Today's FT article "If we can't raise rates for the guy who pays late, everyone is charged more." by Saskia Scholtes left the basic assumptions underlying that statement unquestioned. I dashed off a letter to the FT editor in haste this morning, but in the event it doesn't get published, here are my thoughts.
This is what Mr. Dimon would like to have us believe, of course. It is true considering that they have issued credit cards to people who shouldn't have them in the first place, and who, therefore, represent default risks. Chase would not make money from a customer who pays off bills promptly at the end of each cycle. They would much prefer a customer who maintains a continuous balance, i.e., someone who is essentially unable to pay off his or her credit card expenses each month. That's the juicy customer who pays the high interest that Chase charges. By extension, it would be eminently conceivable that a person who maintains a constant balance, with little effort, turns into a person whose balance keeps growing unsustainably. Now, I ask you, is Chase incapable of distinguishing good risks from late payers and defaulters? I hardly think so. By including "everyone", which they do essentially by force, by constantly mailing credit card offers, Chase and other credit card issuers are buttressing this specious argument. Is a credit card something "everyone" should have? No more than a home loan, I'd assume.
Stepping back for a grander view, is it hard to see why the securitization market has created asset-backed securities out of credit-card receivables? On the one hand, there is a hungry investor class of monied people looking for ever greater returns on their investments. On the other, there is the working class, who might conveniently be lured with credit cards to spend money they cannot easily repay, and then bilked with exorbitantly high interest rates and late fees in order to generate these sought after returns. Issuers like Chase are the enablers of this abuse of credit cards, which are essentially ingenious devices of efficiency and convenience in a modern economy. And for this enablement of wealth transfer, they require a rather large cut of the spoils, and are willing to spend millions lobbying Congress to allow them to aggressively market products through mailers, charge usurious rates that may be changed arbitrarily at any time, deny bankruptcy protection to their clients, and to fight any attempt at meaningful regulatory reform.