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should have a legal duty to the customer to act in the customer's best interests first What does this even mean though? Say I'm getting a loan from a bank. It

by harryh 7y ago

should have a legal duty to the customer to act in the customer's best interests first What does this even mean though? Say I'm getting a loan from a bank. It's in my best interest to get that loan for 0%. But it's obviously not in the bank's best interest.

manicdee 7y ago
We used to define this using heuristics like limiting loans to amounts that can be serviced on ⅓ of the primary household income. We could go back to using those rules, the catch is that people desperate for finance will shop around to find a less principled lender, so FOMO leads to acquiring customers who are one bad week away from defaulting.
absherwin 7y ago
That's a zero sum game. Let's consider two possibilities that aren't zero sum. Late payments: A credit card company might make slightly more money when people pay late than it costs them in servicing and default costs while the cost of the fees alone may exceed that benefit even ignoring the cost of a diminished credit score Increasing spending and borrowing: A company does marketing that convinces people to spend an amount (either through marketing a new card, a line increase or straight up marketing spend), that nets the issuer $100 in value and creates $30 a month in interest for the customer for six years. The argument is the same as any other case of information asymmetries that create negative externalities. How should we regulate marketing cigarettes? How should we regulate marketing cotton candy? A purist would argue we ought to tax those activities.
hvidgaard 7y ago
That is just the cost of doing business. And they have the statistics figured out well enough to know what rate they need to make money and cover the similar customers that default on their loans. But we've heard countless of stories where banks "rearrange" the order of transactions such that there is multiple overdrafts and thus fees. That is an example of something not in the customers best interest, but designed to suck out as much money as possible.
CaptainZapp 7y ago
How about having reasonable laws? For example: To prohibit lenders to provide credit if the credit receiver is already so much in debt, that she's never able to service an additional loan? Or how about capping annual interest rates at 15%? Making everything above that ursury and thus a criminal offense? Now you may imply that this is the case in some socialist hellhole that hates business and you would be very wrong. That's the law of the land in Switzerland, which, last I looked isn't exactly hating business.

by harryh 7y ago

manicdee 7y ago

We used to define this using heuristics like limiting loans to amounts that can be serviced on ⅓ of the primary household income. We could go back to using those rules, the catch is that people desperate for finance will shop around to find a less principled lender, so FOMO leads to acquiring customers who are one bad week away from defaulting.

absherwin 7y ago

That's a zero sum game. Let's consider two possibilities that aren't zero sum. Late payments: A credit card company might make slightly more money when people pay late than it costs them in servicing and default costs while the cost of the fees alone may exceed that benefit even ignoring the cost of a diminished credit score Increasing spending and borrowing: A company does marketing that convinces people to spend an amount (either through marketing a new card, a line increase or straight up marketing spend), that nets the issuer $100 in value and creates $30 a month in interest for the customer for six years. The argument is the same as any other case of information asymmetries that create negative externalities. How should we regulate marketing cigarettes? How should we regulate marketing cotton candy? A purist would argue we ought to tax those activities.

hvidgaard 7y ago

That is just the cost of doing business. And they have the statistics figured out well enough to know what rate they need to make money and cover the similar customers that default on their loans. But we've heard countless of stories where banks "rearrange" the order of transactions such that there is multiple overdrafts and thus fees. That is an example of something not in the customers best interest, but designed to suck out as much money as possible.

CaptainZapp 7y ago

How about having reasonable laws? For example: To prohibit lenders to provide credit if the credit receiver is already so much in debt, that she's never able to service an additional loan? Or how about capping annual interest rates at 15%? Making everything above that ursury and thus a criminal offense? Now you may imply that this is the case in some socialist hellhole that hates business and you would be very wrong. That's the law of the land in Switzerland, which, last I looked isn't exactly hating business.