Wallet Watch

Entries from August 2008

Will banking by cell phone be an industry transformation or the latest flop?

August 11, 2008 · No Comments

Mobile banking holds a lot of promise — both industry experts and nonprofit activists hail it as a transformation in the industry. Industry experts like to be able to reach consumers anywhere — banking by mobile device will make banking possible all the time — and nonprofit experts see the potential for more low-income and/or underbanked people to have better access to accounts that can help them build assets.

Nonprofit experts make a great case. The estimated 10 percent of Americans who don’t have bank accounts — who are overwhelmingly low-income — have no place to store their money, and don’t have access to the types of accounts that help them build interest, build credit, and to the larger array of financial services such as car loans, student loans, and home mortgages. Given that cellphones have become a ubiquitous item, reaching the underbanked by cellphone seems like a terrific delivery system.

But will we realize that mobile banking will be filled with the same hidden fees and pitfalls that bank accounts are currently laden with? The mobile banking experience reminds me of the hype around prepaid debit cards as a way to transition underbanked people to the banking system, but then the types and numbers of fees with prepaid cards started to seem overwhelming.

Let’s not forget that banking on the web, in concert with the proliferation of ATMs in the late 90s, was supposed to transform banking also. In many ways it has transformed banking. But the internet hasn’t led to the disappearance of bank branches as was predicted. And in fact a plan by Bank One to charge customers money to speak to a teller — designed in part to increase the use of ATMs and internet banking — flopped miserably.

Categories: checking accounts · the underbanked

A big victory for credit card holders

August 7, 2008 · No Comments

Last week, the House Committee on Financial Services handed a big victory to credit card holders, and a big slap to credit card companies. The Credit Cardholders Bill of Rights Act, championed by Rep. Carolyn Maloney (D-NY), passed that committee 39-27. Here’s a summary from www.creditcards.com, but also check out this post from Ed Mierzwinski’s US PIRG Consumer blog.

A pro-consumer bill that would abolish unpopular credit card industry practices passed a key U.S. House committee test late Thursday, moving it toward a vote by the full House.

Largely along party lines, members of the House Financial Services Committee voted 39-27 in favor of the Credit Cardholders’ Bill of Rights, which would limit interest rate hikes, fees, and billing and payment practices cited most often by consumers and credit card industry critics. Committee Democrats all voted for it; they were joined by just two Republicans.

The bill targets credit card companies and seeks to ban practices such as retroactive interest rate increases, except under certain conditions, and limits “double-cycle” billing, which increases the ability of card issuers to impose interest charges.

Under the proposed legislation, consumers would get a minimum of 45 days’ notice of any interest rate increases and have at least 25 days between the date of the monthly statement and the due date to pay their bills. Last-minute amendments to the bill added provisions to block credit cards issued to people under 18 years of age and ban over-the-limit fees caused by “holds” placed on the credit card account.

Rep. Carolyn B. Maloney, the New York City Democrat who is the bill’s sponsor, called the vote “a historic victory for American consumers and the free market.”

Categories: Uncategorized

Six of One, Half Dozen of the Other

August 6, 2008 · No Comments

Via the Center for American Progress:

The end of the housing boom has cut off a key financial safety net for American families. During the past decade of low interest rates, families borrowed heavily against the value of their homes to finance their consumption and increase their purchasing power. But as the credit crisis unfolded, and as the value of Americans’ homes dropped, lenders tightened standards on all types of mortgage loans, making it harder for families to access their home equity.

With the spigot of home equity turned off, families have turned to credit cards. Between April 2006 and May 2008, inflation adjusted credit card debt rose at an annualized average monthly rate of 4.1 percent. Compare this to the period from March 2001 to March 2006, when inflation adjusted credit card debt rose at an annualized monthly rate of only 1.1 percent.

At the height of the mortgage boom in the first quarter of 2006, the difference between the total dollar amount of new mortgages and the amount of money that people spent on their homes—the new mortgage debt available—amounted to $137 billion (in 2007 dollars). This means that families cashed out $137 billion worth of equity in their homes in just one quarter. Since the mortgage market has tightened, home-equity cashouts have declined precipitously (see figure 1). By the last quarter of 2007, home equity withdrawals slowed to $40 billion (in 2007 dollars). And by the first quarter of 2008, real estate investments actually exceeded total new mortgages for the first time since the current business cycle began in March 2001.

These trends seem increasingly important nowadays: less able to access their home equity, it’s going to be very difficult for Americans to maintain their middle-class status in the face of rising prices and stagnant incomes.

Categories: Uncategorized

Listen to the 56,000

August 6, 2008 · No Comments

This New York Times editorial couldn’t have put it better in my opinion.  I generally don’t comment on the behind-the-scenes lobbying clout of the industry — mainly because I don’t experience or see it myself — so that part of the editorial I’ll have to take for granted. But what is true is that credit card companies are so lightly regulated that their tricks and traps have caused 56,000 ordinary Americans to respond to an obscure call for comments by the Federal Reserve Board.

The consumer finance movement in the United States may not be the strongest movement writing letters to Congress, but 56,000 is pretty substantial.

 

Listen to the 56,000

When the Federal Reserve asked for comments on its proposed rules on abusive credit card practices, an astonishing 56,000 poured in. Most were from outraged consumers. They told of interest rates skyrocketing when they paid an unrelated bill late. They complained of unwarranted late fees and pushed-up due dates. One Pennsylvania customer fumed: “I’m fed up with credit card company tricks that drive us deeper in debt.”

This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.

For too long, members of Congress have shirked the responsibility to ensure fair lending to credit card customers and have listened more intently to the banking lobbyists. A low point came in 2005, when Congress passed a bankruptcy law that was badly tilted against borrowers. It gave extra protections to lenders against unscrupulous debtors. But it also made it much harder for people to declare bankruptcy, even when the economic crisis was caused by sickness or family tragedy.

Ronald Mann, a Columbia Law School professor, has argued that the law creates a “sweat box of credit card debt.” As borrowers become “distressed,” the credit card issuer has more time to pile on interest charges and fees until the client actually goes bankrupt. As heartless as that bankruptcy law has been for beleaguered consumers, the Democrats, who have controlled Congress since 2006, have not fixed it.

They did take one step forward last week. By a 39-to-27 vote, the House Financial Services Committee approved a cardholders’ bill of rights that was sponsored by Representative Carolyn Maloney, Democrat of New York. It would stop credit card companies from raising interest rates on balances incurred under an old rate. It would let consumers pay off loans with higher interest rates first. And it would stop unfair late fees and “universal default,” the practice of raising interest rates on accounts in good standing when a borrower falls behind on other bills. This borrowers’ bill of rights should move quickly to the House floor, and Christopher Dodd, the Democratic chairman of the Senate Banking Committee, should support similar legislation in his chamber.

The banks are openly fighting both the Maloney bill and the Federal Reserve rules. They warn of unintended consequences, mainly that less credit would be available to consumers. They also argue that most cardholders are happy and that the complaints are just “anecdotal.”

The huge file of comments at the Federal Reserve contains plenty of anecdotes, and there are surely many more where those came from. Congress should give consumers what they need and deserve — fair and clear lending rules for credit cards.

Categories: Uncategorized