7 ms·

PBS: Secret history of the credit card

76 points by kalvin 18y ago

ovi256 18y ago
Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However, as this increases the cost on society, and (I think) on yourself in the long term, regulation is imposed - in the form of compulsory insurance.
- mseebach 18y ago
  Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.
  - awt 18y ago
    Wouldn't you agree though that if enough people screw themselves, people who haven't screwed themselves start getting screwed, too?
    - sokoloff 18y ago
      In the long run, I do not. In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate. Honestly, even though I bought a house in summer 2007 (which is now worth somewhat less than I paid), I've been made vastly better off by the free and easy credit that others took part in and that I for the most part did not. Sure, the economic turmoil/headwinds now are less pleasant than 2004-2006/early 2007, but that's far from saying "I got screwed by this obviously unsustainable great ride ending."
      - jimbokun 18y ago
        "In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate." The entire U.S. financial industry and the entire U.S. auto industry have, for all intents and purposes, been vaporized out of existence. To me, that seems a pretty high price to pay for "artificially high good times." Enough so that regulations that would have kept the good times from being quite so good in exchange for the down times not being disastrous, are more than a fair exchange. Do you disagree?
        sokoloff 18y ago
        First of all: IMO, the US auto industry woes have not one damn thing to do with credit boom/bust, and if anything, their run (the companies and the UAW) was extended by the credit freedom, but in any free market, if your costs are 1.5x your competitors and the desirability of their product is 1.5x yours, you're in for a world of hurt. (I own three American cars: one Jeep and two sixties Mustangs, and if I had to do it over again, I probably wouldn't have bought the Jeep.) The US financial industry, I'd agree with you IF I thought we could effectively modulate without introducing deadweight losses for no net gain. (Historically, I don't think we have a good track record at this, in this or any other country.) What do I mean by that? The minute you introduce legislation to try to modulate something, a substantial result of that is to take smart people and apply them to figuring out how to comply with and/or work within/around the new regulations. So instead of building something people want or that makes the world better/more efficient, they're instead working on regulatory compliance. Then the most powerful institutions bid up the prices of the services of those people who are the very best at working around the regulation, or at lobbying for their activities to be exempted, and the cycle continues. If we could come up with a means to instanteously generate perfect regulation, I would indeed agree with your proposal. I'm not holding my breath for it...
  - netcan 18y ago
    It's true. That's an important distinction. But apart from 'information' requirements like those imposed on tobacco in many places (advertising bans, warning labels, mass propoganda campaigns) I don't think any more information would help. If you go that path, you may as well regulate. What would happen if all regulations beyond basic information availability requirements were lifted? If you could sell people whatever they would buy? We know what happens in lower risk, higher value credit. The effect of large scale defaults is a flavour of everyone else is screwed.
  - iamelgringo 18y ago
    What other product can you purchase, and have the price change after you purchase the product? What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan? What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely different companies? I've meet well educated Md's and people with Master's degrees who've gotten screwed by credit card companies. It's not a matter of education, IMHO. It's a matter of deceptive business practices that people don't really get wise to until they've gotten burned badly. Have you ever tried to read through a credit card agreement? I'm a well educated man, and I can't make heads or tails of those agreements. I'm sorry, but even an industry needed regulation, its the credit card industry.
    - ars 18y ago
      The price is not changing after the fact - you agreed to all the rates and changes before you start. If they want to change those in any other way then they have to contact you and you have the option to stop using the card and pay off the balance at the old rate. The agreements are not that complicated - people simply don't read. I see it happen all the time with website UI's - the instructions are right there and people never read them. You don't need to read the full agreement - everything you need to know about the rates is on the back of the application - in a format set by congress. How much more regulation do you need? Edit: apparently there is more regulation coming: http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b07658.html?nclick_check=1 http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b076...
      - sethg 18y ago
        I can't find the page where I saw the numbers, but a staggering proportion of American adults don't know basic math well enough to figure out which grocery store has the lowest prices. I assume an even more staggering proportion doesn't really understand how compound interest works.
        eru 18y ago
  - fallentimes 18y ago
    I agree. When used properly, credit cards are unbelievably useful for consumers & businesses alike. The blame should lie on the person who makes the poor decisions with the credit cards, not the credit cards themselves.
    - eru 18y ago
      Though credit cards can be replaced by less dangerous debit cards for most of their functions.
      - fallentimes 18y ago
        Actually, debit cards are significantly more dangerous (when talking about external events, not accountability). The amount of liability you have + paperwork in the event of fraud is exponential compared to credit cards.
        eru 18y ago
        I do not know if we are talking about the same thing. But I configured my debit card not to be able overdraw my bank account and I make sure that there is always not too much money in it.
        fallentimes 18y ago
        You're talking about money management; I'm talking about fraud and liability. http://www.consumer-action.org/english/articles/understanding_debit_cards/ http://www.consumer-action.org/english/articles/understandin...
        eru 18y ago
        Yes. I agree. (Edit: I have read the linked article. The debit card system is somewhat different in Germany, where debit cards are much more widespread that credit cards. In fact credit cards are still somewhat of a rarity while everyone seems to have a debit card.)
  - ovi256 18y ago
    A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide. Of course, that's not what happens. So the harm limited to self argument does not apply.
- gaius 18y ago
  Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future How do you assess that except on a case-by-case basis?
- nazgulnarsil 18y ago
  um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?
  - ovi256 18y ago
    Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).
    - nazgulnarsil 18y ago
      my comment was towards the use of the word "irrational" in the parent comment.
netcan 18y ago
Mr. Kahr, for one, makes no apologies. "If someone is riskier, he should be paying a higher rate,'' he said. "It's more economically sound. It's fairer for riskier people to pay a higher interest rate, higher fees, whatever it is, than less risky people. Interesting. What he is really saying is 'what's fair got to do with it? Free markets dissolve the concept. "If there was a demand for a credit card product that never changed its terms and rates and stuck with the customer no matter what, I'd be running around telling people 'Let's market this wonderful fairness card,'" he said. "You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."
- randallsquared 18y ago
  "Free markets dissolve the concept [of fairness]." Some would say that free markets implement the concept of fairness. Of course, there are no free markets in the world today, to a first approximation, since all the prices and outcomes are distorted by external agencies, so whether free markets are fair is a bit academic.
  - netcan 18y ago
    That is irrelevant really. You may think that the result is fair, but fair is not the reason that is the result. The free market comes to a result based on a series of self interested decisions. At the core are the buy/sell decisions. I price in a way that maximises my profit, you buy in a way that maximises your utility. Fair (I admit an ambiguous term) represents something external to this.
    - randallsquared 18y ago
      You maximize your profit as a proxy for maximizing your utility (and some people choose less profit because "helping others" boosts their utility more). Since we're both maximizing our utility in a free market, it's arguable that the outcome of our transaction is maximum fairness, or at least a local maximum of fairness.
- sokoloff 18y ago
alecco 18y ago
Many of us would love some digital money/payments/savings/loan fair system. There has to be some way for a startup to turn bigger than Google just with that.
ph0rque 18y ago
This suggests an opportunity for a credit card startup that: * Charges no fees of any kind * Charges a rate that is determined by a publicized equation where the only variables are the amount borrowed, time (in, say, days), and the rate.
- jimbokun 18y ago
  Or in the words of Mr. Kahr: "You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."
  - ph0rque 18y ago
    That's great validation, to paraphrase Arthur C. Clarke: > If an elderly but distinguished expert says that something will be successful he is almost certainly right, but if he says that it won't, he is very probably wrong.
    - pragmatic 18y ago
      You'd need a huge bankroll to get started. Financial startups aren't as easy as a social media web 2.0 site. Look at prosper.com. Regulatory costs are astronomical. Between state and federal auditors and Sarbanes-Oxley and CRA, etc, you'll have your hands full. Also, why would investor capital flow to you? You'd make a lower return with no upside of lower defaults, etc. But yes go ahead. Start a low rate credit card company. I might sign up for your card!
      - helveticaman 18y ago
        More importantly, you'd have to cover lobbying costs for 5 or 6 years just to break into the tight oligopoly.
        lnguyen 18y ago
        Discover finally settled a suit with Visa and Mastercard over anti-competitve practices: http://www.reuters.com/article/bankingFinancial/idUSN2735065420081028 http://www.reuters.com/article/bankingFinancial/idUSN2735065... FYI, Discover's been around since 1985 (introduced during '86 Superbowl), suit was filed in 2004 (along with a similar one by AmEx) and finally settled in October for $2.75 billion.
shimon 18y ago
I'd really love to see an explanation of the structure of the credit card / payments industry in terms of what roles different corporations play, who are the major players in each role, and how they make money. I understand there are networks like Visa, which seem to basically administer account number namespaces and perform some role in clearing payments between banks and merchants. There are also payment processors, who contract with those networks and provide services (card scanners, online payments, etc) to merchants. And there are lending banks, who pay the merchants (via their processors, I guess) and bill the consumer as they would for any loan. My guess is that at one or more levels of this industry, there is an effective cartel: if you want to offer a credit card that's better for merchants, or consumers, or just run more efficiently, you're unlikely to be able to buy your way in. It does seem ludicrous that 1% to 3% of your purchases (or, from the merchant's side, revenue) goes somewhere into Visaland instantly; this seems like a massive privatized tax in return for administering an electronic payments system which might not be that difficult to replace today.
helveticaman 18y ago
"The industry also got an unintended boost from President Carter. In 1980, as part of a short-lived effort to tame inflation, the White House imposed a freeze on soliciting new credit card accounts. The freeze only lasted for a few months, but it was long enough for credit card companies to introduce a new concept -- the $20 annual fee -- without inciting mass defections." So this is an oligopoly, and behaves accordingly. Of course it charges sellers extra, charges high interest rates, and all that other shit; they don't allow more entrants into their market.
JackWhite22 18y ago
Credit Cards shouldn't be allowed in this world.
newmediaclay 18y ago
What it boils down to is that Kahr is just a great businessman. He understood what people wanted, gave it to them and tied in a great revenue model that didn't scare people away. He did this by truly understanding his target customer and their risk/expense threshold.

76 points by kalvin 18y ago

Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future - experimental economists found this, but I can not retrieve references right now, my googlefoo is failing. This is a textbook case for regulation. A similar case is car insurance : your (irrational) choice is to not buy it. However, as this increases the cost on society, and (I think) on yourself in the long term, regulation is imposed - in the form of compulsory insurance.

mseebach 18y ago
Except, when you get credit cards, you get screwed. When you don't get insurance, everyone else is screwed. That's why credit cards are a classical case for information, not regulation. It's a sad sad slope that regulation is incresingly used to protect people from themselves, rather than each other.
- awt 18y ago
  Wouldn't you agree though that if enough people screw themselves, people who haven't screwed themselves start getting screwed, too?
  - sokoloff 18y ago
    In the long run, I do not. In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate. Honestly, even though I bought a house in summer 2007 (which is now worth somewhat less than I paid), I've been made vastly better off by the free and easy credit that others took part in and that I for the most part did not. Sure, the economic turmoil/headwinds now are less pleasant than 2004-2006/early 2007, but that's far from saying "I got screwed by this obviously unsustainable great ride ending."
    - jimbokun 18y ago
      "In the short run, I think you are confusing the end of the artificially high good times substantially fueled by these people "screwing themselves" with an absolute reduction in relative purchasing power (or other measure of "goodness") for people who didn't participate." The entire U.S. financial industry and the entire U.S. auto industry have, for all intents and purposes, been vaporized out of existence. To me, that seems a pretty high price to pay for "artificially high good times." Enough so that regulations that would have kept the good times from being quite so good in exchange for the down times not being disastrous, are more than a fair exchange. Do you disagree?
      - sokoloff 18y ago
        First of all: IMO, the US auto industry woes have not one damn thing to do with credit boom/bust, and if anything, their run (the companies and the UAW) was extended by the credit freedom, but in any free market, if your costs are 1.5x your competitors and the desirability of their product is 1.5x yours, you're in for a world of hurt. (I own three American cars: one Jeep and two sixties Mustangs, and if I had to do it over again, I probably wouldn't have bought the Jeep.) The US financial industry, I'd agree with you IF I thought we could effectively modulate without introducing deadweight losses for no net gain. (Historically, I don't think we have a good track record at this, in this or any other country.) What do I mean by that? The minute you introduce legislation to try to modulate something, a substantial result of that is to take smart people and apply them to figuring out how to comply with and/or work within/around the new regulations. So instead of building something people want or that makes the world better/more efficient, they're instead working on regulatory compliance. Then the most powerful institutions bid up the prices of the services of those people who are the very best at working around the regulation, or at lobbying for their activities to be exempted, and the cycle continues. If we could come up with a means to instanteously generate perfect regulation, I would indeed agree with your proposal. I'm not holding my breath for it...
- netcan 18y ago
  It's true. That's an important distinction. But apart from 'information' requirements like those imposed on tobacco in many places (advertising bans, warning labels, mass propoganda campaigns) I don't think any more information would help. If you go that path, you may as well regulate. What would happen if all regulations beyond basic information availability requirements were lifted? If you could sell people whatever they would buy? We know what happens in lower risk, higher value credit. The effect of large scale defaults is a flavour of everyone else is screwed.
- iamelgringo 18y ago
  What other product can you purchase, and have the price change after you purchase the product? What other form of loans/credit can you purchase and then have the interest rate changed without your knowledge and without informing you because of a missed or late payment on a different loan? What other form of loan can increase your interest rate (cost) based on an increase in the balances on accounts with completely different companies? I've meet well educated Md's and people with Master's degrees who've gotten screwed by credit card companies. It's not a matter of education, IMHO. It's a matter of deceptive business practices that people don't really get wise to until they've gotten burned badly. Have you ever tried to read through a credit card agreement? I'm a well educated man, and I can't make heads or tails of those agreements. I'm sorry, but even an industry needed regulation, its the credit card industry.
  - ars 18y ago
    The price is not changing after the fact - you agreed to all the rates and changes before you start. If they want to change those in any other way then they have to contact you and you have the option to stop using the card and pay off the balance at the old rate. The agreements are not that complicated - people simply don't read. I see it happen all the time with website UI's - the instructions are right there and people never read them. You don't need to read the full agreement - everything you need to know about the rates is on the back of the application - in a format set by congress. How much more regulation do you need? Edit: apparently there is more regulation coming: http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b07658.html?nclick_check=1 http://www.ft.com/cms/s/0/d70973f2-ca0f-11dd-93e5-000077b076...
    - sethg 18y ago
      I can't find the page where I saw the numbers, but a staggering proportion of American adults don't know basic math well enough to figure out which grocery store has the lowest prices. I assume an even more staggering proportion doesn't really understand how compound interest works.
      - eru 18y ago
- fallentimes 18y ago
  I agree. When used properly, credit cards are unbelievably useful for consumers & businesses alike. The blame should lie on the person who makes the poor decisions with the credit cards, not the credit cards themselves.
  - eru 18y ago
    Though credit cards can be replaced by less dangerous debit cards for most of their functions.
    - fallentimes 18y ago
      Actually, debit cards are significantly more dangerous (when talking about external events, not accountability). The amount of liability you have + paperwork in the event of fraud is exponential compared to credit cards.
      - eru 18y ago
        I do not know if we are talking about the same thing. But I configured my debit card not to be able overdraw my bank account and I make sure that there is always not too much money in it.
        fallentimes 18y ago
        You're talking about money management; I'm talking about fraud and liability. http://www.consumer-action.org/english/articles/understanding_debit_cards/ http://www.consumer-action.org/english/articles/understandin...
        eru 18y ago
        Yes. I agree. (Edit: I have read the linked article. The debit card system is somewhat different in Germany, where debit cards are much more widespread that credit cards. In fact credit cards are still somewhat of a rarity while everyone seems to have a debit card.)
- ovi256 18y ago
  A counter-example: think about tainted food. When you unknowingly buy and eat tainted food, you get screwed. When you don't get insurance, everyone else is screwed. That's why tainted food is a classical case for information, not regulation. Just stick an ol' label explaining that it contains dioxin, and let the free market decide. Of course, that's not what happens. So the harm limited to self argument does not apply.
gaius 18y ago
Credit cards are exploiting holes in our rationality: classical, well known rational choice failures like irrationally valuing x dollars now more than 2x dollars some time in the future How do you assess that except on a case-by-case basis?
nazgulnarsil 18y ago
um...not buying it is rational. if buying insurance was positive sum then how would insurance companies make money?
- ovi256 18y ago
  Because it is positive sum - which means that it creates value. Fiduciary, insurance companies gain more than you, but you gain non-fiduciary value (tranquility etc).
  - nazgulnarsil 18y ago
    my comment was towards the use of the word "irrational" in the parent comment.

netcan 18y ago

Mr. Kahr, for one, makes no apologies. "If someone is riskier, he should be paying a higher rate,'' he said. "It's more economically sound. It's fairer for riskier people to pay a higher interest rate, higher fees, whatever it is, than less risky people. Interesting. What he is really saying is 'what's fair got to do with it? Free markets dissolve the concept. "If there was a demand for a credit card product that never changed its terms and rates and stuck with the customer no matter what, I'd be running around telling people 'Let's market this wonderful fairness card,'" he said. "You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."

randallsquared 18y ago
"Free markets dissolve the concept [of fairness]." Some would say that free markets implement the concept of fairness. Of course, there are no free markets in the world today, to a first approximation, since all the prices and outcomes are distorted by external agencies, so whether free markets are fair is a bit academic.
- netcan 18y ago
  That is irrelevant really. You may think that the result is fair, but fair is not the reason that is the result. The free market comes to a result based on a series of self interested decisions. At the core are the buy/sell decisions. I price in a way that maximises my profit, you buy in a way that maximises your utility. Fair (I admit an ambiguous term) represents something external to this.
  - randallsquared 18y ago
    You maximize your profit as a proxy for maximizing your utility (and some people choose less profit because "helping others" boosts their utility more). Since we're both maximizing our utility in a free market, it's arguable that the outcome of our transaction is maximum fairness, or at least a local maximum of fairness.
sokoloff 18y ago

alecco 18y ago

Many of us would love some digital money/payments/savings/loan fair system. There has to be some way for a startup to turn bigger than Google just with that.

ph0rque 18y ago

This suggests an opportunity for a credit card startup that: * Charges no fees of any kind * Charges a rate that is determined by a publicized equation where the only variables are the amount borrowed, time (in, say, days), and the rate.

jimbokun 18y ago
Or in the words of Mr. Kahr: "You know -- 'transparency card,' 'rock solid card' -- whatever it may be. I don't believe that that would succeed."
- ph0rque 18y ago
  That's great validation, to paraphrase Arthur C. Clarke: > If an elderly but distinguished expert says that something will be successful he is almost certainly right, but if he says that it won't, he is very probably wrong.
  - pragmatic 18y ago
    You'd need a huge bankroll to get started. Financial startups aren't as easy as a social media web 2.0 site. Look at prosper.com. Regulatory costs are astronomical. Between state and federal auditors and Sarbanes-Oxley and CRA, etc, you'll have your hands full. Also, why would investor capital flow to you? You'd make a lower return with no upside of lower defaults, etc. But yes go ahead. Start a low rate credit card company. I might sign up for your card!
    - helveticaman 18y ago
      More importantly, you'd have to cover lobbying costs for 5 or 6 years just to break into the tight oligopoly.
      - lnguyen 18y ago
        Discover finally settled a suit with Visa and Mastercard over anti-competitve practices: http://www.reuters.com/article/bankingFinancial/idUSN2735065420081028 http://www.reuters.com/article/bankingFinancial/idUSN2735065... FYI, Discover's been around since 1985 (introduced during '86 Superbowl), suit was filed in 2004 (along with a similar one by AmEx) and finally settled in October for $2.75 billion.

shimon 18y ago

I'd really love to see an explanation of the structure of the credit card / payments industry in terms of what roles different corporations play, who are the major players in each role, and how they make money. I understand there are networks like Visa, which seem to basically administer account number namespaces and perform some role in clearing payments between banks and merchants. There are also payment processors, who contract with those networks and provide services (card scanners, online payments, etc) to merchants. And there are lending banks, who pay the merchants (via their processors, I guess) and bill the consumer as they would for any loan. My guess is that at one or more levels of this industry, there is an effective cartel: if you want to offer a credit card that's better for merchants, or consumers, or just run more efficiently, you're unlikely to be able to buy your way in. It does seem ludicrous that 1% to 3% of your purchases (or, from the merchant's side, revenue) goes somewhere into Visaland instantly; this seems like a massive privatized tax in return for administering an electronic payments system which might not be that difficult to replace today.

helveticaman 18y ago

"The industry also got an unintended boost from President Carter. In 1980, as part of a short-lived effort to tame inflation, the White House imposed a freeze on soliciting new credit card accounts. The freeze only lasted for a few months, but it was long enough for credit card companies to introduce a new concept -- the $20 annual fee -- without inciting mass defections." So this is an oligopoly, and behaves accordingly. Of course it charges sellers extra, charges high interest rates, and all that other shit; they don't allow more entrants into their market.

JackWhite22 18y ago

Credit Cards shouldn't be allowed in this world.

newmediaclay 18y ago

What it boils down to is that Kahr is just a great businessman. He understood what people wanted, gave it to them and tied in a great revenue model that didn't scare people away. He did this by truly understanding his target customer and their risk/expense threshold.