Thursday, September 11, 2008

Payment Card Hokey Pokey

Photo by The Consumerist

Two seemingly unrelated stories in this morning's news demonstrate the lengths to which credit and debit card issuers are now going to market their wares and squeeze out income.

First, the Wall Street Journal's "Personal Journal" today explains that card issuers, responding to a campus clamp-down on marketing credit cards, have begun hawking prepaid debit cards to college students (D1, D6, "The New Card On Campus: Prepaid Debit"). The W$J report contains a very sophisticated discussion of the EFTA and Reg E fraud protection rules (fail to report the loss within 48 hours, liable for up to $500, unlimited liability after 60 days), contrasting them with the much more protective TILA and Reg Y protections for credit cards (max $50, period). Perhaps giving up some fraud protection is a small price to pay for avoiding the horrors of college-student debt chronicled in, e.g., James Scurlock's fabulous and disturbing documentary, Maxed Out.

But perhaps not. The subtitle of the story tells it all: "Issuers Push High-Fee Alternatives." It turns out that these limited-fund, pre-paid debit cards don't allow users to incur interest or most overdraft charges, but these cards are "often laden with transaction fees," such as enrollment/activation fees, monthly account fees (that are waived if the card balance exceeds $1000!!), ATM fees (in addition to fees charged by the ATM's bank-owner), and my favorite--monthly inactive-account fees; that is, if the card isn't used within a 90-day period, the overly-miserly user is charged $5 per month of inactivity! Interest income is just too straightforward and oh so 20th century, while fee-based income runs under the radar and kills silently, bit by bit. My sense is that these kinds of cards will become very common, as parents try to limit their college kids' spending, but this array of fees will eat away at balances in a hurry. Caveat emptor, indeed!

So what are issuers doing with all of those extra credit cards? Sending them to small business people, of course! The American Bankruptcy Institute's daily headline service alerted me to this story in today's New York Times. It explains that more and more small businesses are turning to credit cards for liquidity because credit lines and other "prime" sources of financing have dried up. Isn't one source of credit the same as any other in this context--surely businesses can negotiate for favorable treatment. Nope! Small business credit cards are like sub-prime predatory lending in the consumer context, "offering" higher interest rates and unpredictable terms for changing (read: increasing) those rates at the drop of a hat (or the drop of Fannie & Freddie's stock price). One small business owner explained that her rate had jumped from 3.9% to 27.9% after her payment allegedly arrived one day late, and another's jumped from 16.99% to 34.99% (where do they come up with these numbers?!) when the financial aftermath of a home fire increased his debt-to-income ratio and decreased his credit score. Banks are worried about their bottom lines these days, too (capital requirements and the like), so if they can't squeeze college kids, they've moved on to a segment of the market that is even more desperate for large amounts of liquidity--and a segment that can and will pay big interest charges to carry them through to the next "in the black" period.

So what's a parent or small entrepreneur to do? The best and only advice seems to be, "Shop around."

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