January 06, 2009
-
News: CC Risky-Shifty Business: Brave New CC World.
If the foundation is replaced, will the tower lean? The foundation of credit card lending has always been set by the lender. As with most forms of lending, the lender begins by carrying risk. With unsecured lending, the risk becomes even greater. In a free market, that lender has to provide a product that appears to be an advantage to the borrower. If the venture is to survive, a balance must be reached where both sides benefit sufficiently. Boundary rules must be enforced to protect both sides from being unduly hurt without stifling the life-blood. The life blood of the credit card market is the interaction between risk-protection and cost-effectiveness. To that end, the credit card industry has settled on a balance of providing competitive interest rates with the reservation that they can arbitrarily change those rates if necessary. Mutual good-faith trust is required here. As long as it isn't abused, it usually works fine.
What happens when times become very unusual, however? That's what we're finding out now. Unprecedented job losses, defaults, stock losses; unprecedented bad news in every direction. With the shock of all the events hitting everyone at the same time, both sides of the equation have naturally flinched in opposite directions – each trying to protect themselves. With the obvious need for some government involvement, they became involved. But this precarious balance of credit card lending is not well-understood by government regulators and neither side is completely happy over the outcome. The credit card industry is warning that redefining this balance is a dangerous venture when dynamics are not considered foremost. If too much risk is shifted against the supplier side, the industry contends, than supply will diminish and consumers will be worse off.
The lending banks contend that they will be forced to re-price credit card accounts to "preemptively plan for various eventualities" and this will leave millions of consumers without credit cards. Consumer proponents counter that these are just scare tactics and that the free market will protect them against the worst threats. Analysts seem to agree that more risky applicants will be subject to more costly options but that, most of the consumers are responsible borrowers and won't see a very significant change.