The Amazing American Consumer

  In the last six months two facts have begun to strike fear in the hearts of credit card firms.
  The first is that debit card usage is up over 20% and for the first time the number of debit transactions has exceeded the number of credit transactions. The second fact is that in just six months, consumers registered more than 50 million phone numbers with the federal do-not-call program aimed at limiting unsolicited telemarketing calls, thanks in large part to an easy-to-use Web site.
  When given information and ease of activity, the consumer will act. But the credit card industry has consistently underestimated the intelligence of the great American consumer. This is an awesome group that drives over 60% of the economy and in the long run is the proverbial rational economic being. Many of the industry's current woes are due to ignoring consumers' intelligence.
  Take pricing. When receivables growth slowed, the balance-transfer offer became the norm-low-rate money for six to 12 months. Of course, current customers were never offered the same great deal. Why would anyone be surprised that loyalty began to diminish as customers moved around balances or threatened to move balances if lower rates weren't given?
  To compensate, firms raised or established new fees and harsher terms if a payment was missed-terms usually discovered in the small print. Now customers were not only not loyal, but also suspicious. Rate changes were mysterious events and rarely explained or highlighted. The consumer was always in a state of discovery and surprise. No wonder that surveys and focus groups showed that consumers did not trust credit card companies or feel loyalty to any one card.
  Then look at payments. First there was the late fee. At $10, the consumer shrugged it off and companies made money. But as the spread on balances fell, late fees went up and suddenly $39 was very noticeable.
  Meanwhile, intelligent consumers began to listen to the companies' plea that they pay over the Internet. Companies loved it as it cut processing costs, and consumers loved the ease.
  Of course no good deed goes unpunished and firms discovered that those late fees were declining rapidly. So just as firms did with pricing, they played around with the fine print-accounts would not be credited for 72 hours, and cut-off times were very early in the day. But the consumer adapted. Now this has led some firms to charging for paying through the Internet. Debit cards begin to look more and more attractive.
  Bankruptcy is another self-inflicted wound. We would like to think that it is the economy and changing consumer ethics, but the credit industry played its part as well. During the euphoria of the 1990s, firms would lend to bankrupts under the theory that 1.) borrowers couldn't go bankrupt again for seven years, and 2.) they wouldn't incur that much new debt.
  The message that the consumer heard, however, was that going bankrupt was not such a bad deal. You could still have a credit card and a mortgage and an automobile. In fact, after only a year or two of good behavior, the consumer would be receiving offers at prime rates and high lines. Going bankrupt was becoming a rational economic decision.
  In the last five years, more than seven million consumers have gone bankrupt and the number grows by over one million a year. Bankruptcies now represent a significant portion of industry losses.
  Our amazing American consumer is not alone. He has some powerful friends in Washington who began to listen and respond. Predatory pricing, extreme subprime lending, privacy, full disclosure and negative amortization all became topics of active discussion.
  While the regulators initially focused on mortgages and consumer finance, none of these topics were a surprise to a card industry in which restraint and self-regulation had begun to disappear. Not unexpectedly, the industry fought the California initiative to require credit card companies to print on the statement how long it would take to repay debt if only the minimum due were paid. What is disappointing is that reform came only on the threat of regulatory intervention. When angry, our consumer can unleash powerful forces.
  Credit cards are a wonderful financial tool. They provide the consumer with flexibility, access and mobility. But they are part of the larger activity of payments and credit, for which there are numerous competitors.
  The consumer has shown the ability to make rational decisions. The industry needs to respect that intelligence and offer a rational product.
  The second step is to rethink the economic model for credit cards in a world where the consumer has been trained to look for low prices. Will debit cards attached to overdraft lines at banks become the Wal-Mart of the credit card industry?
  Darcy Walker is president of Darcy Walker & Associates LLC, a Chicago financial consultancy focusing on risk-management technology. She has more than 30 years of lending experience at Citibank and Discover. She can be reached at darcywalker123 aol.com.