Go Back   ManagementParadise.com | Management & Business Education Learning Platform Management Students Voices ( MBA,BMS,MMS,BMM,BBA) > International MBA

Fix a Credit Card Industry Gone Awry

Discuss Fix a Credit Card Industry Gone Awry within the International MBA forums, part of the Management Students Voices ( MBA,BMS,MMS,BMM,BBA) category; One of the companies I studied for my dissertation research, which dealt with how established companies build competences to tackle ...



Thread Tools Display Modes
Fix a Credit Card Industry Gone Awry
 (1 (permalink))
Maya Raichura
MayaRai has a spectacular aura aboutMayaRai has a spectacular aura about
Management Paradise Guru
Status: Offline
Posts: 42,854
Join Date: Nov 2004
Age: 56
Fix a Credit Card Industry Gone Awry - August 19th, 2012

One of the companies I studied for my dissertation research, which dealt with how established companies build competences to tackle new areas, was Citibank (as it was then known). Citi was kind enough to sponsor my three-year research program on their corporate ventures that yielded many insights into the corporate venturing process (and which helped me get through graduate school). I studied their successes and the failures and tried to figure out what made the difference.

Ironically, one of Citibank’s major successes was its credit card division. In a plot with many twists and turns, I learned how Citibank had leveraged Bank of America’s marketing campaign to switch from BankAmericard to “Visa” by capitalizing on a mistake. Bank of America, which had convinced many customers that a Visa card was the next must-have financial product, proceeded to promise customers that they would indeed get their new Visa cards — but only when their current cards expired. By definition, half their target audience would have to wait six months or more! Citi put huge ads in the newspaper, promising that if customers applied for its Visa, they would get one immediately. The response was overwhelming — so much so that the resulting cash outflow nearly sunk the bank. The operational stress was legendary. Warehouses full of Christmas receipts were said to be still sitting around in February. Cleaning up the operations was what eventually set John Reed up to become the CEO of the bank.

An even bigger problem, however, was that bank regulation at the time (the 1970s) strictly limited how much interest could be charged on consumer credit. These regulations, called usury laws, were intended to help protect consumers from the rapacious behavior of people who would take advantage of them. But by 1980, the interest limits imposed by usury laws were lower than the rate of inflation. Citibank was being squeezed between New York state usury laws and double-digit inflation rates.

“You are lending money at 12 percent and paying 20 percent,” said Walter Wriston, then the CEO of Citi. “You don’t have to be Einstein to realize you’re out of business.”

Citi successfully lobbied the government of South Dakota for a deal. The company would bring thousands of well-paid white collar jobs to a state that was going through massive economic suffering in exchange for the ability to charge higher rates of interest on revolving credit card debt. Deal done, Citi moved, and the forces that shaped the way we use credit cards today were set in motion.

Amazingly, even when interest rates came down, consumers continued to pay high rates of interest on their cards. As I’ve argued elsewhere, the people that run credit card companies must be the smartest behavioral economists in the world — they figured out how to get people to take the cards, run up balances and ignore the long-term implications.

At the time, changes in the rules around credit cards were viewed as having many positive consequences. Entire populations, like students and housewives, got access to spending power and the chance to build an independent credit record. Credit cards changed the allocation of credit from whatever the local bank manager thought about you to a more objective formula, which was based on things like your ability to pay and not the color of your skin or social status. And if you were truly facing an emergency, credit card debt could get you through a rough patch. But whoa, hasn’t bankings’ dependence on cards now gone way too far?

Retroactive changes to interest rates on existing balances, increasing interest rates for payment issues with other lenders (such as the phone company), selling an account from one provider to another and charging customers for the transaction. And fees, fees, fees galore — for everything from late payments to charging above your maximum. It is just amazing. And at some level, I think this behavior violates most people’s basic understanding of what is a fair and appropriate way to treat consumers.

My prediction is that for the first time in several decades, there may be a populist, political and economic perfect storm that will result in a reining in of the card companies. Now let’s hope that the useful and advantageous aspects of the card industry don’t get thrown out along with the more egregious practices.

Photo credit: Giuseppe Leto Barone


Friends: (0)
Reply With Quote

Related to Fix a Credit Card Industry Gone Awry

Similar Threads

Thread Thread Starter Forum Replies Last Post
Solutions Manuals, Instructor Manuals, Test Banks collection 2012 Soso M General Talks 22 May 15th, 2017 07:04 PM
View of a MARBLE industry chaitalithakker Miscellaneous Projects 13 June 13th, 2015 05:45 PM
Reading Your Cards Maya Raichura International MBA 0 August 19th, 2012 01:50 PM
Reading Your Cards Maya Raichura International MBA 0 July 20th, 2012 04:30 PM
Fix a Credit Card Industry Gone Awry Maya Raichura International MBA 0 July 20th, 2012 04:30 PM

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off

ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.

Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.