How banks give up trust for money

By Felix Salmon
August 11, 2009
Ryan Chittum has a prime example -- himself:

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Interest-free balance transfers are horribly corrosive things which are instrumental in creating an atmosphere of mistrust between retail banks and their customers. Ryan Chittum has a prime example — himself:

My wife recently mixed up my BofA credit card with my BofA check card and went over limit on the credit line by $39. That triggered the clause that ended my free balance transfer on several thousand dollars I had parked in there, sending the APR up to 18 percent. That’s costing us $110 a month in new interest payments.

Now, sure it’s our fault for screwing up the cards (though they look an awful lot a like), but the point is why do these banks let you go over limit anyway? Precisely to gouge you with fees and to get out from under special offers like free transfers. Remember the days when credit cards were rejected? They wised up on that.

It’s anti-consumer.

But here’s the thing: what’s a reasonable amount of annual interest to pay for a $7,000 personal loan? Obviously $0 is too little, and $1,300 is too much. At Bank of America, the rates for a simple personal loan are, um, er, oh. There’s a lovely list there of no fewer than 61 different products and services offered by BofA — but simple unsecured personal loans are nowhere to be found. Bank of America doesn’t want to offer personal loans to its customers, because it can make so much more money off them by offering highly-lucrative and fee-laden alternative products like credit cards and “overdraft protection”.

All of this has culminated in the Spy-vs-Spy dance that is the free balance-transfer offer. A credit-card company — often a bank — sends you a piece of junk direct mail. Like most junk mail, your first instinct is to trash it. So they have to make it really attractive. And the way they do that is by promising you an interest-free loan. Let us lend you $7,000, Mr Chittum! We’d be happy to! And we won’t charge you a penny in interest!

Mr Chittum, of course, is wise to the trick. Most people are, these days. The credit-card company gets you locked in with a high balance of $7,000 which you’re very unlikely to pay off; at some point in the future, it’ll be able to start charging you enormous interest rates (29% is not unheard-of when it comes to credit-card balances; 18%, these days, is pretty much par for the course) on that money. If you’re smart and disciplined and lucky, you might be able to game the system and pay no interest at all on that balance. Bank of America, for its part, does it very best to make you think that you’ll be able to do just that, essentially getting one over on The Man.

But Bank of America has the empirical data on its side; you don’t. Yes, some unknown percentage of people who take the bank up on its free balance-transfer offer will end up paying no money at all in interest. But statistically speaking, those people turn out to be quite profitable for the bank — if they didn’t, the bank wouldn’t be making the offer in the first place. And so Mr Chittum, when he takes the bank up on its offer, is essentially betting that he (and his wife) will be unusually on-the-ball and conscientious when it comes to managing his credit-card debt.

Most people, when they sign up for one of these offers, think that they’ll successfully game the system. But of course most of them are wrong. That’s good for the bank, in the short term. But in the long term it’s bad, since everybody who ends up making a slip and suddenly paying 18% interest — everybody who chooses to play a game which is stacked against them, and loses — ends up hating the bank, accusing it (reasonably enough) of gouging them with fees and being anti-consumer.

There might be a way in which the new Consumer Financial Protection Agency, if it ever gets off the ground, can change this dynamic. There’s been a race to the bottom in retail financial services which has left most banks with very little in the way of reputation and goodwill; with none left to lose, they feel more free than ever to gouge and mislead their customers. Maybe if the CFPA puts the worst practices to an end, then banks might start competing on reputation and honesty. They won’t pretend to offer you $7,000 interest-free, but they also won’t charge you hundreds of dollars a day if you inadvertently buy a few different items on your debit card without having sufficient funds in your account.

For the time being, we’re right not to trust our banks, because given half a chance they will screw us. It would be great to go back to a world where we can start rebuilding a lot of the trust that has been lost. But I won’t believe it until I see it.

Comments
9 comments so far

3-7 years ago, when I had credit card debt, I played the 0% intro rate game. I bounced from Chase to Discover to B of A, all at 12-18 month 0% intro rates before finally paying it off.

I slipped up in the middle of my run w/ B of A when I paid my bill a few hrs after the due date. I immediately called and said this was my 1st time, please don’t charge me a fee, and please don’t cancel my 0% intro rate. They obliged w/o hesitation.

I was prepared to threaten to transfer my balance to another card if they dismissed my request, but I didn’t even have to go down that route. My guess is that threat from a consumer may not go over as well in 2009 since it may be harder to get a new card vs 2004.

Posted by Dave | Report as abusive

Some years ago, a close friend of mine was getting a car loan from a bank. Her credit was imperfect, and the bank was pressuring her to get me to co-sign.

They called me; we talked. I said, “How about I put up collateral? My friend gets a lower rate and I get an asset instead of a liability.” Pregnant pause. The bank officer then says, “Well,… yeah, I guess we could do that…”

Posted by MattF | Report as abusive

And isn’t it ironic that one of the biggest challenges for depositary banks is simply persuading the consumer that their deposit will be safe with them?

So much so that we have the FDIC to insure the money; and still there are millions of people in the US who prefer to keep their money at home; or who, like many immigrants and the poor, will prefer to work with expensive check-cashing firms and payday lenders rather than open a deposit account at a bank or credit union?

All the banking CEOs in the country need to be made to stand in front of the country to write endlessly: “If there is no trust, there is no depositary banking system. If there is no depositary banking system, there is no consumer credit. If there is no consumer credit, then I can’t justify my pay package…”

Posted by Eric Dewey | Report as abusive

Doesn’t all this pave the way for a truly honest, open, and fair company to take over of this entire field? Any system (or company) that pokes people in the eye with a stick out of principle is just begging to be replaced.

Posted by Grey Economics | Report as abusive

Um, agreed that Mr. Chittum is getting rolled here. However, I have significant difficulty in believing that an error by his wife (let’s blame the wife!) put him in that position. Im sorry, he put himself in that position. I am getting less impressed by Mr. Chittum every time you cite him.

Posted by Curmudgeon | Report as abusive

“everybody who chooses to play a game which is stacked against them, and loses — ends up hating the …”

Finish the sentence with bank and you’re right. Finish the sentence with casino, and you’ll be wrong — for the most part. People don’t always seem to hate losing a rigged game. They just hate it when it’s the banks that stack the game against them.

Seems like if you make the game fun, people take the losses in stride. I wonder what the banks could do to make people stop hating them, even when they run a stacked game?

Posted by Don | Report as abusive

Please stay involved in the various protest blogs that have sprung up.

These are all research and information links so please don’t think of them as spam.

http://www.theburningplatform.com/econom y/

http://www.consumeraffairs.com/credit_ca rds/chase_credit_cards.html

http://www.opengov.ideascale.com/akira/d td/4487-4049

http://www.givemebackmycredit.com/blog/2 009/06/jpmorgan-chase-and-wamu-face-m.ht ml

http://www.daily-protest.blogspot.com/20 09/07/chase-banks-2-to-5-monthly-minimum .html

http://www.daily-protest.com

http://www.robotsagainstchase.com

http://www.bloggersagainstchasebank.com

http://www.changeinterms.com

http://www.dailypuma.blogspot.com/2009/0 7/credit-card-companies-me-first-approac h.html

http://www.changeinterms.com

http://www.bday.co.za/articles/Content.a spx?id=75569

It has been said of CE of JPMorgan Chase, Jamie Dimon (who does not have a banking qualification), that his dominance exists because at every meeting all the participants know that he could do each of their jobs better than they could. But the business world cannot operate at all if it can operate only with individuals of the calibre of Dimon. — John Kay

My problem with your solution is I like getting a free personal loan from the Bank. I don’t think the Bank is bad because they have rules which they have to inform me about and I have to follow. I have successfully “gamed” them in the past, I am currently “gaming” them, and would like to “game” them in the future. How about letting the “Consumer Financial Protection Agency” sign up people who admit that they are to stupid to deal with a Bank on their own and let the rest of us act like grownups?

Posted by Bill | Report as abusive

Having worked in both mortgage lending and consumer banking, I have come to realize two things:

1) Financial institutions build their business models on gouging customers as much as they (legally?) can.

2) Most consumers are so stupid/preoccupied that, even if banks offered only a few conditions that were clearly and patiently explained, they would still go home and promptly incur penalties under the terms of their loan/account/etc.

Let’s be realistic – easily 50% of American adults (maybe more?) have absolutely no business having bank accounts or credit cards.

Posted by cynic | Report as abusive
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