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Consumers are back on their credit card kick. Two years ago, they were using debit cards more than credit cards, but that trend has flipped, according to First Data (via CNN).
This, of course, is good news for the economy, which has been pining away for consumers to take up their pre-recession purchasing behavior again.
It is even better news for banks as Bank of America, J.P. Morgan Chase, Wells Fargo, and Citigroup, which have seen fee revenue decline in a number of once-profitable areas for various reasons—assuming, that is, that consumers take up their love affair with credit cards where they left off in 2008: high tolerance for high balances, a willingness to make minimum payments and a laissez faire attitude about the total amount due.
A Newbie Role
At least one government agency is hoping that is not the case: the newbie and in some quarters, much-hated, Consumer Finance Protection Board. It plans on hosting a press conference this Wednesday to announce a new “Know Before You Owe” project aimed at helping consumers understand their credit cards.
Where’s the Overreach?
This press conference follows a report that came out a few weeks ago by the bureau about credit card practices. Based on some 5,000 complaints it received--which is not a representative sample as CFPB acknowledged—it chronicled some of the practices it deemed still to be a problem in the industry.
Said Raj Date, special advisor to the Treasury Secretary for the CFPB in the report: “We are learning that there is a lot of consumer confusion about credit card terms.”
So it is launching an education campaign about credit cards. Like we’ve never seen one of those before.
Most likely the CFPB will step up its game if the president’s nominee to head the agency, former Ohio Attorney General Richard Cordray, is confirmed by Congress (which he probably won’t be).
So far, though, there is no sign of the demonic, out-of-control government overreach that its critics painted when the bureau moved through Congress.
Whether that is good news or bad, depends on your perspective and political leanings.
That said, for any company that writes a financial contract with a consumer—from telecos to rent-a-centers to credit card companies—the slow path CFPB is taking is illustrative.
Good Ideas, But How to Execute
Consider some of the suggestions that consumer advocates have tossed out to remedy the long-standing issue of hard-to-read contracts:
Credit card agreements posted on-line that have pop-ups to define terms unfamiliar to consumers. If the CFPB decided to move forward with something like this, says Roberta G. Torian, a partner with ReedSmith LLP, it will have to determine what words required definitions, which would be a major undertaking since all credit card agreements do not contain the same terms. “Compliance with such a requirement would pose an unreasonable added expense and compliance burden for the credit card issuers,” she says.
Okay, fine. How about something simpler, say the idea that printing a credit card agreement in 12-point type (which would make it 30-pages long, but never mind)?
That’s a maybe, although credit card companies are likely cringing at the thought of the printing costs.
“The CFPB may want to test a credit card agreement printed in 10 or 12 point type, while still observing the specific requirements that govern format and type face size for some of the disclosures, and ask consumers for their reaction to such a document,” Torian suggests, adding, “there really is no easy answer.”
Three Approaches
Technically, the CFPB has three approaches it can take to this problem, David Reiss, a professor of law at Brooklyn Law School says. They all have their drawbacks.
“ It can seek to provide financial literacy training to a broad swath of the population,” Reiss say. “It can require even clearer disclosures by credit card companies and it can regulate the types of products that credit card companies issue to ensure more standardized product offerings across the industry.”
Regarding the first: the CFPB is setting up an Office of Financial Education and, of course, it is launching its “Know Before You Owe” campaign. There is, however, contradictory evidence as to whether financial education is effective at helping people make better financial decisions, Reiss says.
The second: This, in fact, was covered by the Credit Card Accountability Responsibility and Disclosure Act of 2009, which requires that credit card companies be more transparent about the terms of the products that they offer.
“Disclosure has, however, its own limitations, particularly when it comes to complicated financial products like mortgages,” Reiss says. “So, again, the jury is out on whether disclosure is a sufficient response to the problems that consumers face in the credit card industry.”
And number three: This also was also addressed in the Card Act, which limited certain unfair terms that had been prevalent in the industry. This final approach works well for discrete issues, Reiss says.
“The risks that it brings are that credit card companies will develop new unfair practices that are not addressed in the Card Act and that the government overregulates credit such that consumers’ access to credit is unduly restrained. “However, he says, there is no evidence that this latter risk has materialized.
So many options, so little choices—and yet few have any doubt that many consumers do find their credit card statements confusing. You almost have to feel sorry for Cordray if gets the job.
