Reporting on how credit card companies are coping as the number of customers in default grows, The New York Times Magazine fell into what I call the “devilishly clever” trap. This trap is sprung when a reporter delves so deeply into a particular process that, along the way of dissecting it, he or she forgets that it’s part of some larger thing that is actually quite malevolent. (This NPR report on “ingenious” cocaine smugglers who use submersible crafts is a good example.) This trap often presents itself when a reporter spends much time understanding how something works, and immersing herself in the process to such an extent that this newfound expertise and enthusiasm for the subject obscures the real-world ramifications of the story.
Such was the case with this Times Magazine piece on the credit-card industry. But, while the reporting delved deeply into industry practices, the plight of the consumers who were victims of creditors’ deceptive practices went unmentioned. Here are the nut grafs:
After two decades of almost constant expansion and profitability, card companies today are in deep trouble. Monstrous losses — estimated to top $395 billion over the next five years — are growing as cardholders, brought low by the recession, walk away from their debts. And Congress and President Obama are pushing for legislation that would make it much harder for companies to hike up interest rates and charge many of the sneaky fees that have been an easy source of revenue for years.
So credit-card firms are changing their business plans. Gone are the days of handing out cards willy-nilly and hoping that the cardholders who dutifully pay up will offset the losses from those who default. Today companies are focusing on those customers most likely to honor their debts. And they are looking for ways to convince existing cardholders that if they only have enough money to pay one bill, it’s wiser to pay off their credit card than, say, the phone.
Put another way, credit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.
One way these companies are figuring out “what makes cardholders tick” is by relying on psychology and data analysis culled from months or years of the consumer’s own purchases. As credit card companies profit models shifted from collecting annual fees, interest payments, and merchant fees, to penalties, late fees, and “silently skyrocketing interest rates,” data analysis helped companies identify customers who would provide more revenue by defaulting—not by being responsible.
And, this is where reporter Charles Duhigg fell in love with the process: To figure out how to maximize the profit from these cardholders, the companies sifted through customers’ purchase data to draw some nifty conclusions:
People who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.
Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check. Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash. Have they started using their cards for therapy sessions? Do they call the card company in the middle of the day, when they should be at work? What do they say when a customer-service representative asks how they’re feeling? Are their sighs long or short? Do they respond better to a comforting or bullying tone?