CJR: Red Ink Rising

Feature, The Audit — March / April 2008

Red Ink Rising

How the press missed a sea change in the credit-card industry

By Dean Starkman

One of the paradoxes of the business press is that while everyone should read it, since we all live in the economy, not everyone does. In fact, most people don’t. I suspect, if they look at financial publications at all, they flip through with a sense of disconnect. Forbes, Fortune, the Financial Times, and the agenda-setter for the financial community, The Wall Street Journal, and others are usually sophisticated and informed and often interesting. But they can seem strangely remote from the reality that people live day to day or sense is happening to friends, neighbors, and strangers in far-off states.

Nowhere is this disconnect more pronounced than in the story of credit cards and personal debt. Reading back over the last several years, one can detect two parallel narratives on this subject. One body of work, compiled by nonprofit groups, academics, documentarians, and others, has marshaled data to make visible what readers already sense: a dramatic qualitative and quantitative—and recent—shift in the relationship between the credit-card industry and its customers. Yes, this narrative says, something has changed, and, no, the change does not benefit you. The credit-card exchange, we are told, has shifted from a lending and underwriting paradigm to a sales paradigm; penalties, fees, and default interest at rates that were illegal a generation ago are no longer regrettable outcomes to be avoided but central to the business model.

These non-business-press sources place their credit-card story within a broader context, that of a besieged American middle class caught in an iron vice of stagnating incomes; shrinking disposable income; rising costs for health care, housing, and education; the aforementioned usurious and rapacious practices of the credit-card industry; a growing, consolidating, and increasingly sophisticated debt-collection industry; and, to add insult to injury, a new bankruptcy law that closes the courthouse door to formerly eligible debtors.

This narrative, as we will see, is fully supported by credible anecdotal and aggregate data and happens also to be true.

The business press did not ignore these major shifts in the credit-card industry over the years and actually did several fine stories that documented the changing relationship between the industry and its customers. But those stories were all but unavoidable for business publications under the circumstances and did not come close to reflecting the dramatic reordering of a marketplace. With notable and important exceptions, financial publications as a whole stuck to their usual formula of chronicling the (stellar) financial performance, strategies, and intramural competition of corporate actors and of profiling their leaders:

CHARGE! American Express CEO Ken Chenault is about to launch a huge credit-card war. Backed by an antitrust ruling, he’s gunning for Visa and MasterCard. Let the fight begin.
(Business Week, August 9, 2004)

This is a fine story, by the way, but it comes from a stock-investor’s perspective. It is a Wall Street narrative, the one with which rank-and-file business editors and most reporters are most comfortable. Such coverage, while competent, interesting, and necessary, is in the end insufficient. In retrospect it looks blinkered and out of touch.

I’m talking about a question of emphasis, really. The credit-card and general consumer-credit industry shifted radically in just a few years, faster than the financial press recognized. As a result, news organizations were caught unprepared when the reckoning came.

The full story of the credit-card industry’s growth, transformation, and impact has been piling up for the better part of a decade and can be found in Credit Card Natio, by Robert D. Manning, a Rochester Institute of Technology professor; in the work of Elizabeth Warren, a Harvard law professor, bankruptcy expert, and popular author; and in reports from the Center for Responsible Lending, a Durham, North Carolina, nonprofit that did important and prescient work on subprime mortgage lending. Lately, independent documentarians, including James D. Scurlock, creator of the film Maxed Out, have capitalized on an unmet public demand for information on the subject.

By way of background, as these sources explain, the modern credit-card industry is just a couple of decades old and has two founding fathers: Dee Hock, an obscure employee of an obscure Seattle bank, who in 1970 formed the banking cooperative that would become the modern Visa, which allows banks to share fees charged to merchants; and Walter Wriston, chairman of Citigroup’s predecessor from 1970 to 1984 and a banking visionary who steered the bank into consumer lending, fought tirelessly for deregulation, set a then-unheard-of 15 percent growth target, and outmaneuvered competitors to become the biggest issuer of early Visas. Both men were instrumental in radically transforming banking’s cautious post-war lending culture (a result of huge losses suffered after a consumer-lending binge of the 1920s).

As always, irresponsible and unethical business practices were preceded by a regulatory rollback. In the case of credit cards, the U.S. Supreme Court started it with a 1978 ruling that allowed banks to override state usury laws and offer whatever rate was allowed in the bank’s home state. (This is why so many banks’ credit-card operations are now in South Dakota.) In 1996, the court cleared the way for even higher fees.

With no adequate regulatory regime to replace what had been lost, an increasingly sophisticated industry transformed the market from a convenience product to, in the phrase of Demos, a nonprofit New York-based research group, the American family’s “plastic safety net.” And the safety net proved a costly one:

• Americans’ credit-card debt now stands at $900 billion, up 9,000 percent from $10 billion in 1968, adjusted for inflation.

• It rose by a third in the five years ended in 2006, even during a housing and stock market boom, and as consumers shifted card debt to home-equity lines.

• Low and middle-income Americans average $8,650 in credit-card debt.

• The percentage of families that pay more than 10 percent of their income on credit-card payments rose to 23 percent in 2004, from 13.5 percent in 1989.

1 | 2 | 3

Comments

AhmNee

Thu 13 Mar 2008 01:41 PM

It's amazing how deeply held that myth is. With the fear of a recession (or is it a realization of a recession) in full swing idle conversation turns to the economy more often than it did in years past. It's astounding how many people whom I've talked to believe that the US culture has turned into a culture of irresponsible spending. That people who file bankruptcy have brought it upon themselves with their frivolous consumer spending.

Perhaps we're all just so willing to believe the worst about our neighbors or perhaps the credit companies have some very good marketing and PR departments. Whatever it is, it seems that a great many of us stare ignorantly at a non-existent problem while the banks pick our pockets.

cats22

Fri 14 Mar 2008 11:07 AM

It's almost as if no consumer press reporter or editor was her/him-self a victim of the banks' credit card abuses. Surely everyone knows a person or two who's seriously enough concerned about this issue that they've actually discussed it with friends.

People rant and rave, in letters to editors, about oil companies' unjustifiable profits but say, in that forum, little or nothing about the runaway interest rates of lenders.

And the press watchdog continues to not bark.

Shame, shame -- on professional scribes and editors-letters writers!

nellieh

Sun 16 Mar 2008 10:55 AM

Several comments. The financial papers and magazines usually write from the perspective of business and profit, not how the profit is attained. Such as interest rates "that were illegal" a generation ago. The bankruptcy bill, should be named the "Biden" bill, was written BY the credit card companies to get people on the hook for life. They do absolutely no vetting of prospective customers. If you are breathing, or not, a dog or cat, an infant or toddler, it doesn't matter. They just blanket the population with pre-approved credit. Go to any University in the fall and see the lines of tables set up giving away tee shirts to sign up for credit cards to UNEMPLOYED KIDS with backbreaking student loans, books to buy, lodging to procure and food for sustenance. That is the hook that will keep them in debt for life.