Felix Salmon

There’s a new credit card out there, called Barclaycard Ring, which manages the rare feat of being a good, solid financial product even as it’s also incredibly gimmicky. It’s being branded as “the first ever crowdsourced credit card” — a financial product “built on a community” which, by the looks of the stock photography on the website, is full of incredibly happy, healthy, outdoorsy types who live only in bright sunshine. You don’t just apply for this thing, you “join the conversation”.

Which is not to say you shouldn’t apply. This card has an 8% APR, and no penalty APR. You miss a payment? You default on some other credit card debt? Your APR stays at 8%. For “revolvers” — people carrying a balance — this has got to be one of the cheapest credit cards out there, and certainly one of the least dangerous. The fee schedule is the one place where you don’t find gimmicks: no 0% APR balance transfers (with 3% up-front fee hidden in the small print), no hugely complicated reward program you’re never going to use, no annual membership fee which you have to mentally amortize against the perceived value of all those hypothetical rewards.

I hope and trust that the idea of a card without a penalty APR will catch on. Under new regulations, credit-card companies aren’t allowed to apply a new penalty APR to the entire balance being revolved any more; they have to apply it just to new purchases — and they have to pay that high-rate balance down first. As a result, penalty APRs aren’t nearly as profitable as they used to be. And when you do introduce a card with no penalty APR, it becomes incredibly easy to make apples-to-apples comparisons between cards: you should just go for the one with the lower rate.

Barclaycard is also promising to publish its own P&L statement for the card, showing how much money it’s making from interest payments, from late fees, and from interchange fees. That’s going to be interesting, when it starts being published in the next few months. It says that any profit over and above its own reasonable hurdle-rate expectations will then be rebated back into the “community” somehow, although the exact mechanism here is unclear. The general idea seems to be that if the cardmembers want something like onshore card servicing, then they’ll be given the choice to essentially pay for it, out of the excess profits that the card is rebating back to them.

At the same time, watching a big bank try to be all cool and down with the social kids can be rather like watching your father try to rap. The Twitter feed is embarrassing enough, but the sponsored posts are much worse. For instance: companies who “get” social media are “are the ones that are leading the fold and have good futures ahead of them”, says BrainFoggles, who seems to have been paid to write that by something called Dweeb Media, which specializes in “creating conversational blog post campaigns”.

And when I spoke to Barclaycard’s Paul Wilmore, I was far from convinced when he tried to sell me on the idea that if people with a Barclaycard Ring feel as though they’re part of a community, they’re going to be less likely to default on that card. That might be true with credit-union credit cards, where people really are part of a pre-existing community. But I doubt that the group of people with this Mastercard rather than that one will ever cohere into something real enough to change collective behavior by 200-300bp, as Wilmore is hoping.

For the representative of an exercise in radical transparency, Wilmore was also surprisingly reticent on some pretty basic issues. For instance, what’s Barclaycard’s profit margin going to be on this card? That number is going to be public, but he wouldn’t even give me a hint. Or, why do you need to become a cardmember before being able to read either the official cardmember agreement or the shorter summary agreement? Why aren’t those documents freely available on the card’s website, for people to read before they apply for the card?

Wilmore did tell me, quite proudly, that Barclaycard has filed no fewer than 14 patents around this card, which scared me a little: I’m not a fan of the idea that financial innovations can or should be patented. Insofar as there are good ideas here, I want to see them broadly adopted, but if anything these patents seem designed to discourage anybody else from trying out interesting products in this space.

In a sense, then, I wish that Barclaycard had just released a simple no-annual-fee, no-rewards, no-penalty-APR card and left it at that. I fear that the gimmicky social side of Barclaycard Ring is going to overshadow the fact that underneath its trendy exterior it’s actually a perfectly good product. Even if, as someone in financial media, I will admit to looking forward to those P&L statements.

Well done to Joe Nocera for giving some well-deserved publicity to Jeff Horwitz’s fantastic (and still ongoing) investigation into the way that banks encouraged debt collectors to sue Americans for credit-card debt they didn’t owe.

Nocera also raises the possibility that people might start, quite rationally, simply walking away from their credit-card debts in much the same way that they have been walking away from their mortgages.

Lawyers on the front lines say that credit card debt collection remains a horrific problem. “Most of the time, the borrower has no lawyer,” says Carolyn Coffey, of MFY Legal Services, who defends consumers being sued by debt collectors. “There are terrible problems with people not being served properly, so they don’t even know they have been sued. But if you do get to court and ask for documentation, the debt buyers drop the case. It is not worth it for them if they have to provide actual proof.”

There are very serious questions about the reliability with which debtors are actually served by the collection agencies who buy credit-card debts from the big banks for as little as $0.018 on the dollar. All too often, the debtor doesn’t even know that they’ve been “served”, and therefore default judgments get filed against them even when the underlying documentation is weak or nonexistent.

But if you do find out that a collections agency is suing you for unpaid credit-card debt, then you should absolutely turn up in court and ask for documentation. By that point, of course, any hit to your credit will already have happened, so you can’t damage your credit score by fighting the suit and refusing to pay.And the simple act of asking the plaintiff to prove that you owe what they say you owe will very often make the whole suit disappear.

So get the word out: if you, or anybody you know, gets sued for unpaid credit-card debt, the first thing you should do is simply ask the person suing you to prove that you owe what they say that you owe. The onus is not on you to provide documentation that you paid off the debt, or anything like that. The onus is on them to prove that the debt exists. Borrowers should not shy away from asking for this proof out the moralistic feeling that they should pay back what they owe. And it turns out that much of the time, the debt will have been sold to them by a bank refusing to make “any representations, warranties, promises, covenants, agreements, or guaranties of any kind or character whatsoever” about the accuracy or completeness of the debts’ records. If that kind of language is in the transfer documents, it’s very unlikely that the collections agency will be able to win a contested lawsuit.

If people start contesting these suits en masse, then that will surely reduce the attractiveness, to the banks, of selling written-off debt to sleazy collections agencies en masse. If banks want to sue borrowers for money those borrowers owe, let the banks do so themselves. At least it’s more honest that way.

Dan Freed has an amazing story today about credit-card interchange fees — the ones that weren’t touched at all by the Durbin amendment in the Dodd-Frank bill. But it turns out that the courts might yet prove even tougher than Congress: various suits working their way through the legal system could end up costing the banks hundreds of billions of dollars in settlement costs — plus a reduction of interchange fees to something approaching international norms.

The threat here is very real: Visa has already put more than $4 billion in a litigation escrow account, and the card companies’ potential liabilities are much smaller than those of the big banks. Deutsche Bank analyst Bryan Keane says that total damages “could total a couple of hundred billion dollars”, and that’s backed up by some back-of-the-envelope math:

JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.”

Those numbers cited by JPMorgan would appear to point the way to a very large settlement, since the case covers eight years and counting — from 2004 through the present. Eight times $40 billion is $320 billion, and an influential 2005 report on price-fixing by Purdue University economics professor John Connor that looked at 700 cartels going back to the 1600s found a median overcharge rate of 25.5%. But even if one assumes an overcharge of just 10% — the figure used by the Justice Department in its antitrust cases — that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion. If Bank of America had to pay roughly 10% of that, as per its 10-K, the bank would have to cough up $9.6 billion.

Freed includes this helpful chart, showing just how high US credit-card interchange fees are when compared to the rest of the world.

Note that the smallest bar, over to the right, is for the EU as a whole. If Germany is at 1.5, Spain is at 1.1%, and the UK is at 0.8%, then there have to be a lot of countries at or very close to zero in order to bring the overall average down to 0.3%.

Now that Congress has decided quite clearly that it’s not going to regulate credit-card interchange fees, it stands to reason that merchants are going to take their case to the courts. This one will run and run, I’m sure: there won’t be any checks written for a very long time yet. But it’s a huge contingent liability for the banking sector, just as negotiations over a mortgage settlement come to a head. If I were a bank shareholder, I certainly wouldn’t count on credit-card interchange fee remaining at its current inflated levels indefinitely.

Jeff Horwitz has an astonishing story about Chase’s credit-card collections efforts, which look as though they’re riddled with sloppy record-keeping and even possible fraud.

Consider Dade County, for instance, in Florida: Chase was filing claims at the rate of 640 per month in January. And then, after April — nothing. There were a lot of layoffs in New York, too:

In a sign that Chase acted with urgency, numerous regional collections teams were fired in mid-2011 at the order of the New York bank’s headquarters, according to people familiar with the events.

“Nobody told anybody anything. It was very traumatic,” says a former Chase attorney who asked to remain anonymous because of a nondisclosure agreement. “I think there were investigations by the [Office of the Comptroller of the Currency] and other government entities. If we’re not there, we can’t be interviewed.”

Now every bank has a choice when it comes to defaulted debts — it can chase those claims itself, or sell them on to a collections agency. Maybe Chase just decided that supporting an in-house team wasn’t worth it, and that it would outsource most everything, going forwards. Except, Horwitz couldn’t find any surrogate claims, either, in a recent search. And then the whole thing seems to be very closely related, at least in timing, to a lawsuit in Texas last spring:

Linda Almonte, a former team leader in Chase’s San Antonio credit card services division, accused the bank of firing her for objecting to the sale of $200 million in legal judgments obtained by bank attorneys. Half the accounts lacked adequate documentation of judgment and one-sixth listed the wrong amounts owed, Almonte claimed in a suit filed in U.S. District Court for the Western District of Texas.

In its response, Chase did not dispute inaccuracies in the debt balances and documentation. Instead, it said its sales agreement allowed for errors and thus was proper. “[T]he parties explicitly agreed that the judgments were purchased ‘as is’ and “with all faults,” Chase’s attorney wrote.

Chase was unsuccessful in getting the case dismissed and settled it on undisclosed terms last April; it ceased filing new consumer debt lawsuits in many states the same month.

While collections agencies often get the amount owed wrong, no one really stopped to ask whether banks themselves might not know how much they were owed. But that seems to have been the case here: Chase was selling faulty claims to collections agencies, and I’m sure those agencies didn’t suspect for a minute that the amounts owed were often incorrect. After all, the reason you’d buy claims from a bank “with all faults” is precisely because you don’t expect there to be many faults.

Already, the move seems to be having a negative effect on Chase’s collections:

Third-quarter collections, at $266 million, were down 35% from the first quarter, and haven’t been this low in a very long time. And if Chase is willing to give up anything like $100 million per quarter by effectively shutting down its collections operation, one can’t help but suspect that the legal or reputational risk of keeping that operation in place was truly enormous. I hope that American Banker encourages Horwitz to continue digging into this case: there could be a really big story here, somewhere.

I could really do with a lot more transparency from the Fed on why exactly it’s decided to almost double the maximum permitted debit interchange fee. The bank lobby certainly had a lot to do with it — but the bank lobby always said that the Fed was simply doing what it was forced to do under the Durbin amendment to Dodd-Frank, and that therefore Dodd-Frank itself had to be changed.

When the Durbin amendment survived, however, suddenly the banks realized they had a Plan B — to lobby the Fed. And the Fed, it turns out, is even more susceptible to such lobbying efforts than Congress is. The sole dissent among the Fed governors was from Elizabeth Duke, who said that the new fee was too low.

Clearly the facts on the ground didn’t change between December, when the Fed came up with its 12-cent figure, and today. And now the Fed has proved itself susceptible to intense lobbying, you can be sure that the banks will keep their lobbyists active on all manner of rules and regulations which have to be promulgated under Dodd-Frank. Never mind what the law says, just make sure the regulators do what you want!

The optics of this are terrible — the Fed hasn’t even attempted to justify the hike, and indeed no matter how many times you read its press release, you’ll never be able to see that there was any hike at all. There’s talk only of the final fees, and no talk at all of the fact that they were raised substantially from the initial 12-cent proposal. The closest that we get is this, from Ben Bernanke:

We received input from more than 11,000 commenters on our proposed rule. We have taken the time needed to review these comments carefully; they have been very helpful to us and the final rule reflects changes suggested by commenters.

The message, here, is clear: keep on lobbying us! The more you lobby us, the more we’ll listen!

Why Bernanke’s sending that message, on the other hand, I have no idea.

Dick Durbin’s bodyslam of Jamie Dimon on the subject of debit interchange is, simply, a must-read. If Durbin ever had any dreams of a cushy sinecure on JP Morgan’s board, those have surely now been quashed forever — but being able to write a letter like this on official US Senate letterhead makes it oh so very worth it:

He’s also not afraid to get personal:

It’s always difficult for a sitting US senator to pick a fight with a US citizen, because it’s so hard to fight back: it can look like very much like bullying. But Jamie Dimon is no ordinary US citizen, and in fact has more power than Dick Durbin or any other senator. When it comes to bullying, the financial industry clearly has much more control of Congress than Congress has over the financial industry. Durbin, here, is just standing his ground in the face of an astonishing onslaught of mendacious lobbying from Dimon and his minions. Good for him!

If and when Durbin finally wins the debit-interchange fight, he might think about next turning his attentions to credit interchange. This chart comes from Nerdwallet’s Tim Chen:

Credit-interchange fees in the US are not only the highest in the world, they also make life particularly difficult for smaller merchants:

According to NerdWallet’s calculations, a small supermarket pays $1.15 to process a $50 credit-card transaction from a Visa Signature” customer, while a large supermarket pays $0.63 to process the same transaction from a basic or simple rewards customer…

In the United States, the level of “swipe” or interchange fees appears to be based on merchants’ ability to negotiate (Walmart pays substantially lower processing fees than smaller stores and restaurants). The regulated interchange fees in Europe seem to be based more on the costs of processing.

It’s worth noting that even the super-low fees begrudgingly allowed Walmart are significantly higher than the regulated fees just about anywhere else in the world.

There’s a case to be made for credit interchange fees being significantly higher than debit interchange fees. But there comes a point at which they’re simply ridiculously high by any standard — and the US has now reached that point. If Jamie Dimon continues to anger Durbin on the subject of debit interchange, I do hope he gets his comeuppance on the credit-interchange front.

Antony Currie has a handy little FAQ on debit interchange. I agree with most of it, especially his final conclusion that the US should move to a secure chip-and-pin system. But I take issue with his idea that for the time being, the Durbin amendment is flawed and “needs a do-over.”

Indeed, Currie’s two conclusions are at odds with each other. The reason that interchange fees are so much higher in the US than they are elsewhere is precisely because they’re so profitable for the banks, which can use their fraud losses to justify some $16 billion in fees each year. If they moved to a safer, cheaper system, those profits would go away. If you allow banks to continue to wallow in a multi-billion-dollar revenue stream from debit interchange, they’ll have no incentive at all to move to a better system.

So what’s Currie’s reason to keep interchange fees high — or at least higher than they’re slated to go?

The more that customers have used them over the past 15 years, the more banks have been able to remove minimum balance requirements and transaction fees they used to charge to fund all the cash and checking transactions. These forms of payment cost 70 cents or more a pop, according to JPMorgan — at least 60 percent more than the average debit card fee.

Let me expand this a bit. Once upon a time, banks had to implement unpleasant things like minimum balance requirements and monthly fees and transaction fees, because checking accounts meant lots of cash and check transactions — both of which are labor-intensive things, for banks. Then, debit cards came along, and debit cards are much cheaper, for banks, than either cash or checks. As customers have moved to debit cards, banks have been able to get rid of some of those unpleasant fees. And at this point, debit cards are a significant profit center for banks, in stark contrast to cash and checks, which are both major loss centers.

The answer to this problem is not to continue the weird cross-subsidy of checks by debit. Instead, it’s to move away from checks, and towards a more European system where it’s easy to transfer money directly from any bank account to any other bank account. The less that people use cash and checks, the less cross-subsidy the banks will need from debt interchange and other fees, and the more efficient the whole system will be.

More generally, we have far too much opacity in banking as it is. Hidden fees are regressive: they generally hurt the poor and benefit the rich. (In the case of debit interchange, the rich tend to have those lovely rewards debit cards, while the poor have to pay higher prices at big-box merchants.) If banks want to charge fees, let them be transparent about it so that consumers can shop around. My guess is that for all the doom-mongering from the banks, most of them will somehow find a way of keeping hold of their customers, and keeping fees low. No bank ever likes to lose a customer, if only because today’s low-income, low-profit account can easily turn into tomorrow’s lucrative banking relationship once the customer starts getting rich.

The Fed’s swipe-fee proposals are out, and the market action in Visa and Mastercard — both of them are down more than 10 percent today — tells you everything you need to know. Basically, big card issuers won’t be able to charge more than 12 cents per transaction for debit-card purchases, and under one alternative their fees might be kept as low as 7 cents per transaction. That’s a massive reduction from the levels we’re seeing right now, which can range as high as 2 percent.

This is a victory for Dodd-Frank, a victory for consumers, and above all a victory for merchants over the financial-services industry. Assuming, that is, that the banks don’t find some way of killing, avoiding, or repealing it. Well done, Fed.

How long will it take to get readable credit-card contracts? My guess is somewhere in 2012, if we’re lucky. Right now, although we’re moving in the right direction, we’re also moving far too slowly:

In a follow-up to its July 2010 credit card agreement readability study, CreditCards.com looked at the 20 most difficult to read and the 20 wordiest contracts to see if any had improved between July and October. Only six of the 20 most difficult-to-read contracts showed improvement. Nine of the 20 had the same reading level, three were more difficult to read and two were no longer offered by the credit card issuer. All were still rated at the 12th grade reading level or higher — too difficult for four out of five adults to understand.

To give an idea of what we’re talking about here, take a look at Fifth Third’s credit card agreement. For one thing, it’s 15 pages long. And for another, it includes crystalline passages like this:

I’m using an image here, rather than quoting in text, to show that banks have made no graphical concessions to readability at all: prose is presented in dense paragraphs, in the kind of hard-to-read narrow sans-serif text which just screams “don’t read me.”

And of course there’s no point in reading this kind of thing: I doubt one cardholder in a hundred could even begin to say what it means to “honor claims of privilege recognized at law.” I certainly couldn’t.

To put this in context, check out this two-pager from the University of Illinois Employees Credit Union. It leaves something to be desired in terms of graphic design, and parts of it could be cleared up a bit, but there’s certainly no gratuitous legalese. It’s possible, bankers! Don’t let the lawyers stop you!

Gartner’s Avivah Litan knows what she’s talking about when it comes to the relative safety of signature debit and PIN-based transactions. PIN is much safer — to the point at which Bonneville Bancorp recently banned signature debit altogether, despite its higher fees:

“All I can think of is that the fraud was so high that the lost interchange revenue is worth it compared to the cost of issuing new accounts,” said Avivah Litan, a vice president and distinguished analyst at the Stamford, Conn., market research company Gartner Inc. “It’s a statement admitting PIN is more secure” …

Litan said there is no confusion about which is the more secure method.

“From a pure technical security standpoint, PIN is much more secure,” she said. “There’s no two ways about it.”

So how on earth did the WSJ’s Karen Blumenthal manage to report this over the weekend, in an article about ATM fraud?

Use your PIN sparingly at retailers, and choose the signature option—or a credit card—instead, Ms. Litan says.

This doesn’t make any sense. For one thing, the article is about ATM fraud, and says nothing about the possibility of fraud when using a retailer’s POS machine. And as Litan well knows, signature debit is much more prone to fraud than using a PIN.

More generally, Blumenthal seems weirdly wary of the most secure form of payment there is:

Chip-and-PIN technology isn’t foolproof, and experts say U.S. banks and retailers may instead leapfrog that technology, possibly by using the capabilities of smartphones to verify transactions or to actually make the transactions instead of using a card.

“Foolproof” is an impossible and silly standard to use when it comes to payments; I can guarantee you that if and when smartphones get involved, that won’t be foolproof either. And in any case, smartphone verification is still very much in the realm of science fiction, in stark contrast to chip-and-PIN technology, which is used by hundreds of millions of people every day.

The fact is that chip-and-PIN is safer than PIN, and PIN is safer than signature. But you’d never guess that from reading Blumenthal’s piece. And I’m genuinely puzzled about that quote from Litan.

Update: Litan clears things up in the comments. Signature debit is definitely more prone to fraud — so in order to incentivize their customers to still use it, the banks are much more generous when it comes to fraud coverage for signature debit than they are for PIN transactions. As a result, it makes sense for consumers to use the less secure payment method — because if they are a victim of fraud, they’ll be covered more quickly and easily.

I took the subway downtown from work today, since it was raining rather heavily, and saw an ad for something called Chase Commuter Cash. The idea is that you enroll your Chase debit card in the scheme, use that debit card to pay for your Metrocards and then get $10 back from the bank for every $150 you spend.

Now Metrocard vending machines are, by their nature, a huge security hole when it comes to credit cards. They’re completely anonymous, you don’t need to sign anything, you don’t need to show ID: all you need to do is swipe and maybe punch in your Zip code. Which isn’t much of a security check:

When paying by credit card it may ask you for a zip code. I just use the New York Zip code 10007. It has always worked for me so far.

As such, you’d think that Chase would be urging all its customers to use the much more secure PIN code when they pay with debit cards. But you’d think wrong. In order to get the cash back from Chase, only ” transactions made without using your PIN” qualify.

The reason, of course, is that Chase gets higher interchange fees if you press the “credit” button on the machine and don’t put in your PIN, even though you’re using a debit card. Why are the interchange fees higher for credit than for debit? To make up for all the extra fraud, of course. But clearly Chase doesn’t seem to be worried about that.

All of this is prima facie evidence, of course, that the interchange fees for signature debit are far too high. But it’s also a way of getting the public into the habit of hitting the “credit” button whenever they use their debit card — something which will ultimately only serve to increase the amount of fraud in the system.

Signature debit is an abomination which ought never to have existed in the first place and which really ought to be abolished rather than encouraged by the very banks who will ultimately suffer ever-greater losses as a result of its use. But the banks, desperate for fee income, are ignoring the obvious fact that what they’re doing simply is not sustainable.

I’m reminded of airlines’ bag-check fees:

Here’s an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free…

“Baggage fees are the kind of shortsighted things that are killing us,” the top U.S. executive of a European airline told me recently. “The accountants we have are great at tracking the ‘ancillary’ revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It’s a scandal.”

For “baggage fees” read “signature debit” and I suspect that we’re seeing exactly the same thing with the commercial banks. No good can come of this, over the medium term. Which only goes to prove that bankers are no better at building long-term value than they ever were.

This was probably inevitable: the minute that Dodd-Frank cracked down on the fees charged by credit cards aimed at students, some other bright financial innovation would crop up. This time, a debit card aimed at students. Which carries lots of fees. Ylan Mui reports that a company called Higher One has started signing up colleges around the country, taking on the burden of providing cash to students. In return, it gets lots of fees:

Students say several of the fees associated with Higher One’s card are particularly irksome, including the $19 inactivity fee, a 50-cent charge for using a PIN to make a purchase rather than a signature, and a $2.50 fee for using other banks’ ATMs…

Higher One said that only 1 percent of customers have been charged an inactivity fee and that more than half are charged the 50-cent fee only once. All fees are listed on Higher One’s Web site, along with tips on avoiding them.

“We have a big effort with educating students on how to use the account,” Smith said. “We’re very passionate about financial literacy.”

If the fees are listed on Higher One’s website, they’re not exactly prominent. I did find this page, eventually, via this blog entry, but it just says that “when you swipe & sign, you won’t be charged the PIN-based transaction fee”. I haven’t been able to find a page showing a 50-cent transaction fee anywhere*, although I did manage to find this page, showing a $25 fee for domestic wire transfers and a $50 fee for international wire transfers. “Higher One offers less costly alternatives for transferring funds”, it says, without giving any indication what they might be; I suspect that what they’re talking about is transfers to or from people who have already registered somehow with Higher One.

It should go without saying that any firm which is “very passionate about financial literacy” would encourage, rather than penalize, simple, cheap and safe PIN-debit transactions. It would not give students a debit card and then tell them that if they want to avoid fees they should select the “credit” option rather than the “debit” option when they come to pay.

And I can’t think of any good reason to charge a $19 inactivity fee to people who haven’t used their cards in 9 months.

The fact is that students are often very naive when it comes to money, and it’s easy to gouge them once or twice before they learn that banks are not necessarily on their side. If you can get your card accepted by a majority of freshmen every year, and then come up with all manner of weird fees to hit them with, that’s a great way of making money out of ignorance.

Meanwhile, all students should have a bank account: giving them a debit card instead only serves to maximize the number of unbanked students. So while I’m sure cards like this are attractive to colleges, it would be great if either the colleges or else the Consumer Financial Protection Bureau started being a lot more critical of them. Prepaid cards only ever make sense if the alternative is being completely unbanked; that should not ever be the case for students.

*At Southern Oregon University, Higher One agreed to waive the 50-cent PIN-debit charge, but only if there was a simultaneous “swipe-and-sign” campaign. If the campaign is unsuccessful and students do the sensible thing by using PIN debit, then the university can be charged $2 per student for “PIN fee elimination”.

Update: Higher One’s Donald Smith responds:

Higher One was founded 10 years ago by three college students (undergraduates at the time) who were looking for streamlining the way financial aid refunds were distributed to students. Today we work with more than 675 campuses across the country, have a 97% client retention rating, and an A+ rating with the BBB.

The OneAccount is Higher One’s optional, no minimum balance, no monthly fee, FDIC-Insured checking account created by students for students. We do not offer a stored value card. We are very open with our fee schedule. We post it on every program website for all to access, explain each fee, discuss how to avoid each fee, and provide students with a web page that tells them how to use the account for free (which you’ve already found). Because of this, we believe that our customers pay less than half the amount in fees that the average bank checking account customer pays per year.

Two of the fees you referenced in your blog are the PIN fee and the Abandoned Account Fee. The PIN fee is easily avoided by choosing a signature based transaction at the checkout. The majority of students uses it in this manner and is in turn protected by MasterCard’s Zero Liability Policy against fraudulent charges (a safer way of purchasing than a PIN based transaction). We do not have an inactivity fee on our fee schedule – we don’t penalize students who do not use their accounts. We do have an Abandoned Account Fee of up to $19, for those who have abandoned their accounts, but this has been charged to less than 1% of all OneAccount holders in our company’s history because of our proactive outreach plan.

Higher One offers no instruments of credit. As a matter of fact, we’re generally in favor of initiatives restricting students’ access to credit cards and promoting financial literacy. This is why we offer a full range of financial literacy resources along with the services we provide.

I particularly dislike the implication, here, that PIN-based transactions are unsafe. They’re not; they’re just less lucrative, in terms of interchange fees, than signature-based transactions.

While John Hempton was uncovering a dodgy Chinese stock on the New York Stock Exchange, Tim Chen of Nerdwallet was looking into a much smaller operation, Anacott Financial.

The company’s home page seems simple and professional enough, although the picture of the credit card doesn’t have a Visa or MasterCard logo on it, which is a bit odd: those logos are slapped on the bottom of the page. After you move on from the home page, things rapidly fall apart, and not just because the company doesn’t seem to be able to spell.

For one thing, if you simply Google their name, the first result is their website; the next three are message boards complaining about them and asking if they’re a scam. The answer, it seems, is yes: there might be no annual fee, but they ask you for $99 upfront, and they’re likely to simply walk away with that $99 and not even send you a card.

Here’s what Chen found out after spending a bit of time on their website:

• Their about us page (screenshot) makes a few claims that we are having trouble verifying.
  • They claim to be 5 years old, with the last web update happening on May 14, 2010, even though their domain was registered on July 29, 2010.
  • They claim to be a member of Deutschland Financial Services, a company with no web presence.
  • Their address matches an office sub-lease space for small businesses listed on this website (screenshot). Their supposed UK office is in a residential area, judging from a snap from Google Earth.
  • Efforts to find their supposed 5 year old consumer loan division also failed, which is odd because their credit card site advertises home improvement loans.
• Their free credit score check page communicates a few undisputable lies.
  • It asks for personal information, including your social security number, then falsely claims to access TransUnion, Equifax, and Expirian to download your FICO score. The page then prints out a random FICO score.
  • This sequence of events is objectively happening based on our analysis of the source code of their “creditscore.php” page. The javascript cycles through “Accessing Expirian Servers….” type text based on a random timer, then generates a random score.
  • You can trigger this sequence without any input data if you navigate directly there using this link. Alternatively, you can fabricate user data and get the same results.
  • We’ve taken screen shots of the sequence – here is a sample shot where they claim to access Expirian and retrieve a score – which is clearly a lie because I put in Jean Claude Van Damme’s name and a bogus SSN, not to mention that it spits out a different socre every time. Any programmer looking at the source code can show you where the number is randomly generated.
• Their “Make a Payment” and “Account Login” pages do not appear to function when you enter fake data, are they on the site just for appearances?
  • The “make a payment” page (screenshot) is coded such that it requires you to fill out BOTH your external credit card and checking account information in order for the form to be submittable, which makes no sense from a user interface perspective – if it were actually intended to be used for processing payments. Once you submit bogus information, the page leads nowhere, not even to a “wrong password” page.
  • The submit button on the “Make a Payment” page says “Submit Your Application” (screenshot)
  • The account login page‘s submit button says “Submit and Check Your Credit Score for Free” (screenshot), and leads nowhere if you put in bogus information.
• Are they trying to bilk the $99 application fee out of people with poor credit?
  • Their terms & conditions page is inconsistent with the bullets on their site. The site says you get the $99 application fee back “After First Payment”. The terms & conditions page (screenshot) says you get the $99 back if you cancel the card “within five days of application date”, which might be difficult because it also says “Please allow for four weeks from date of submission to process a completed application”.
  • The fine print drops a bombshell – you aren’t necessarily going to get approved for the card you applied for – (screenshot). On discussion forums, one person reports receiving a prepaid debit card after an extensive wait. Here are a few examples of affiliates promoting the card using the “approved copy” – a bad credit website, and comparison site CardTrak. This marketing copy is deceptive, because (i) there is a credit check involved based on the fine print, (ii) approval is not guaranteed, for the advertised card.
• Does the credit card even exist? I can’t find any credible reports of people actually receiving the card, and there are circumstantial hints that the card does not even exist.
  • There appears to be an effort to fake a person named “Rossana Laspina” on Yahoo Answers, who claims to have received the card. She has been active on Yahoo Answers exactly 2 weeks at the time of this writing, and has been answering completely random topics in hopes of looking like a real person. The two other users who claim to have received the card, Tish Alvarez and Sharika Torske, have deleted profiles.
  • Yahoo Answers also has other highly suspicious activity, namely all the posts where the “contributor” says the card is a scam have been voted down to the point where Yahoo hides the answer. Meanwhile, other posts have been voted up.
  • This thread has a member who states that they received a prepaid debit card, with a zero balance, despite being promised a credit card based on the credit screen.
  • It’s highly unusual for a credit card not to have a Visa or MC logo on the front.
  • They do not list a card issuing bank, which I’ve never seen before.
• Did they catch BankRate off guard? Google’s cache shows that BankRate previously advertised the card, but 3 weeks later the card has been pulled from the site.

I have enough faith in my readers that I doubt any of you would actually have shipped off $99 to these guys. But still, it would be nice to see them put out of business. In the absence of a Consumer Financial Protection Bureau, what’s the best way to do that? Asking their web host to take down the site would probably just result in it popping up elsewhere.

The Anacott site says that the $99 payment goes through AlliedWallet, which might be a more fruitful line of attack. They seem to be based in London, but I can’t get through on the phone number they provide there. Still, AllliedWallet did recently put out this press release:

Allied Wallet has engaged the Brand Protection Group to persistently monitor its entire merchant portfolio to ensure its clients remain in compliance with all laws, regulations, and card brand guidelines.

I retain some hope, then, that with the help of AlliedWallet and BrandProtection, Anacott Financial might not last long. Still, the underlying scam — not to mention the underlying scamsters — won’t go away.

The solution is simple: If you’re dealing with any company based solely on their web presence, at the very least do a cursory web search on them first. If the first thing you find is a litany of complaints, it’s probably a good idea to avoid that company.

Joe Toms of Lending Club emails me the data for this chart:

Joe comments:

Consumer credit has been the one area that has dropped the least. Said in a nice way, this points to the structural inefficiency. A more blunt assessment is that banks have been taking advantage of consumers.

The picture is certainly striking: consumer credit rates, as measured by the Federal Reserve, fell by just 3.74 points over the period in question, while Treasuries and corporate debt dropped in yield by over 10 points. Even munis saw a much more striking fall in rates, despite the fact that their tax advantages were seriously eroded as tax rates fell.

Part of what’s going on here, of course, is that the consumer-credit universe became much less creditworthy as banks started giving out credit cards to anybody and everybody. But that’s not the whole story. We’re also seeing a move from relatively low-interest-rate personal loans to relatively high-interest-rate credit cards. And, of course, we’re seeing huge profit margins, at the banks, on consumer credit: the banks in general have done a very good job of competing on everything except lending rates.

The result is a gap in the market for innovative new online companies like Lending Club and BankSimple, all of whom in one way or another are looking to profit from those high consumer-lending rates. Given that they’ve stayed stubbornly high for the past 30 years, it’s probably fair to assume they’ll stay high for the foreseeable future.

Update: There was an error in the original chart: I’d labeled the Mortgages as Aaa bonds. Fixed now. Why were mortgages more expensive than consumer credit in 1981? I’m not sure, but it’s probably something to do with negative convexity and prepayment risk, as well as the fact that they’re much further out the yield curve.

When the financial crisis caused a sudden stop in the availability of home equity lines of credit, credit-card default rates naturally spiked. No longer could consumers spend as much as they like, and then, when their credit-card debt got out of control, pay it all off with a cash-out refinance.

But two years after Lehman Brothers collapsed, credit card default rates are still high — in fact, at 10.8% in the second quarter of 2010, the charge-off rate is hitting new highs and rising alarmingly. (It was 9.8% in the same quarter of 2009, and 10.1% in the first quarter of 2010.)

Consumers are continuing to rack up new credit-card debt: far from paying down their balances at all, they’re charging new stuff every month. Yes, the total amount of credit-card debt outstanding is falling — but that’s only because the banks have given up on collecting an enormous amount of it — they wrote off $81.6 billion in 2009, and another $43.5 billion in the first half of 2010.

I, for one, didn’t expect credit-card charge-off rates to rise in 2010: aren’t we meant to be in a recovery? Weren’t they extremely high to begin with? Haven’t card companies been reducing credit limits and generally trying to rid themselves of uncreditworthy customers for a couple of years now?

I do think that this data series is probably going to prove a good proxy for the point at which the US population as a whole gets less pessimistic and begins to think that we’re no longer in a recession. I don’t think that the goods being charged onto these credit cards are silly luxuries: it’s just that for a very large part of the country, it’s extremely difficult to live within your means. The banks keep on having to write off credit-card loans as it becomes clear they will never be repaid — but just because a loan is written off, doesn’t mean it disappears. The debt remains, and will weigh down the cardholders’ finances for many years to come. It just now belongs to debt-collection agencies rather than banks.