Friday, May 29, 2009

NYT Article: Credit Card Industry Aims to Profit From Sterling Payers

It is only rational for the industry to make the kinds of changes mentioned in this article, that will hit those who pay on time. Businesses should always seek to drop unprofitable customers, or turn them into profitable customers. But because the gross profit margins in credit cards currently are so great, the credit card issuers find it effective to cast a wide net. If a few unprofitable "dolphins" are caught up in the net, that is a tolerable inefficiency, so long as they can trap many more customers who will eventually be filleted by the high fees and usurious interest rates.

Now where all this leads is an interesting question. As a pay-in-full person, while I can tolerate trimming around the edges (maybe small annual fees, losing the 1% cash-back), if they make it so that it costs me to use a credit card (surcharge, zero grace period), then I will drop the card like a hot potato. So the ultimate question is where the credit card industry can find its profit. The fact is, there is absolutely no rational reason that anybody should be willing to pay 20-30% interest. None.

So from the standpoint of macroeconomic efficiency, I think it would be a good think for the credit card industry to contract substantially. Any product that has tremendous gross profitability--credit cards, pharmaceuticals--will expend large sums in aggressively marketing to seek new customers. While some amount of marketing is necessary economic lubrication, it does not follow that more is better. So in the end, even if I lose some of my credit card perks, the world will be a better and more rational place if the credit card industry is cut down to size.

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