A Critique of the American Bankers Association's Study on Credit Card Regulation

Abstract

This Critique takes issue with four of the main assertions of the American Bankers Association's Study on Credit Card Regulation. First, this Critique addresses the ABA Study's claim that credit card pricing is risk-based and demonstrates that only certain elements of card pricing are marginally risk-based; overall, credit card pricing is not risk-based, and risk-based pricing does not explain card issuers' abusive and manipulative billing practices such as unilateral term changes, two-cycle billing, universal cross-default, and retroactive application of higher interest rates. Instead, these practices are merely rent extraction devices that allow card issuers to take advantage of cardholder lock-in. Second, the putative benefits of risk-based pricing?lower costs of credit to creditworthy consumers, and greater availability of credit to subprime consumers?are either illusory or attributable to other causes. To the extent that credit card interest rates have declined over the past two decades, it is attributable to issuers' decreased cost of funds, and overall, credit card pricing may not have decreased for any consumers. Greater subprime access to credit cards is attributable to issuers' ability to pass off risk and increase lending capacity through securitization, and increased credit card access is hardly a boon absent ability to repay debts. Third, this Critique shows that contrary to the ABA Study's claims, credit card debt now supplements, rather than replaces other forms of consumer debt. And fourth, this Critique exposes the flaws in the ABA Study's conclusory assertion that there is no basis for credit card price structure regulation. Instead, seven of the eight standard independent reasons for regulation apply squarely to credit cards, making regulatory intervention in the credit card market a question of how, not whether.