America's Most Hated Industry
Charles Duhigg has a terrific piece about the credit card industry in the upcoming issue of the New York Times Magazine. Here's an excerpt:
The exploration into cardholders’ minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year. Canadian Tire’s stores sold electronics, sporting equipment, kitchen supplies and automotive goods and issued a credit card that could be used almost anywhere. Martin could often see precisely what cardholders were purchasing, and he discovered that the brands we buy are the windows into our souls — or at least into our willingness to make good on our debts. His data indicated, for instance, that people who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.
....Testing indicated that Martin’s predictions, when paired with other commonly used data like cardholders’ credit histories and incomes, were often much more precise than what the industry traditionally used to forecast cardholder riskiness....Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check. Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash.
Credit card companies used to be serious about extending credit only to customers they thought would pay their bills. But then life changed, and they realized that they could make more money by deliberately extending credit to poor risks, encouraging them to overspend, and then dunning them with an endless stream of fees, penalties, and increased interest rates. They were helped along in this by laws that allowed them almost insane levels of freedom to screw customers while protecting them from the results of their own folly.
But even the United States Congress wasn't enough to prevent them from taking huge losses during the current recession, so now they're getting serious about evaluating credit risks again. Which is good. Except for one thing: do we really want credit card companies making these decisions based on the results of bizarrely opaque data mining experiments? If you're turned down for a card because you don't pay your bills on time, that's one thing. But if you're turned down because you bought some generic motor oil — and 37% of generic motor oil buyers are poor credit risks — is that fair? Is that something we want to allow? What happens when it turns out — and it will — that a lot of this data mining correlates strongly with sex, race, age, religion, and ethnicity? This is something we ought to start thinking pretty hard about.
But while you're thinking about it, read the rest of Duhigg's piece. Especially be sure to read down to the section that describes how card companies like Bank of America are perfectly willing to cut distressed cardholder debt in half just for asking ("Much of what they’re paying, after all, is fees and interest that Bank of America itself tacked on"), but that instead of letting distraught customers know this they cynically and studiously create elaborate faux "friendships" over the phone so that customers feel obligated to their new pals. It's nothing illegal. But it is disgusting, indecent, and unscrupulous. And they wonder why they're the most hated industry in America.