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Citibank Says Credit Market Doesn't Work

posted by Elizabeth Warren

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.


I agree. The credit card market today is like "Vegas". On TV it looks great, but they never advertise that the "house always wins" and wins big. It's ok for the house to win but at least explain to me in "english" how and why. "They" do advertise that "this" is such a great deal but then trip us up on a clause that takes an attorney to understand. By the time we understand, we are "bound" to have to play by their rules and on their court......down 10 points before the game even starts!

How can credit card cos' provide that one on one attention when they are set up for volume? "They" have gotten away from "service",only to make up the dif.+ some with the "extras". Why would they want to do it any other way? They are doing so well for themselves when at min. pmts they 3X-5X what they lend.

I don't carry a credit card. I have 13 credit lines, and owe $25,000, but I haven't paid a penny of interest in years. I guess my real-world advice (in lieu of Congressional action) is to (a) don't use credit cards, or (b) have many, so if one tricks you, you can call to cancel, AND CANCEL, and have another in backup. They'll offer to nullify the fee, but what's the pain in that? Running out of credit is much worse than running out of cash, so once again all this is plenty of rope to hang yourself.

I can think of at least two ways customers might 'vote with their feet' in a market that worked. One, of course, is choosing to carry a Citi card instead of a competitors. The second would be to use the Citi card more than using the competitor's card. (I suppose a third would be in the case where the only card held was Citi's and using it more).

But, this is a key point. How many consumers have only one card? How many consumers are not operating at or near the limit of their credit? And, ask both these questions for those consumers who would most likely be affected by the 'deal is a deal' promise. Wouldn't that target market have been folks who had many cards and operated at or near the limit?

In light of these questions, I wonder about the pragmatic, real world effect of Citi's promise on actual consumers for whom that promise might have induced 'voting with their feet'. My guess is that, even if consumers understood the promise (which as Prof Warren writes is unlikely), there wouldn't have been enough consumers to make all that much of a difference -- even if they had acted.

All of which raises another question: Who was the intended audience of Citi's promise that a 'deal is a deal'?

Most likely answer: Congress and the Media.

I'm shocked. A credit card company manipulating the legislative process for their own gain. Sounds a bit like a bunch of pages out of the bankruptcy reform playbook.

It’s very disappointing to hear that Citibank may take back its word on the promise to abolish universal default. If so, this certainly doesn’t lend any credibility to their ‘deal is a deal’ messages and undermines the positive image they were attempting to put forth in the industry and for consumers. In this case, perception is reality – another example of credit card companies pretending to act in the consumer’s best interest and then changing the rules of the game to their favor again.

I would ask just how much Citibank actually gave the messages to end universal default a chance to succeed. The article mentions that they attempted this for a year and that they didn’t get the consumer response they expected. Consider, if Citibank put as much effort into ending universal default as they do with their reward programs or other card promotions, I’m sure the universal default point would have hit home.

If Citibank took the promise to end universal default seriously, there should have been some careful positioning of the messages on how/why they were doing this. You could start with a press release along the lines of ‘As an industry leader in providing credit product solutions, Citibank is pleased to announce that it is the first company to abolish the practice of universal default. Citibank is doing this because we believe it is the right and ethical choice for our customers and business practices, and we hope that other credit card companies will follow in our steps to do away with their universal default practices. For more information on how Citibank is committed to ending this practice visit citi.com. We appreciate your business and look forward to serving your banking and credit product needs for years to come.’ As more companies got on board to end their universal default practices, a statement could have been issued, along the lines of an alliance with those participating credit card companies’ names on the release. Done right, this could be one differentiating factor for consumers to see which companies got on board with the commitment to end universal default.

The "magic of the market" is a myth. It all presumes rational economic actors with perfect information and behaving solely as economic actors. In the real world, we have none of that -- and marketers of financial products know that (in fact, they count on that). The only thing that surprises me is that Citi's CEO made such a silly statement. He knows better. The real reason (I think) for his making that statement was simple: so he could argue that borrowers don't care whether lenders take advantage of them. You just got a preview of his testimony before Congress, next time the issue comes up there.

I might recommend that you read the following article by Trent Sorobe that appeared at Paybefore.com. There are some of us in the banking industry that embrace straightforward disclosure and simplicity.


Trent's bio from www.metapay.com reads:

Trent Sorbe currently serves as Senior Vice President of Credit Products at Meta Payment Systems and a recognized leader in small dollar, micro-lending. Trent is responsible for the evaluation, development, and administration of all large-scale credit products for Meta, including the organization’s patent-pending iAdvance Line of CreditSM. iAdvance is the first large scale credit feature tied to an underlying prepaid card relationship, an achievement earning the prepaid card industry’s 2007 Most Innovative Product Award. To learn more about iAdvance, see www.myiadvance.com. Trent joined Meta with over 15 years of consumer credit and regulatory experience in the banking industry and the FDIC. He is also a Certified Risk Professional and a Certified Regulatory Compliance Manager.

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