Speaking of thieves, it’s not everyday that a former CEO lays out how stacked the deck has become against working families. Atlantic blogger Mike Konczal on a recent Frontline special on the credit card industry:
[It] traces a narrative of the changing nature of credit and debit cards, where services and goods became free because they explicitly took on hidden fees and charges, hoping to net enough from a large body of consumers to make profits. Shailesh Mehta [former CEO of Providian, a major credit card company] is quite explicit about this, as are other insiders.There’s been a lot of fascinating research in behavioral applied microeconomics along these lines recently; it seems that the credit card industry already figured it out a long time ago. Mehta points out that the most affluent consumers pay the least, while the poorest pay the most.
Mehta’s exact words are pretty stunning:
Mehta: Now, if somebody pays their monthly bill in full, and zero interest income, and if you don’t charge annual fee, zero fee income. So you have to make up everything from the merchant side, which you cannot. So what banks ended up doing is therefore they were subsidizing this whole group, because still two-thirds of the people were not making full payment. And that interest income covered the losses of the people who were paying in full.So overall, the business looked profitable. But … in a strange way, banks were charging borrowers higher interest rates in order to give the wealthy people a break — in a strange way, if you look at it, because the people who have money were paying in full, and they were getting the break at the expense of the people who couldn’t pay in full. [Emphasis added]
PBS: So it was sort of an unintended transfer of wealth.
Mehta: It’s unintended, exactly. I don’t think anybody thought through that. But correct.
