Inspired by When It Comes To Repaying Debt, Consumers Erroneously Prefer Molehills Over Mountain (11/09/2011, Sacramento Bee) . Via American Marketing Association (AMA), author.
The unhappy marriage of banks and credit card customers has taken an even stranger turn according to new research.
Which partner is better?
Let’s be clear: Banks are happy to the tune of over $20 billion (US). That’s the estimated profit from interest, charges, and fees according to a NYTimes 2009 report. Over half of bank profits are expected to come from interest and fees charged to the weakest customers. In fact, fees may soon outweigh interest charges in the financial profit churn.
- A slow-paying partner pays only the minimum each month. Revenues from interest charged outweigh processing costs. For the partner, over time, the original purchase price of an item can double or triple. So the “poor” partner is the profit maker (left icon).
- A quick-paying partner pays off the full amount due within 30 days, carrying no outstanding balance. No interest is charged, by agreement. This positive behavior costs the bank. The card provider absorbs the cost of processing the payment, yet does not post any interest to recover the cost. Surprisingly, the “good” partner is the profit taker (right icon).
Congress and the Federal Reserve play the watchful in-laws.
The Credit CARD Act of 2009 seeks to repair the marriage of banks and their credit card customers. New regulations require clear information about pay-off options. Even with the changes, banks continued to profit (though not as much). Get it? One partner can’t afford the cost of change and isn’t incentivized to change.
In “Winning the Battle but Losing the War: The Psychology of Debt Management” ( Moty Amar, Dan Ariely, Shahar Ayal, Cynthia E. Cryder and Scott I. Rick) researchers reported a sad fact. The “weakest” credit card borrowers continued to make poor debt pay-down choices by paying off the “wrong” cards first. Net: credit card borrowers continue to double original purchase price of items through interest charges and fees.
Using gamification methods, researchers determined that consumers who are short-sighted in paying down debt can be taught new behaviors, i.e., profitable pay down behaviors and skills. They offer this example as a sign to banks, perhaps that they should be stronger in empowering customers to become debt-free like their prompt-paying fellow customers. That would make all relationships with “both” partners equal. In particular,
The authors say understanding how consumers manage debt can help lenders develop tools that can help consumers get out of debt more quickly.
From: When It Comes To Repaying Debt, Consumers Erroneously Prefer Molehills Over Mountain (11/09/2011, Sacramento Bee)
While it’s interesting to have the research, something doesn’t make sense. Think it out, Marketing Management 101.
Banks aren’t motivated to make credit-card relationships profitable for customers first.
What's in it for banks?
Banks are now obligated to provide more data (proposed legislation continues). CARD 2009 also requires existing information to be shared in ways that are direct, functional and easy to absorb. Fair enough: It’s about time!
Here’s the question: Are bankers motivated to engage customers to pay off debt wisely and so learn new and empowering financial behaviors. Taking a first-pass at Maslow’s Pyramid, the decision for banks is safety, self-interest and recouping $8billion in fees lost due to the 2009 regulations. The core issue is inherent to the product more than design, function, and communications. Who helps customers rethink, change their behavior and find their own way up the pyramid to financial self-esteem?
How to motivate banks to improve relations with all customers
The current trend is pre-paid credit cards (a fix but not a cure). Others include “savings”, e.g., every time a card holder spends, a small percent is automatically transferred to a savings account. Is gamification the way out? Please weigh in.
Telegraph Co. UK , Unhappy marriage