaking things up (Google or Apple buying MC?).
A final thought. The more distance we get from Durbin, the more I like the amendment. It's public utility regulation: rate regulation (section 920(a)) and open access (section 920(b)). That's not a totally new move in bank regulation (think Reg Q), but it really encourages thinking of at least some banking functions as being public utility functions. There might be something to that.
Here's a plug for a conference on mobile payments that the FTC is hosting next week. It will be webcast live. The agenda is here. I'm one of the speakers.
Despite my participation, it should be a really interesting conference. Mobile brings together a range of new and existing consumer finance, privacy, IP, and antitrust issues: mix together one part banks, one part telecoms, one part device manufacturers, one part OS manufacturers, and one part app designers and stir. What's going to result from that mix isn't clear. We're still in the early stages of mobile; it's clear that in 10 years, if not 5, mobile will be a major part of the US payment system, but it isn't clear yet what that will look like. It could develop in a number of ways, with very different implications for the end-users (consumers and merchants) and the various intermediation participants (banks, telecoms, OS, hardware, and app makers).
There is a lot of potential benefit to consumers and merchants from marrying payments with all of the other consumer data that goes through mobile (e.g., location, contacts, interests), but also major privacy and competitive concerns. We don't have a clear framework for working through those issues at present. Mobile's cross-sector business complicates attempts to create such a framework. Mobile touches on the jurisdiction of the FTC, CFPB, FCC, and DOJ (antitrust), raising obvious coordination issues. Uncertainty over regulation isn't simply a concern for end-users; a clear regulatory framework is actually important for the development of mobile platforms, as regulatory uncertainty creates an investment risk. I'm really glad to see the FTC hosting this conference--it shows a regulatory awareness of the need to engage with the issues raised by mobile.
While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”
There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money--and a challenge for the Credit Slips community.
Sticker in San Francisco: "Of course it's cash-only, it's the Mission."
Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)
The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.
Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).
In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.
Jeff Horwitz at the American Banker has been doing some great reporting on abusive debt collection practices in the credit card industry. Joe Nocera's column took up the subject today. Robo-signing and other abuses have been a problem for a while with credit card debt collections, and Horwitz and Nocera do a public service by drawing attention to the problems. The situation cries out for congressional hearings and for regulatory investigation. It is great to see the Consumer Financial Protection Bureau make debt collection practices one of its top priorities.
Horwitz's articles at the American Banker include:
Maria Aspen at American Banker separately reported how the sloppy sales of delinquent credit card accounts and shoddy debt collection practices were a nightmare for one Maryland woman.
One of my students came across a humorous blog post from February, 2012. Titled, “What your payment method reveals about you,” the author listed a series of unlikely payment actions and a line on the presumed personal characteristics of the payer. The humor appeals to… well, us, anyway, and probably you, too.
Slinging your card down: You've definitely shoved a dog's face away from you because "move."
Slinging cash down: You've consumed alcohol that's involved whipped cream in the past week.
Using your Hello Kitty-themed card: You have many other credit cards.
Handing a bag of nickels and dimes, uncounted: You are nine.
Around the same time, the United States Agency for International Development launched an initiative to replace the use of cash in aid efforts with electronic forms of value transfer:
"If you care about reducing poverty, then you must also care about reducing the reliance on physical cash. We begin a movement to do just that. USAID Administrator Rajiv Shah is announcing a broad set of reforms [in order to] reduce the development industry’s dependence on cash. This includes integrating new language into USAID contracts and grants to encourage the use of electronic and mobile payments and launching new programs in 10 countries designed to catalyze the scale of innovative payments platforms."
The USAID “Better Than Cash” program was the culmination of at least a year’s discussion internally and with major donor agencies over the costs of cash for the poor--the heightened risk of theft associated with physical currency, the anonymity of cash, the difficulty in transporting and storing cash for those without access to formal financial institutions. Our own work has been enlisted in this effort, yet we are a bit more circumspect: although there are very real problems associated with cash, there are also virtues. One of these virtues is that cash is publicly issued, not privately enclosed and tolled like most electronic forms of value transfer, and almost always accepted at par value. We’ll return to this topic as we examine some mobile phone-enabled money transfer and payment systems in the developing world, and regulatory responses to them, that might provide useful models. Over the course of the week, we will look closely at cash and how the debate over cashlessness—at times downright silly—is getting more serious, as at least some major actors shift from “the evils of cash” to “the benefits of an agnostic digital payment platform.” We think this is a consequential shift.
Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs - in the article "In Vitro a Fertile Niche for Lenders." (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here.
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