The passage of a credit card "bill of rights" has banks acting like what we liberals call WATB, Whiny Ass Tittie Babies.
The final bill is not all it could be. But it's pretty good. Especially when you look at how the credit card economy works for the banks.
Every credit card purchase is a loan. But it's not a loan for which the bank pays out cash immediately, like a car loan. Instead you get what you bought, and the money goes to the merchant after the transaction is settled, less a "discount" based on the merchant's past history.
The amount of the discount varies. With Discover it can be as low as 1.5%. With Visa it's usually 2.5%, although it jumps substantially in "card not present" transactions like Internet purchases. For AmEx transactions it usually starts at 5% and goes up from there. I'm barely counting the cost of processing the transaction because that comes to just a few pennies, although if your average sale price is very low (if you're a $1 store) those pennies add up fast.
For these reasons some merchants illegally limit credit card transactions to purchases of a certain size. At the same time some high-volume merchants, like fast food joints, allow small purchases and don't even make you sign for them. That is an innovative "product" of the industry, specifically for high volume merchants. All that really happens is that the card number is run against a "hot card list" in the store. Settlements are made overnight on a "batch" basis, the credit card computer calling up the store's terminals, uploading the day's transactions, downloading the new hot card list.
There's another way the bank gets back at merchants. Chargebacks. If you return the merchandise, or change your mind and cancel within a few days (a big risk for Internet merchants) the bank takes that money back. Oh, and the more chargebacks you have the higher the merchant's discount.
Because of this, a customer who pays their balance off each month makes a lot of money for the bank. Say you pay off a $1,000 balance on your card every month, within the grace period. That's $12,000 on which the bank has earned discount fees and transaction fees, from the merchants, for the year. If you're going to nothing but the best merchants, that's still $300 plus transaction fees, that was earned off your business.
You're not a freeloader. Anything but.
Now it's true there are two sides to every credit transaction. There are merchant files and customer files. Merchant fees are earned by the bank holding the merchant account. What the banks are "threatening" to do in reaction to the credit card bill is to hammer good customers. Not just by raising interest rates, not just by imposing annual fees, and not just by getting rid of things like airline miles and other incentives. They are talking, seriously, of imposing whatever the interest rate is from the moment you use the credit card until the balance is paid.
Go back to the previous example. $1,000 per month customer pays it off right away. This great customer gets a great rate of 12%, 1% per month. That's still $10/month, out of the customer's pocket, for using the credit card.
If every bank does this it's a clear violation of anti-trust law. If any bank refuses to go along they get all the best customers. The best customers are the best because they're smart. They will move quickly to a better deal, when one is offered.
There is another way this can go, and this is how I expect things to work. Try to tie deposits to the credit card. If you're holding, say, $5,000 in an ordinary bank account, or investment account, then the bank lets you maintain the grace period.
All I can say is that this is going to be great for banks that also own discount brokerages, especially TD Waterhouse (Toronto-Dominion Bank) and Schwab (Schwab Bank). If you're really smart and want to play this bill in the market, buy yourself some E*Trade. Their account base is suddenly worth a bundle to a company like Capital One that wants to maintain its presence with big customers but feels it needs a deposit base in order to justify it.
The best news is that this is a competitive market. Don't believe what the lobbyists say. Listen to what your credit card company says, and be prepared to move if they try to push you around. Call your own bank first, then your broker, and if they both ignore you I guarantee there will be one who won't.
If you currently have a balance, and you get notice of a rate increase, then cut up that credit card and start paying it off. The law gives you five years on the balance. Then switch to debit cards.
It's true this bill is going to take a bite out of growth, but it's a bite that had to be taken. It's also true this bill is going to increase the number of bankruptcies, but those were filings that had to be made.
We should not expect the debt balloon that caused this problem to solve it by reinflation. Instead we must become a nation of makers again.
